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TMI Blog2016 (11) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... heir ALP was determined. The assessee is aggrieved against such determination of ALP of the transactions between the head office and branch office. 4. We have heard the rival submissions and perused the relevant material on record. It is undisputed that the assessee is an Indian enterprise having its branch office in Canada. Under these circumstances, a question arises as to whether a separate determination of ALP of the transactions between Indian head office and branch office, Canada, should be made so as to make an addition on account of transfer pricing adjustment. 5. It is simple and plain that no person can transact with self in common parlance. As such, one can neither earn any profit nor suffer loss from self. The same is true in the context of business as well. Neither any person can earn income nor suffer loss from dealings with self. It is called the principle of mutuality. When expanded commercially, the proposition which follows is that there can be no profit from trade with self. This has been fairly settled through a catena of judgments from the Hon'ble Apex Court including Sir Kikabhai Prem Chand VS CIT (1953) 24 ITR 506 (SC) and also the Hon'ble High Courts. In B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s year of a person who is a resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year'. Thus it is apparent that a resident assessee is liable to tax for its world income, which not only comprises of Indian income but also the income which `accrues or arises to him outside India during such year'. The final accounts of foreign branch office, including all the items of income, expenses, assets and liabilities are merged with the accounts of head office and the accumulated income so determined is liable to tax in India. When the sale made by the Indian Head office is considered as purchase of the foreign branch office and the figures of head office and branch office are consolidated, any under or over invoicing becomes tax neutral. Even if for a moment, we accept the contention of the Revenue as correct that the head office earned profit from its branch office, then such profit earned would constitute additional cost of the Bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions' in terms of section 92B. This is for the reason that the total income of a non-resident in terms of section 5(2) includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Thus it is only the Indian income of a non-resident, which is chargeable to tax in India. In such circumstances, there can be an allurement to some non-resident assesses to resort to under or over-invoicing so as to mitigate the tax burden in India. It is with this background in mind that the legislature introduced Chapter X with the caption `Special provision relating to avoidance of tax' so to ensure that the international transactions are reported at ALP. Some foreign associated enterprise instead of having an Indian enterprise may opt to have a branch office in India and then claim that since the Indian branch office is not a separate enterprise, the transfer pricing provisions should not be applied. Section 92F(iii) has been incorporated to ensure that not only the transactions between the foreign enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate method with Profit level indicator (PLI) of OP/OC. Certain comparables were chosen after applying certain filters, which have been listed on page 3 of the TPO's order. That is how, the assessee claimed that its international transactions were at ALP. Not satisfied, the AO made reference to the TPO for determination of the ALP of this international transaction. The TPO disagreed with certain filters adopted by the assessee and finally applied the following filters for selecting the comparable companies : -
* Companies whose data is not available for the FY 2007-08 were excluded.
* Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded.
* Companies whose software development service revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the filter of exclusion of companies with service revenue of less than Rs. 1 crore was not fully correct. He did not raise any objection to the application of lower limit of filter at Rs. 1 crore, but, challenged the upper limit of turnover, which was left open by the TPO. The ld. AR contended that some sort of cap on the upper limit of turnover should have been considered by the TPO.
11.2. We are not convinced with the argument advanced on behalf of the assessee in this regard. When functionally similar companies are chosen and then average of the profit rate of such similarly functional companies is taken into account for determining the ALP of the international transaction undertaken by the assessee, the size of some of the companies in the whole lot of comparable companies, becomes meaningless. Averaging of the profit rates of the whole lot of functionally similar companies of different sizes, viz., some having higher while some others having lower turnover vis-à-vis the assessee, irons out the effect of such differences. The Hon'ble jurisdictional High Court in the case of ChrysVapital Investment Advisors (India) Pvt. Ltd. vs. DCIT (2015) 376 ITR 183 (Del) has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of one nature, like, comparing RPT of purchase with the total purchases or RPT of sales with the total amount of sales of the company. It is also possible to club small transactions of a distinct but related income producing activity with a large transactions of major income producing activity as one unit, both in the numerator as well as in the denominator. For example, RPT of major sale transaction and minor job income can be combined to find out the percentage of RPTs with the total of sales and job income taken together. This entire exercise can be done by firstly calculating the percentage of RPT purchases with total purchases and then of RPT sales and service income as one unit with the total of sales and service income again as one unit. The decision as to whether a company should be included in the list of comparables by applying the filter of more than 25% RPTs, would depend on the outcome of two such percentages of RPTs. If either of the two breaches the 25% threshold, then the company will cease to be comparable. The impugned order, combining sales and expenses, for calculating the percentage of the RPTs is set aside to this extent and the TPO is, accordingly, dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies whose onsite income is more than 75% of the export revenues were excluded.
15.1. The TPO excluded the companies whose onsite income was more than 75% of the export revenues. The ld. AR argued that the income earned by branch office, Canada was largely onsite income and, hence, this filter could not be applied. In support of his contention of the branch office, Canada earning onsite income, he placed on record certain agreements which show the rendering of onsite services by the branch office, Japan. The DR, however, opposed the argument of the ld. AR.
15.2. Having heard the rival submissions and perused the relevant material on record, we find that out of total revenue of Rs. 45.42 crore earned by the assessee, its revenue of the foreign branch is to the tune of Rs. 35.92 crore, which is roughly 80% of the total revenue. The ld. AR contended that the entire income earned by branch office, Canada, was from rendering onsite services. However, this proposition could be substantiated partly as only 2-3 copies of agreements entered into by the branch office, Canada with its clients were furnished as against numerous clients. If the argument of the ld. AR is correct that its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
19. It can be noticed from sub-clause (i) that the net profit margin realized by the enterprise from an international transaction is computed in relation to the costs incurred or sales effected, etc. Sub-clause (ii) talks of determining the net profit margin realized from comparable uncontrolled transactions. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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