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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI O.P. KANT & SHRI. K. N. CHARY
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I-2’ NEW DELHI
BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND SHRI. K. N. CHARY, JUDICIAL MEMBER [Through Video Conferencing]
ITA No.7366/Del/2018 Assessment Year: 2014-15
TRL Riceland Pvt. Ltd. Vs. Addl. CIT, Special Range-9 (formerly known as M/s. New Delhi Tilda Riceland P. Ltd.), Eros Corporate Towers, Level-15, Nehru Place, New Delhi PAN No. AAACU0649N
(Appellant) (Respondent)
Appellant by Sh.Nageshwar Rao, Advocate Respondent by Sh. Sukesh Kumar Jain, CIT DR
Date of hearing 23.09.2021 Date of pronouncement 17.11.2021
ORDER PER O.P. KANT, AM:
This Appeal by the assessee is directed against final assessment order dated 26/09/2018 passed by the Learned Additional Commissioner of Income-tax, Spl Range -9, New Delhi
(in short the Learned Assessing Officer) for Assessment Year 2014- 15, pursuant to the direction dated 27/08/2018 of Learned Dispute Resolution panel (DRP). The grounds raised by the assessee are reproduced as under:
That on facts and circumstances of the case and in law, final
assessment order passed by the Assessing Officer ("AO") is in
complete disregard of the provisions of Act and consequently the
Order is non-est, illegal and bad in law.
Ld. AO / TPO / DRP have erred in making an addition of INR
97,57,951/- under chapter X of the Act in respect of international
transaction pertaining to sale of rice.
Ld. AO/ TPO/ DRP have erred in law in facts and circumstances
of the present case by rejecting application of Comparable
Uncontrolled Price ('CUP') method as the most appropriate method
and further in not deleting the adjustment under Chapter X in
respect of international transaction pertaining to sale of rice.
Ld. AO/DRP have erred in not considering application of CUP
method and not dealing with objections to approach adopted by TPO
in respect of international transaction pertaining to sale of rice.
Ld. AO/ TPO/ DRP have erred in law in facts and circumstances
of the present cases by applying Transactional Net Margin Method
as the most appropriate method in respect of international
transaction pertaining to sale of rice.
Ld. AO / TPO / DRP have erred by not accepting the economic
analysis undertaken by Appellant in respect of international
transaction pertaining to sale of rice.
Ld. AO erred in law in facts and circumstances of the present
cases by computing incorrect operating margin of the assessee by
treating foreign exchange loss arising out of external commercial
borrowings as operating in nature for AY 2014-15.
Ld. AO erred in making addition of INR 97,57,951/- to book
profits of Appellant for the purposes of Section1 115JB of the Act
and thereby assessing book profits of Appellant at INR (-)
22,76,62,401/- without appreciating that book profits of a company
cannot be adjusted except as provided Explanation 1 of Section
115JB (2) and transfer pricing adjustment is not one of the classes
of adjustments provided in such explanation.
Ld. AO has erred by alleging that the Appellant has furnished
inaccurate particulars of income, thereby proposing to initiate
penalty proceedings under section 271 (1)(c) of the Act.
Briefly stated facts of the case are that the assessee company is engaged in the business of paddy purchase, rice milling and export of price. The assessee export different varieties of rice viz traditional basmati rice, evolved basmati rice, raw milled rice, sella milled Basmati rice, raw brown Basmati rice, Sona Massori rice and Permal rice etc to European Union and Middle East countries etc. For the year under consideration, the assessee filed return of income on 26/11/2014, declaring loss of rupees (-) 23, 74, 20, 352/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. The Assessing Officer noticed international transactions entered into by the assessee with its Associated Enterprises (AEs) and therefore referred the matter of determination of arm's-length price to the Learned Transfer Pricing Officer (TPO). The Learned TPO observed the international transaction entered into by the assessee with its Associated Enterprises, as under:
Operating Revenues Received (A) 588,174,000 Total Operating Cost (B) 801,897,000 Arm’s Length Profit(C=4.66% OF B] 37,368,400 Arm’s Length Price (D= B+C) 839,265,400 Adjustment/Difference (E= D-A) 251,091,400 Price Received by Assessee in international transaction] 19,782,708 Proportion of AEs revenue to Total Revenue (G=F/A). 3.36% Adjustment H= E*G) 8,445,235
The Learned TPO disputed the benchmarking in the case of international transaction of the sale of Basmati rice and sale of non- basmati rice. The Learned DRP also upheld the rejection of most appropriate method but allowed partly in respect of treating foreign exchange gain/loss as operating in nature. Before us, the assessee in respect of transfer pricing addition, has pressed only issue of rejection of CUP method as most appropriate method by the Assessing Officer/Transfer Pricing Officer. The Learned Counsel of the assessee submitted that assessee is not interested in pressing ground Nos.1, 6, 7 and 9 of the appeal. The remaining ground No.2 is general in nature and therefore, we are not required to adjudicate upon the specifically. The ground Nos. 3 to 5, are in respect of rejection of CUP method is most appropriate method. The ground No.8 is in respect of corporate addition.
Ground No. 3 to 5
First of all, we take up ground No. 3 to 5, where the issue challenged is of rejection of CUP method as most appropriate method by the Assessing Officer, while benchmarking the international transaction of sale of Basmati rice and non-Basmati rice.
The assessee in its transfer pricing study has used comparable uncontrolled price (CUP) method. The assessee analysed the prices invoice -wise and benchmarked the same against quartelyweighted average prices of export prevailing in the international market as
reported in Daily Export Data April 2013-March, 2014 compiled by TIPS Software Services Private Limited, Mumbai. While computing the weighted average price, the assessee excluded the transactions in units other than metric tons (MTs), transaction of organic rice, and transactions with extraordinary high prices. It was submitted by the assessee that export price in all transaction is either higher or equal to or within the permissible variance limit(+)/ (-) 3% from the transfer price provided under section 92C(2) of the Act, and therefore, transaction between the assessee and its Associated enterprises in respect of sale of Basmati rice and non-Basmati rice should be considered it arm’s-length. It was submitted by the assessee that Tribunal in the case of the assessee for assessment year 2008-09 has upheld the use of CUP method.
The Learned TPO on the other and observed that the assessee has been using CUP based on adoption of certain filters and also based on the quarterly average price analysis, whereas while applying CUP, the comparability between controlled and uncontrolled transaction should not only just from the point of view of the ‘product comparability’ but should also take into consideration the effect on the price of other broader business functions. According to him, when differences exist between controlled and uncontrolled transaction or between the enterprises undertaking those transaction, it may be difficult to determine reasonable accurate adjustment to eliminate the effect on price. The Learned TPO rejected the approach of the assessee of comparing average export price by the assessee to its AEs with the average
uncontrolled export price in view of the Rule 10 B(1)(a)(i) of Income- tax Rules, 1962 ( in short the Rules) and proposed Transactional Net Margin Method as most appropriate method in view of the Rule 10C of Rules. The reasoning given by the learner TPO for rejecting the CUP method adopted by the assessee is reproduced as under:
Discussion on contention of the assessee
4.1 Rejection of CUP method adopted by the assessee
Contention of the Assessee
The assessee submits that the CUP Method selected by it to benchmark the various International Transactions undertaken during AY 2014-15 is the most appropriate method. The Assessee submits that it has maintained contemporaneous documentations wherein CUP Method was selected as most appropriate method and applied in the manner prescribed under the provision of the Act and the Rules made there under. Assessee further submits that CUP Method is the most direct method and since, reliable data for application of CUP data was available, it should be preferred over the other prescribed method.
TPO's Remarks
(i) It has been contended that Rule 10C(1) of the Income-tax Rules, provides that the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transactions and which provides the most reliable measure of an arm's length price in relation to the international transactions. In addition, the OECD Guideline’s have been relied upon which states that traditional methods viz CUP, RPM and CPM are generally preferred over other methods. Reliance has been placed on many decisions for selection of CUP as the most appropriate method, few are stated as under:
• ACIT vs MSS India Pvt. Ltd. [123 TTj 657) -ITAT Pune
Serdia Pharmaceuticals Pvt. Ltd vs ACIT [136 TTJ 129)-ITAT Mum
• Clear Plus India Pvt. Ltd. vs DCIT [ITA no.3944/D/2010) ITAT Delhi
[ii] Though CUP method may have been described as one of the preferred methods yet the OECD Guidelines state that an uncontrolled transaction is comparable to a controlled transaction for purposes of the CUP method if one of the two conditions is met:
• None of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the price in the open market.
• Reasonably accurate adjustment can be made to eliminate effect of such differences.
(iii) Similarly, Rule 10C(2)(e) of the Income-Tax Rules provide the same as below:
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely.
(e) The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transactions and the comparable uncontrolled transaction or between the enterprises entering into such transactions;
The selection of the most appropriate method is done as per the provisions of section 92C of the Income Tax Act 1961, wherein the provision of section 92C (3) states as under:
Where during the course of any for the assessment of income, the Assessing Officer is, on the basis of material information or document in his possession, of the opinion that-
(a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2);or
(b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub- section (1) of section 92 D and the rules made in this behalf; or
(c) the information or data used in computation of the arm's length price is not reliable or correct; or
(d) the assessee has failed to furnish within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D,
The Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub- sections (1) and (2), on the basis of such material or information or document available with him.
Rule 10C(1) of the rules defines the most appropriate method. The most appropriate method shall be the method, which is best, suited to the facts and circumstances of the each particular international transaction, and which provides the most reliable measure of an arm’s length price in relation to an international transaction.
Rule 10C(2) of the rules provides that the most appropriate method shall be selected having regard to the following factors;
(a) The nature and class of the international transaction;
(b) The class or classes of associated enterprises entering into the transaction and the functions performed, assets employed and risks assumed by them;
(c) The availability, coverage and reliability of data necessary for the application of the method;
(d) The degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) The extent to which reliable and accurate adjustments can be made to account for differences , if any between the transactions being compared and the enterprises entering into such transactions; and
(f) The nature, extent and reliability of assumptions required to be made in application of a method. It is but very clear that as per the provisions of the Income-tax Act and Rules and the OECD Guidelines, CUP method requires high degree, of product similarity because even minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction. Comparability under this method depends on close similarity with respect to these factors or adjustments to account for any differences.
(iv) The assessee has contended that it has used external CUP and has relied upon the public
Software Service Pvt. Ltd Mumbai, which is an external agency providing custom data in respect of the export of goods from India to various countries. The assessee has further contended that by taking quarterly average price it has given due consideration for the product difference and geographic differences and eliminated the same by considering the data for similar variety of rice being exported to similar destination as the controlled transaction. This contention of assessee was examined and found that the products data compiled in the TIPS database taken from custom data relating to rice, is not only in the broad generic category of rice, but also specifies the variety and brand of basmati/non- basmati rice. The CUP method requires adjustment to the price if there are differences between the controlled and uncontrolled transactions, however, there is no guidance on the different type of adjustments that can be made.
(v) Relying on the OECD Guidelines, some of the factors that could be particularly relevant to this method include:
a) Detailed functional analysis: An accurate functional analysis is required as it may have bearing on the price and may require adjustment on account of intangible property associated with the sale, foreign currency risk, date of transactions etc.
b) Characteristics of the property: The characteristics of the goods/services/intangibles under consideration have a bearing on price and the differences on this account need to be taken into account while judging the comparability of the comparables. It is quite possible that because of further processing and consequent value addition, the higher price which a company is able to command is more than proportionate to the additional cost incurred in such cases the adjustment for differences in characteristics of the goods may not be appropriate.
c) Contractual terms: Contractual terms provide the responsibilities, risks and benefits. However, there are no contractual terms in this case.
d) Level of the market: Goods generally go through various layers of distribution from the time they are manufactured to the time they reach the ultimate customers. Accordingly, a comparison of 2 transactions should be made at the same level of the market e.g. wholesalers or retailers.
e) Geographic market: Prices of same product are likely to differ in various geographic due to such as demand and supply conditions, income levels and consumer preferences.
(vi) The assessee has stated that there is no contract with third parties entered into by the assessee for the sale of rice and the price is determined by the market conditions. To benchmark the international transaction, assessee has selected external CUP as the most appropriate method.
(vii)The assessee more importantly relied upon the decision of Hon'ble ITAT in assessee's own case for AY 2008-09. As already discussed in show cause notice issued to the assessee and incorporated in order above, the Hon’ble ITAT (supra) in addition to Upholding the use of CUP and TIPS software also made following observations:
* Although, the compilation of daily exports port data did constitute a reasonable source of inputs, the assessee had determined arm’s length price of its transactions with the AEs by comparing average export price by the assessee to its AEs with the average uncontrolled export price. This approach was held to be patently incorrect and in contravention of rule lOB(l)(a)(iii) as each international transaction had to be considered on standalone basis.
• The assessee had excluded exceptionally high prices, which was not permissible under the CUP method unless such high prices could be explained by differences of product or commercial terms. In any event, exclusion of extreme cases, such as in quartile ranges, was normally not permissible under the scheme of determination of ALP under the CUP method.
While using TIPS software, the assessee has applied an outlier on both the lower and upper side, which was clearly rejected by the Hon’ble 1TAT.
(viii) CUP using the average quarter prices of the assessee as well as of other exporters has been rejected by the ITAT in assessee's own case in AY 2008-09, Still
assessee is following the same CUP for the year under consideration. Hence, it cannot be accepted.
(ix) Also department has filed an appeal with the Hon'ble High Court against the order of the Hon'ble ITAT, in response to which the Hon’ble High Court has framed a question of law on whether the ITAT has erred in law and on facts in rejecting the TNMM method as most appropriate method.
(x) During the course of Transfer Pricing Proceedings, assessee was asked to furnish the invoice wise analysis of CUP data using the comparable rate to nearest date of the transaction as per ITAT order. The assessee vide its submissions has submitted that the analysis done by it is complete and done as per the provisions of the IT Act and the Rules. Assessee further justified its average quarterly price based CUP wherein assessee has used following criteria:
a) Assessee has taken the average of all exports rate of a particular date of similar rice instead of comparing with single invoice.
b) Assessee has then taken the benefit of +-3% after taking the average as discussed in point no. i) above.
c) After this assessee has compared its invoice rate with average rate after taking the benefit of +3% variation. It means if the assessee price is upto 103%, then assessee has assumed it to be within range. And if it crosses the 103% range then assessee has offered the variation for adjustment.
The working of the assessee is faulty. Since, the quality of the rice of the assessee is best in its category as claimed by the assessee only, the assessee has to compare it with the highest rate of that date or nearest possible date. Secondly, assessee’s claim of benefit of +/- 3% range is not accepted-in view of the following decisions when there is only one price. Same is also not available even under amended provisions.
• UE Trade Corporation (India) (2011-TII-04-ITAT-Del-TP)
• |J Spectrum Silk Ltd. (2011-TII-091TAT-Kol-TP)
• Haworth (India) Pvt. Ltd. A.Y. 2006-07 (ITA NO 5341/DeI/2010)
• ADP Private Ltd. (2 01 l-TII-44-ITAT-Hyd-TP)
Further the excess charge received in respect of some invoices cannot be set-off against under invoicing done in respect of other exports.
This also supports that benchmarking using the CUP by the assessee is not correct.
(xi) It is pertinent to mention here that in its website, the company has claimed that they are the best Basmati rice manufacturer/ exporter in India to Europe and USA. The raw rice is purchased by the company after doing "Advance DNA Technology" over it and once the said rice passes the said test, it is purchased and further processed by the company. The relevant gist from the website is reproduced as under:
"The story of Tilda is one of unbroken success. Tilda was the first company to bring Basmati to the Western World over 40 years ago and has become an international food brand selling in over 50 countries. The company started its business selling Basmati to the Asian community who immigrated to the UK in the late sixties and early seventies.
To this day Tilda is by far the favourite Basmati brand within this discerning rice-eating community.
With the rise in Indian food popularity it didn't take long for the Tilda brand to secure distribution in major supermarkets and by the nineties Tilda had become supermarket brand leader in the rapidly growing Basmati rice market. This position has strengthened over recent years as more and more consumers have switched from ordinary long grain rice to Basmati.
By the late eighties Tilda had outgrown its previous location and moved to its present site on the Thames estuary. The location provided a perfect gateway for the rice barges to make their deliveries from overseas. By this time the Tilda brand was selling in many international markets including France, Germany, the Middle East and the USA.
With the start of the new millennium Tilda introduced 'ready-to-heat' Steamed Basmati rice in microwavable pouches. This new 2 minute Basmati rice proved an instant success with consumers increasingly looking to save time. In 2008 Tilda introduced new packaging to align the Tilda Steamed Basmati range with the original Tilda Pure Basmati dry rice variants. The packaging design uses illustration to tell the seed-to- plate story.
Basmati remains at the very heart of Tilda. We are committed to only selecting the finest Basmati for all our products. Indeed, Tilda refuses to blend with inferior grains.
We have for many years worked hand-in-hand with the Basmati farming community and taken on the mantle of guardianship of this precious grain. In our quest for the very best Basmati, Tilda employs the latest DNA fingerprint technology and checks every batch of rice for purity.
To this day Tilda is proud of its reputation for uncompromising quality; and a commitment to sustaining the legendary? status of Basmati and the Tilda Basmati brand worldwide."
"Tilda recognises that its activity, like any human activity, has an impact on the planet.
We are therefore committed to maximising the economic and social benefits of our business activities - for example through our fair play policy for farmers - and minimising the environmental impacts wherever we can.
The worldwide rice market is facing particular challenges at the moment For our part, we are committed to playing a full part in managing those issues and continuing to supply our customers with products of impeccable quality and good value.
In the context of rising commodity prices we recognise there is an important balance to be struck between the consumer interest, corporate profitability and the livelihoods of rice farmers."
Since, the assessee itself is claiming its rice as "best rice in its industry", the 'industry rice basket' cannot be used to represent the 'Assessee rice basket'.
In view of assessee’s own claim, benchmarking using the "Industry Quarterly Average Price” cannot be accepted by any prudent person.
(xii) Further, there are several instances where assessee's quarterly average is less as compared to "Industry Quarterly Average Price”.
Therefore, based on discussion above and reasons mentioned in show-cause notice, it is concluded that CUP applied by the assessee after making some adjustments does not
give reliable results and the adjustments are not appropriate to be compared with the uncontrolled transactions and is hereby rejected.
The Learned DRP rejected objection of the assessee on the issue of the most appropriate method observing as under:
4.3.2 DRP Directions-
Grounds no 3 to 5 are similar in nature and inter-related and hence are dealt with together. Comparable Uncontrolled Price (CUP) was not the most appropriate method in the instant case because CUP required high degree of comparability between the controlled and the uncontrolled transactions. The TPO quoted from the OECD guidelines the conditions for applicability of CUP and analysed the provisions of the Income-Tax Act in this regard. The TPO concluded that the products data compiled in the TIPS database even after making some adjustments did not give reliable results and that it would not be appropriate to compare the adjusted CUP data with the controlled transactions.
The Panel took into account the rival submissions. Looking to the fact that there are various varieties and grades of rice, there is bound to be differences between the controlled and uncontrolled transactions which may not permit suitable adjustments and fair comparability. Therefore the Panel concurs with the view of the TPO that CUP method was required to be rejected and TNMM has rightly been applied as the most appropriate method. Accordingly the said objections are dismissed.
Before us, the Learned Counsel of the assessee filed a paperbook containing pages 1 to 105 and submitted that the Tribunal in the case of the assessee for assessment year 2008-09 has approved the CUP method is most appropriate method to be applied. The Learned Counsel referred to order of the transfer pricing order giving effect to the direction of the Tribunal for Assessment Year 2008-09 (available on page 16 to 22 of the paperbook. The Learned Counsel also referred to the order of the Hon’ble Delhi High Court available on page 23 to 24 wherein the appeal filed by the Revenue against the order of the Tribunal was admitted. The Learned Counsel submitted that final decision on the appeal before the Hon’ble High Court it still pending. The Learned Counsel accordingly submitted that the Revenue authorities might be directed to follow the finding of the Tribunal (supra).
Learned DR on the other hand submitted that Department has not accepted the finding of the Tribunal in assessment year 2008- 09 and matter has been disputed before the Hon’ble Delhi High Court, which is pending. The Leaned DR submitted that application of CUP method by the assessee suffers from various defects such as comparison with weighted average industry price of all kind of rice as against best quality Basmati rice exported by the assessee to its associated enterprises. He also submitted that while averaging industry transaction, exceptionally high or low transaction has been excluded, which is not permitted under the CUP method. He also
submitted that while benchmarking the transaction under CUP, the assessee is required to take into consideration properties of the product and evaluate accompanying circumstances. He submitted that even a minor change in the property of the product, circumstances of the trade (billing period, amount of credit thereon etc) may have a significant effect of the price. He submitted that product comparability is a absolutely key in particular physical features such as size, weight, appearance along with volume, reliability, storage requirement, regulatory requirement etc and pricing of product is a very subjective and can differ depending on the marketplace and therefore CUP method requires a high degree of comparability along with following dimensions:
(i) Quality of the product or service; (ii) Contractual terms (example, scope and terms of warranties provided, sale or purchasevolumes, credit terms, transportation terms, etc) (iii)Level of market i.e. wholesale, retail, etc. (iv) Geographical market in which the transaction takes place, (v) Date of transaction (vi)Intangible property associated with the sale (vii)Foreign currency receipt (viii)Alternatives realistically available with the buyer and the seller.
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. Before us the assessee has only disputed the issue of rejection of CUP method as
most appropriate method for benchmarking international transaction of sale of ‘Basmati’ and ‘nonbasmati rice’ to Associated Enterprises.
The selection of most appropriate method is required to be done as per the provisions of section 92C of the Act. The Section 92C(1) has prescribed different method of benchmarking including CUP, resale price method, cost plus method, profit split method and transactional net margin method. The Section 92C(2) of the Act has provided manner of applying most approved method in terms of Rule 10. The section 92C(3) has provided basis for the TPO for applying most appropriate method in terms of section 92C(1) and 92C(2) of the Act. The Rules in this respect read as under :-
“Rule 10 C (1) of the rules defines the most appropriate method. The most appropriate method shall be the method, which is best, suited' to the facts and circumstances of the each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to an international transaction.
Rule 10 C (2) of the rules provides that the most appropriate method shall be selected having regard to the following factors; (a) The nature and class of the international transaction;
(b)The class or classes of associated enterprises entering into the transaction and the functions performed, assets employed and risks assumed by them;
(c)The availability, coverage and reliability of data necessary for the application of the method;
(d) The degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) The extent to which reliable and accurate adjustments can lie made to account for differences , if any between the transactions being compared and the enterprises entering into such transactions; and
(f) The nature, extent and reliability of assumptions required to be made in application of a method.”
The Tribunal in Assessment Year 2008-09 in the case of the assessee has analysed the CUP method employed by the assessee but averaging of control transactions with its AEs and comparison of the same with average uncontrolled transaction has not been approved by the Tribunal. The Tribunal also did not approve exclusion of high-priced sale instances. The relevant finding of the Tribunal analysing the CUP method applied by the assessee is reproduced as under:
We have considered the rival submission and perused the material on record. A co-ordinate Bench of the Delhi Tribunal in the case of Ciena India Pvt. Ltd. v. DCIT in ITA Nos. 2948, 3324/Del/2013, has held as under
“9.2. We have heard the rival submissions and perused the relevant material on record. It can be seen from the information supplied by this company u/s 133(6) of the Act, a part of which has been reproduced in the TPO's order, that this company 'has developed a few of its own products in the area of identity management connectors.' Revenue from product licences stands at Rs.288.93 million as against the revenue from software development services at Rs.4829.57 millions. Though this company is more
engaged in software development services, but, is also a software product company, which is evident from the information supplied by it to the TPO. Thus, the total profits of the company on entity level also, inter alia, include revenue from product licences. As there is no separate segmental information and it has been considered as comparable on entity level, it implies that the total revenue considered also consist of some part from product licences. In such circumstances, it is not possible to ascertain the impact of such revenue on the total revenue of this company. Further, there is no information available from the Annual report of this company or the data collected by the TPO u/s 133(6) of the Act to divulge the amount of revenue from software development services alone to the exclusion of revenue from product licences. As the assessee is not engaged in the sale of any software products, this company on entity level, cannot be considered as comparable. The Delhi Bench of the Tribunal in the case of Toluna India Pvt. Ltd. vs. ACIT (ITA No.5645/Del/2011, vide its order dated 26.8.2014 has held Persistent Systems Ltd. to be incomparable with Toluna India Pvt. Ltd., also a company engaged in providing software development services to its related parties alone. Similar view has been taken by the Tribunal in Lear Automotive India Pvt. Ltd. vs. ACIT (ITA No.5612/Del/2011) vide its order dated 22.12.2014. The Id. DR could not point out any distinguishing feature in the factual matrix of the assessee in question and Toluna India Pvt. Ltd., and Lear Automotive India Pvt. Ltd. Since both these companies are also engaged in the business of providing software development services to its AEs, similar to the activity done by the assessee, respectfully following the precedents, we order for the exclusion of this company from the list of comparables.”
Similarly, in the case of assessee’s group company, viz., Fiserv India Pvt. Ltd. for AY 2010-11, which company is also in the business of software development services, a co-ordinate Bench of the Delhi Tribunal in ITA No.6737/Del/2014 deleted Persistent from the list of comparables.
Further a perusal of page 484 (PB-2) Annual Report of Persistent reveals that it is not only engaged in the business of software development
services but also manufacture and sale of software products and owns significant intangibles and that segmental data for services and products is not available and the Id DR, could not controvert this fact, so we concur with the order of co-ordinate bench of the Tribunal, and we direct exclusion of Persistent Systems Ltd. from the list of comparables .
ZYLOG SYSTEMS LTD. (ZYLOG)
The case of the assessee is that Zylog is not only engaged in software services but also software and hardware products and the revenue of the company is also derived from licensing of software products. It is submitted that there is no segmental information regarding revenues of Rs.968.19 crores which, as per the annual report of Zylog, is derived both from services and products. It was further submitted that the assessee had included Zylog Systems (India) Ltd. in its list of comparables which was substituted with Zylog by the TPO.
The DRP repelled the objection of the assessee as under:
“As regards Zylog Systems Ltd. since the taxpayer himself has selected this company as a valid comparable and therefore as discussed above this company cannot be taken out because of high turnover filter. Hence, it is a valid comparable since it appeared in the taxpayer’s TP study also and clears all the filters used by TPO.”
The issue in dispute before us being identical to the issue adjudicated by the Tribunal (supra), and therefore respectfully following the finding of the Tribunal (supra) on the issue in dispute, we restore the issue of determination of arm’s-length price to the file of the AO/TPO for deciding the issue in terms of direction of the Tribunal in assessment year 2008-09. The ground No. 3 to 5 of the appeal are accordingly allowed for statistical purposes.
The ground No. 8 of the appeal relates to addition of Rs.97, 57, 951 to the book profit made by the assessing officer in terms of section 115JB of the Act. In impugned assessment order, the Learned Assessing Officer has computed book profit as under:
Computation of Book Profit u/s 115 JB is given below: Book Profit as declared by the assessee Rs. (-) 23,73,92,482/- Additions Transfer Pricing Adjustment Rs. 97,57,951/- Assessed Book Profit u/s. 115JB Rs. (-) 22,76,62,701/- MAT u/s. 115JB (@18.5%) Rs. NIL
We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that identical issue of addition of transfer pricing adjustment to book profit has been adjudicated by the Tribunal in the case of Cash Edge India (P) Ltd in ITA No. 64/del/2015 for assessment year 2010-11, wherein the tribunal has observed as under:
We have considered the rival submissions and perused the material on record. It is settled law that except for adjustments provided in Explanation 1 Section 115JB(2) of the Act, no other adjustment can be made to book profits under Section 115JB of the Act. We find that that transfer pricing adjustment is not one of the adjustments contemplated under Explanation 1 Section 115JB(2) of the Act and, therefore, could not have been added back to the book profits under Section 115JB.
The case-law relied upon by the Ld. Sr. DR i.e. decision of the Special Bench in the case of the Tribunal in Rain Commodities (supra) does not also advance the case of the Revenue. In that case the Special Bench was considering whether the AO can alter the net profits declared by an assessee. The Special Bench has, following the decision the apex Court in Apollo Tyres and HCL Comnet (supra), inter alia, held that the AO cannot travel beyond the net profits declared by the assessee unless (a) it is discovered that profit and loss account is not drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or (b) the incorrect accounting policies, accounting standards have been adopted for preparing such accounts and the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
In the present case there is no allegation is the assessment order much less any finding that either that profit and loss account has not been drawn up in accordance with Part II and Part III of Schedule VI of the Companies Act, or that any incorrect accounting policies, accounting standards has been adopted for preparing such accounts or that the method/rate of depreciation has been incorrectly adopted for preparation of profit and loss account.
In view of aforesaid, we hold that the AO erred in adding back the transfer pricing adjustment of the book profits under Section 115JB of the Act. Accordingly, this ground of the appeal raised by the assessee is allowed and the AO is directed to exclude the transfer pricing adjustment, if such adjustment survives, from the book profits computed under Section 115JB of the Act.
Being identical issue of transfer pricing addition to book profit while assessing income under MAT provisions, which is involved in
case in hand, respectfully following the finding of the Tribunal in the case of Cash Edge India (P) Ltd (supra), the addition in dispute is deleted. The ground No.8 of the appeal, is accordingly allowed.
In the result, the appeal of the assessee is allowed partly for the statistical purposes.
Order pronounced in the open court on 17.11.2021.
Sd/- Sd/- (K. NARSIMHA CHARY) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:17.11.2021 *Neha* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
Sl. No. Particulars Date 1. Date of dictation: 17.11.2021 2. Date on which the draft of order is placed before the 17.11.2021 Dictating Member: 3. Date on which the draft of order is placed before the other 17.11.2021 Member: 4. Date on which the approved draft of order comes to the 17.11.2021 Sr. PS/PS: 5. Date of which the fair order is placed before the Dictating 17.11.2021 Member for pronouncement: 6. Date on which the final order received after having been 17.11.2021 singed/pronounced by the Members: 7. Date on which the final order is uploaded on the website 17.11.2021 of ITAT: 8. Date on which the file goes to the Bench Clerk 9. Date on which files goes to the Head Clerk: 10. Date on which file goes to the Assistant Registrar for signature on the order: 11. Date of dispatch of order: