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TMI Blog2018 (2) TMI 1890X X X X Extracts X X X X X X X X Extracts X X X X ..... rising out of sale proceeds received from AE constitutes part of operating income - we remand this issue to the file of the AO/TPO to re-compute the margin of the assessee by treating foreign exchange gain as part of operating income and also compute profit margins of the comparable entities by treating foreign exchange gain as operating income. This ground of appeal filed by the revenues is partly allowed for statistical purposes. Deduction of 5% from arms length as standard deduction - HELD THAT:- This issue is covered by the decision of the co-ordinate bench of Tribunal in the case of addition of the code adventure of the table in the case of Tatra Vectra Motors Ltd. vs. Dy.CIT [ 2012 (4) TMI 359 - ITAT BANGALORE] in favour of the assessee-company as find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/5% to compute ALP in terms of the erstwhile proviso to section 92C(2) Exclusion of companies on functional dissimilarities - Additional grounds of cross objections - HELD THAT:- We find that there is no finding either by the ld.CIT or by the TPO on functional differences vis- -vis tested party. Since the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen the following entities:
3. The AO referred the matter to the Transfer Pricing Officer for the purpose of bench marking the international transactions. The TPO, by order dated 11/03/2008 passed u/s 92CA of the Act suggested TP adjustment of ₹ 73,43,892/-. The TPO accepted TNMM method adopted by the assessee company but rejected the TP study report. The TPO proceeded to identify different set of comparables for the purpose of determining the ALP. While doing so, the TPO applied the following filters:
a. Companies whose software development service income X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Limited
9
Four Soft Limited
10
Geometric Software Solutions Company Limited
11
Tata Elxsi Limited
12
Sasken Communication Technologies Limited
13
Flextronics Software Systems Limited
14
L & T Infotech Limited
15
Satyam Computer Services Limited
16
Infosys Technologies Limited
17
iGate Global Solutions Limited
6. Being aggrieved by this direction of the ld.CIT(A) excluding above companies, the revenue is in appeal before us in IT(TP)A No.1212/Bang/2011 and the assessee-company is in cross objections bearing CO No.30/Bang/2012.
7. Now we shall take up the revenue's appeal. The revenue has raised the following grounds of appeal:
1. The order of the Learned CIT(A) in so far as it relates to the following grounds is opposed to law and facts of the case.
2. The Id. CIT(A) erred in holding that all companies having related party transactions ought to be excluded as comparables irrespective of the percentage of related party transactions.
3. The Id. CIT(A) erred in directing the TPO/AO to exclude the companies having profits more than 50% on the cost from the list of comparables.
4. The learned CIT(A) erred in holding that the size, tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Dy.CIT (109 ITD 101). The Special Bench of Tribunal (Chandigarh) in the case of DCIT vs. Quark Systems (P) Ltd. [TS 23-ITAT-200 (Chd) held that making super profits or losses cannot by ipse facto reason to exclude these companies from the list of comparables. Therefore, this ground of appeal of the revenue is also allowed.
11. Ground No.4 challenges the finding of the ld.CIT(A) deleting M/s.Infosys Technologies Ltd. on the ground of high turnover and brand values. The issue of comparability of Infosys Technologies Ltd. had come up for consideration in the case of M/s.NTT DATA Global Delivery Services Ltd. vs. Asst. CIT in IT(TP)A No.1487/Bang/2013 dated 06/04/2016 wherein it was held as follows:
"23. The revenue is challenging direction of the CIT(A) to exclude the following companies from the list of comparables on the ground that the turnover of the above companies is more than ₹ 200 crores relying on the decision in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT (20 taxmann.com 715(Bang.):
i. Infosys
ii. L&T Infotech
iii. Satyam Computer Systems
These companies were selected by the TPO as comparables and the assessee-company objected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the law is settled to the extent that foreign exchange gain arising out of sale proceeds received from AE constitutes part of operating income. The co-ordinate bench of Tribunal in the case of Rusabh Diamonds vs. Asst.CIT (145 ITD 499) held as follows:
"10. We have considered the rival submissions as well as the relevant material on record. The assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on export and import of diamonds with AEs. Therefore, the hedging of foreign currency has nexus with the export and import activity of the assessee and the exposure of the assessee in relation to the export and import. The OECD guidelines in para 2.82 are as under;
"2.82 Whether foreign exchange gains and losses should be included or excluded from the determination of the net profit indicator raises a number of difficult comparability issues. First, it needs to be considered whether the foreign exchange gains and losses are of a trading nature (e.g. exchange gain or loss on a trace receivable or payable) and whether or not the tested party is responsible for them. Second, any hedging of foreign currency exposure on the underlying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean."
13. From the plain reading of the above proviso, it is clear that the option is available to the assessee for adjustment of +/- 5% variation for the purposes of computing ALP. As per the said proviso, where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. In our opinion, the benefit of option i.e., adjustment of +/- 5% variation, as provided in proviso to section 92C(2) of the Act is available to the assessee.
14. On a similar issue, the ITAT Delhi Bench in the case of Sony India (P.) Ltd. ( supra) has held as under:
"The proviso to section 92C(2) of the Act consists mainly of two parts:
(a) where more than one price is determined by the most appropriate method, then the arm's length price shall be taken to be the arithmetical mean of such price; or (b) at the option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e even to cases where the assessee intends to challenge the arm's length price taken as arithmetic mean and determined through the most appropriate method. Therefore, the benefit of second limb is available to all assessees irrespective of the fact that the price of international transaction disclosed by them exceeds the margin provided in the provision."
15. In the present case, it appears that the benefit of +/- 5% adjustment has not been given to the assessee for the reason (as mentioned by the TPO) that sales made by the assessee to third parties were higher in comparison to the rates of sale by AEs to the assessee. But nothing is brought on record to substantiate the aforesaid observations of the TPO. The AO had accepted the recommendation of the TPO in his report dated 30.8.2000 and made the addition of ₹ 1,76,56,164, however, while doing so, he did not allow the benefit of the adjustment as provided in the proviso to section 92C(2) of the Act and the contention of the ld. CIT(DR) was that since the impugned assessment was made after 1.10.2009, the amended proviso to section 92C(2) of the Act shall apply in this case, which are applicable from w.e.f. 1.10.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds the margin provided in the Proviso. This aspect of the controversy, in our view, is no longer germane in view of the plethora of decisions of our co-ordinate Benches, namely, Sony India (P) Ltd. (supra); Electrobug Technologies Ltd. (supra), and Development Consultant P Ltd v DCIT 115 TTJ 577 (Kol.) wherein it has been observed that the benefit of the option contained in the latter part of the Proviso to section 92C(2) is available to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso.
21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 which reads as under:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent years. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee's tax liability. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Corrigendum are quite inexplicable. Notwithstanding the aforesaid and without going into the validity of the Corrigendum dated 30.9.2010 (supra), we are of the view that the same would not operate to the detriment of the assessee since at the relevant point of time the contents of the Circular No 5/2010 (supra) were in operation. In other words, the withdrawal of the interpretation placed in circular No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis-entitle the assessee from its claim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v CIT 280 ITR 136 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilters:
a. The learned CIT(A) has erred in law and tiacts by not accepting the Respondent's plea that 'onsite revenues greater than 75% of the revenues' should not be used as a comparability criterion.
b. The learned CIT(A) has erred in law and facts, by not accepting Respondent's plea that companies having economic performance contrary to the industry behaviour (e.g. companies which showed a diminishing revenue trend and/or under-utilisation of assets, etc) should not be rejected.
c. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that certain comparable companies identified in the transfer pricing documentation, where consolidated results had been used for analysis should not be rejected. The Respondent had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide! segmental revenues.
d. The learned CIT(A) has erred in law and facts, by not accepting the Respondent's plea that companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements ..... X X X X Extracts X X X X X X X X Extracts X X X X
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