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TMI Blog2004 (10) TMI 629X X X X Extracts X X X X X X X X Extracts X X X X ..... an as against weighted average used by the assessee, as the Indian transfer pricing regulations prescribed arithmetic mean. b). The TPO used comparable used by the assessee for benchmarking as the assessee was unable to explain how these companies became non comparable for the year under consideration. c). the sensitivity analysis carried out by the TPO is a valid tool of comparability analysis. d). Ld. CIT(A) has not also not pointed out anywhere in her order as to how these companies are non comparable. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." In ITA No. 1490/Del/2011 1. The order of the Learned Assessing officer is bad in law and on the facts and circumstances of the case. 2. The Ld. TPO/AO has erred in law and on the facts of the case in making addition of ₹ 77,35,892/- on account of notional interest on interest free loan given to the subsidiary of the appellant in U.S.A. 3. The appellant may be allowed to add/amend/withdraw any grounds at the time of hearing." 3. The relevant facts of the case are that the assessee retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6% of total revenue. The assessee has not been able to substantiate with any cogent evidence as to how much of these expenses can be attributed to idle employees. The ambiguity in of calculation of idle employee cost is evident from the fact that different adjustment has been claimed in Transfer Pricing report and reply dated 07.12.2005. 6.2 The employee cost at 65.82% of total revenue during financial year 2001-02, if taken as benchmark and applied on total revenue of 110.045 millions for the current year, the assessee company's employee cost under normal operations should be 72.43 millions. Any expense over and above it can be treated as cost on account of idle employees. Since, assessee company has incurred a cost of 99.22 millions and if out of this 72.43 millions is treated as normal expense, the balance ₹ 26.79 millions can be treated as cost for idle employees. Therefore, claim of ATPL on Idle employee cost is restricted to ₹ 26.79 millions. 7. The operating profit (loss) as worked out in Annexure B from the Audited financial statements at ₹ 3,96,46,595/- after a further adjustment of ₹ 26.79 million on account of idle employee cost will leave an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions. In response to the above letter the assessee submitted replies dated 30.12.2005 and 04.01.2006. Nothing substantial was submitted against use of the above comparables. The objections raised were of general nature that there are slight functional variations or last year was first year of Transfer Pricing etc. But a perusal of details of functions of all these six companies it is seen that there is no change in functional profile and other factors which could render them in comparable with the assessee company. Similarly, there is no change in functional profile of ATPL which could make it in comparable with the same set of companies held to be comparable by the assessee during the Transfer Pricing proceeding for immediately preceding year. 8.2 In the aforesaid circumstances the comparables selected by assessee company for the year under reference are accepted but in addition these above said six comparables are also merged for benchmarking international transaction for the purposes of Transactional Net Margin Method (TNMM). 8.3 The Profit level Indicator adopted by the assessee is operating margin and at page 37 of Transfer Pricing report this PLI has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company. Out of these 13 comparables financial data for year 2002-03 in respect of Net Axis was not available and, therefore, this comparable was also rejected. In final analysis only 12 comparables are being adopted for the purposes of calculating comparable profit level indicator. A working of OP/Sales for reference the comparables has earned Operating Profit on sales at 9.47%. As per para 7.0 above OP/Sales in the case of assessee company is -11.68%. Even after providing the benefit of +5% range permitted under Indian Transfer Pricing Law, the international transaction does not confirm to arm's length principle and, therefore, an adjustment in the price is imperative. 9. Calculation of arm's length price for international transaction of sale of software Total Sales of ATPL - ₹ 11,00,45,872 (A) Adjusted Operating Profit (loss) of ATPL (as per para 7.0 above) - ₹ 1,28,56,595 (B) Operating profit/sales of comparables - 9.47% (C) Arm's length operating profit (AXC) - ₹ 1,04,21,344 (D) Difference (D-B) - ₹ 2,32,77,939 It can therefore, be concluded that on international transaction of sale of software ATPL must earn a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst Appellate Authority. The CIT(A) considering the submissions of the assessee which are found reproduced in the impugned order at pages 13-18 came to the following conclusion:- Search for Comparables 8.0 By using two prevalent database i.e., PROWESS and CAPITALINE and after applying filters, explained on page 42 to 45 of Transfer Pricing report, ATPL identified seven companies as final comparables. The gist of working of Operating Profit Margins of these seven comparables is mentioned at page 37 of Transfer Pricing report with Average Mean at 5.91%. The assessee has used data for earlier two years without year 2003 and weighted average has been used for calculation of Profit Level Indicator. The issue of use of multiple year data will be dealt in succeeding paragraphs. During the Transfer Pricing proceedings for the last financial year 2001-02 (A.Y. 2002-03) the assessee company in its transfer pricing report at page 24 has used following ten companies as comparables S.No. Company Name 1. Bodhtree Consul. 2. Fore C Software 3. Fourth Gen. 4. Integ. Hitech 5. Online Media Sol 6. Telesys Software 7. Synfosys Limited 8. Essel Software Limited 9. Srico 10. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akes care of the difference in functions. The Operating Profit Margin is an indicator of performance for the assessee as it calculates the operating income and costs, which truly reflects the profits earned by the assessee from its operations. Hence, the operating profit ratio has been considered as the appropriate PLI." The PLI adopted using operating margin over sales in not disturbed. 8.4 Use of Previous Year Data: It is worthwhile to mention that Rule 10B(4) of Income Tax Rules provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction shall be the data relating to the financial year in which the international transaction has been entered into. The proviso to this rule provides an exception that data for the previous two years may also be considered if it reveals facts, which could have an influence on the determination of transfer price. The proviso is to be applied as an exception only and not as a matter of rule. However, a perusal of data used for comparables by the assessee company reveals that the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The difference between loss reported by the assessee and arm's length profit calculated on the basis of comparables as above would be ₹ 2,32,77,939/-. The value of international transaction on account of sale of customized software is therefore, determined at ₹ 8,73,73,438/- (6,40,95,499 + 2,32,77,939). The Assessing Officer shall increase the income of ATPL by ₹ 2,32,77,939/-." 5. Aggrieved by this both assessee and the Revenue is in appeal before the Tribunal. 6. The Ld. CIT DR Mr. Peeyush Jain & Mr. Yogesh Verma referring to the grievance posed by the Revenue in their appeal invited attention to the finding arrived at in the impugned order on the basis of which it was their submission that the CIT(A) has erred in resorting to use the weighted mean which is contrary to the statutory rules which provides for "arithmetic mean" accordingly the finding is vitiated on this count. It was also submitted that apart from this glaring defect even otherwise it was their argument that reasoning in the impugned order is completely missing as there is nothing on record to show qua the comparables challenged as to on what basis the assessee's claim has been found to be merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the conclusion when questioned in higher forum can only be considered taking into consideration the discussion on the reasons prevailing in the mind of the adjudicating authority. In the absence of any discussion addressing the reason the finding is open to challenge on the grounds of being arbitrary. In view of the above in the absence of any reasoning the order is held to be non-speaking and considering the request of the parties the issue is restored back to the file to the CIT(A) with the direction to decide the same by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. 9. The sole issue agitated by the assessee in its appeal is found discussed in para 10-11 in the TPO's order. A perusal of the same shows that a loan of ₹ 8,08,01,000/- was outstanding at the relevant point of time from Aithent, USA as on 31.03.2003. The assessee claimed that no adjustments were warranted as it was at arm's length. The TPO in para 10.3 of his order took note of the fact that it is worthwhile to note that on one hand the assessee is incurring expense on account of interest (Financial Charges) to the extent of ₹ 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 892/- was made by the AO. This was challenged in appeal before the CIT(A) and considering the submissions advanced by the assessee the CIT(A) decided the issue in the following manner:- "I find no force in the appellants submission the addition made by TPO and his submissions are upheld. The assessee appeal on this ground is dismissed." 10. The Ld. AR inviting attention to the order dated 09.12.2011 in the case of the assessee for 2002-03 assessment year submitted that the Tribunal has restored the issue in the immediately preceding assessment years to the TPO accordingly on account of identical reasoning said issue may also be restored. The parties were required to address the position as since the first issue raised in the departmental appeal has been restored to the CIT(A) why a part of the order should be restored to the AO/TPO. In these circumstances it was the submission of the parties that the CIT(A) can pass the order taking into consideration the view taken by the AO in the immediately preceding assessment year and this direction would meet the ends of justice. 10.1. Accordingly in the light of the submissions advanced by the parties on the material available on record ..... X X X X Extracts X X X X X X X X Extracts X X X X
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