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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 ..... verage 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 returned a loss o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which comes to 65.82% of total revenue. In the year under consideration, total revenue from software development is 110.045 millions against it expenditure on salary is 99.22 million which is 90.16% 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 prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as ignored. Another comparable Geodesic Information Systems Limited has shown abnormally high profits of 185.80% in the current year therefore, considering it abnormal was ignored. In this process of rejection, out ten comparables of last year four were ignored and six were left which could be considered as functionally comparable cases. The assessee vide this office letter dated 28.12.2005, was asked to explain why the remaining six comparables i.e., Bodhtree Consul., Fore C Software Fourth Gen., Integ. Hitech, Online Media Sol, Telesys Software be not considered as comparables for benchmarking international 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 profil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 are to be compared with the arithmetic mean of the net margin of comparable companies for the same financial year i.e. F.Y. 2002-03 instead of the weighted average of net margins for two preceding years only. 8.5 As mentioned in para 8.0 above the seven comparables chosen by the assessee during the current year at page 37 of Transfer Pricing report along with six comparables used last year are taken to be appropriate for benchmarking international transaction for current year. A search process for the financial data for the year 2002-03 for these 13 comparables was run on Capitaline Plus, the database used by 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 internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked separately. 10.2 In the course of Transfer Pricing proceedings in reply letter dated 22.12.2005 in para 3, ATPL retracted its argument that loan is approved by Reserve Bank of India in following terms: The documents such as correspondence with the authorized dealers, ODA forms filed with the RBI, letters filed with the RBI, intimation from the RBI and other relevant documents in relation to the loan granted by the assessee to Aithent Inc. Are enclosed at Annexure 3. In our earlier submissions it was inadvertently submitted that the loan was granted to Aithent Inc. After obtaining approval of the RBI. In this respect we wish to clarify that the loan was granted under the automatic route for which intimation was filed to the RBI by the assessee and the same was also confirmed by the RBI. Hence the very basis on which international transaction was benchmarked goes and therefore, claim of ATPL that transaction is at Arm s length becomes open to scrutiny. 4. Aggrieved by this the assessee went in appeal before the First Appellate Authority. The CIT(A) considering the submissions of the assessee which are found reproduced in the impugned order at pages 13-18 came t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x comparables i.e., Bodhtree Consul., Fore C Software Fourth Gen., Integ. Hitech, Online Media Sol, Telesys Software be not considered as comparables for benchmarking international 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arking international transaction for current year. A search process for the financial data for the year 2002-03 for these 13 comparables was run on Capitaline Plus, the database used by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders of the High Courts and the Tribunals namely Coca Cola India Inc. V. ACIT 309 ITR 194 (Punjab Haryana); 133 ITD 123 para 18 Aztec Software Technology Services Ltd. V. ACIT 107 ITD 141 paras 127-129. Accordingly it was his submission that being a non-speaking order the issue should be restored back to the file of the CIT(A). Attention was invited to page 5 of the said order wherein on the grievance posed by the assessee addressed in assessee s appeal again a cryptic finding has been given and it was his submission that the department shall not oppose the request of the assessee on the ground that a non-speaking order has been passed. 7. Ld. AR though placed reliance on the impugned order however was unable to show how the order of the CIT(A) can be said to be a speaking order. In fact considering the statutory position it was conceded that decision to uphold the applicability of weighted mean as a tool is contrary to the mandate of law and to that extent the departmental stand may be correct. However it was his submission that since the issue is being restored to the CIT(A) the Ld. Authority should be directed to decide the issue afresh after hearing the assessee. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der: (a) Transfer Pricing Regulations were introduced in India (under the Income Tax Act, 1961 and the Income Tax Rules, 1962) w.ef.. financial year 2001-2002. As the regulations were introduced w.e.f financial year 2001-2002 the same will be applicable on the international transactions entered into by an assessee during or after the financial year 2001-02. The Transfer Pricing Regulations cannot be made applicable to the transactions entered into by an assessee before the financial year 2001-2002. (b) By infusing funds in AIUS the benefits would have flown to ATPL also, (c) AIUS was subsidiary company of ATPL therefore in place of interest free loan assessee could have invested in share capital of AIUS thereby blacking funds in US. (d) The Reserve Bank of India has granted approval of transaction in exceptional circumstances and this it can be presumed to be at arm s length. 9.2. These arguments were not accepted and the TPO held that interest @ 10% on outstanding amount is required to be charged on the following reasoning:- 11. In view of the above of the assessee regarding not charging interest from the AE is not percussive and without any face. The charging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.2 is identical to the sole issue raised by the assessee in ITA No.1490/Del/2011. The only difference being that therein on the loan outstanding the issue can be restored to the TPO instead of the CIT(A). A perusal of the record shows that the assessee in the year under consideration returned a loss of ₹ 3,58,53,150/-and the AO in-compliance with the TPO s order dated 10.09.2008 made an addition of ₹ 7,30,15,125/- resulting in a positive income of ₹ 3,71,61,975/-. The assessee carried the issue in appeal before the CIT(A) who considering the past history of the assessee on the said issue upheld the AO s action. Considering the order of the Tribunal relied upon by the assessee in its own case wherein 2002-03 assessment year the issue has been restored to the TPO following which the order in 2003-04 assessment year, we have restored the issue to the CIT(A), accordingly in the peculiar facts and circumstances herein also following the earlier orders the said issue is restored with identical direction. The TPO shall pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. 13. In the result the cross a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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