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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the Revenue against the order of CIT(A)- IT/TP, Pune, dated 31-07-2014 for the A.Y. 2010-11.
Briefly stated relevant facts of the case include that the assessee is a company engaged in the business of software development & Export. During the impugned assessment year, assessee filed the return of income on 04-10-2010 declaring loss of Rs.2,00,621/-. In the year
2 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
under consideration, assessee entered into International Transactions
with its Associated Enterprises amounting to Rs.5,69,11,716/- for
providing software development services. Details of the same are
provided in Para No.3 of the assessment order. Assessee was asked to
furnish the working of Arms Length Price in respect of the international
transactions undertaken by the assessee. Assessee submitted its reply
stating that it followed Cost Plus Method (CPM) as the most appropriate
method for benchmarking the International Transactions. The operating
profit margin is taken as Profit Level Indicator. Assessee mentioned that
the risk adjustment margin works out to 15.80%. At the end of the
assessment u/s.143(3), the AO rejected the Cost Plus Method adopted by
the assessee and has selected Transactional Net Margin Method (TNMM)
analysis as the most appropriate method and determined the Profit Level
Indicator at 0.87%. The whole exercise of benchmarking is done by the
AO and the expertise of the TPO was not sought and case was not
referred to TPO. Eventually, the AO made adjustment of
Rs.1,35,72,171/-. In the 154 proceedings, the AO determined the
assessed income of the assessee company at Rs.87,69,900/-.
Before the CIT(A), assessee submitted that AO did not follow any
strategic search strategy and has merely cherry picked high profit
making companies on the comparable companies selected in A.Y. 2008-
AO did not make any FAR analysis and therefore, the comparables
selected by the AO needs to be rejected and finally prayed for exclusion
of the companies selected by the AO from the final list of comparables.
Eventually, the CIT(A) decided the issue in favour of the assessee and
3 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
deleted the adjustments made by the AO. The operational paras of the
order of CIT(A) is extracted here as under :
“2.2.9 With the result, I find the learned AO’s order is a non- speaking order against which, the appellant has correctly leveled charge of cherry picking of the comparable companies by the learned AO. As stated, the learned AOs approach of not providing reasons as to why comparable companies selected by the Appellant are rejected, the basis on which, he has selected additional comparable companies and grounds on which, je rejected the Appellant’s objections against the proposed adjustment, is not acceptable. The learned AO’s such approach makes the resultant adjustment unsustainable.
2.2.10 In view of the above discussion, I delete the adjustment of Rs.1,35,27,171 made by the learned AO.”
Aggrieved with the deletion of adjustments by the First Appellate
authority, the Revenue filed the present appeal before the Tribunal with
the following grounds :
“1. The Ld.CIT(A) has failed to appreciate that, the AO has not carried out FAR analysis of comparable companies as there is no such statutory requirement.
Hon’ble CIT(A) has failed to appreciate the facts that the comparables selected by the AO were based on comparable selected in assessee’s own case.
The Ld.CIT(A) has failed to appreciate the fact that, these companies were examined by the CIT(A) in respect of A.Y. 2007-08 and 2008-09 and there was no such rejection on the basis of non-availability of FAR.
The Ld.CIT(A) has erred in not considering the show cause notice issued by the AO with set of comparables.
The appellant craves leave to add, alter or amend any or all the grounds of appeal.”
Rule 27 of the ITAT Rules, 1963 : Before us, assessee filed an
application dated 16-08-2017 and invoked the provisions of Rule 27 of
the ITAT Rules, 1963. This rule 27 relates to the ‘Respondent may
support order on grounds decided against him’. Taking us through the
said application, Ld. AR for the assessee submitted that assessee raised
4 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
11 grounds before the CIT(A) raising various specific issues relating to
the TP adjustments and the same were not disposed of by the CIT(A) by
passing a ground-wise speaking order on each of the issues raised by the
assessee in the grounds. The fact that CIT(A) disposed of the grounds in
a summary manner, although the decision is given in favour of the
assessee, does not amount to a speaking order which should be a
characteristic feature of any appealable order. Thus, it is a case where
the TP adjustments were deleted in favour of the assessee and however,
the grounds were not adjudicated in the manner required under the
statute. From this point of view, the assessee is aggrieved and has taken
recourse under the provisions of Rule 27 of the ITAT Rules, 1963 relating
to ‘Respondent may support order on grounds decided against him’.
In addition to the above, Ld. AR for the assessee filed another
chart and submitted that the TP adjustments were unusually made by
the AO without making reference to the TPO as required u/s.92CA of the
Act and as explained by the CBDT Instruction No.03/2003, dated 20-05-
2003. In this regard, Shri R.D. Onkar, Ld. AR for the assessee referred
to Rule 27 of the ITAT Rules, 1963 and submitted that, in this, appeal,
the CIT(A) granted relief to the assessee and the Revenue is in appeal.
Notwithstanding the relief granted by the CIT(A) on merits of the TP
adjustments, Ld. AR for the assessee submitted that this is a case of
Transfer Pricing and the benchmarking of the international transactions
needs to be done by the TPO as per the Instructions No.3 of the CBDT
dated 20-05-2003. AO has no jurisdiction to make such TP
adjustments.
5 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
Mentioning that this is a case where AO assumed jurisdiction of
the TPO in violation of the said CBDT Circular, Ld. AR for the assessee
submitted that the said adjustments becomes null and void due to lack
of jurisdiction. In this regard, Ld. AR for the assessee relied on the
judgment of Hon’ble jurisdictional High Court in the case of Pr.CIT Vs.
M/s. S.G. Asia Holdings (India) Pvt. Ltd. TS-922-HC-2018 (Bom.) (TP)
He also submitted the following written submissions :
“1. The assessee is a wholly owned subsidiary of Magic Software Enterprises Ltd. Israel and is engaged in providing software development services to its parent company. The services are exported by the assessee.
In the relevant previous year the assessee entered into international transactions of export of software services, import of software licenses and commission income on sale of licenses in India amounting to Rs.5,69,11,716/- which is in excess of the threshold of Rs.5 cr. The assessee has determined the ALP of the transactions by adopting Cost Plus Mark up (CPM).
The learned AO in the scrutiny assessment recalculated the price of the International Transactions by thrusting new comparable viz. Persistent Systems and made Transfer Pricing (TP) adjustment of Rs.1,35,72,171/- u/s.92 in the order passed u/s.143(3). The TP adjustment has been made without making the reference to the Transfer Pricing Officer u/s.92CA as mandated by the CBDT Instruction 3/2003, dated 20- 05-2003.
Ld. CIT(A) has held in the order that the AO cherry picked comparable companies, without giving basis and rejecting assessee’s objections thereagainst and concluding that the TP adjustment Rs.1,35,72,171/- made in the AO passed u/s.143(3) as unsustainable.
Though order of Ld.CIT(A) is in favour of the assessee, Ld. CIT(A) unfortunately has not specifically espoused the relevant aspect vital to the issue namely the breach of instructions on the part of Ld. AO to refer the matter to the TPO before confirming TP adjustment as required under instruction issued by the CBDT Ref.3/2003 dated 20-05-2003. We have moved a petition under Rule 27 of ITAT Rules 1963 in August 2017 within a copy of the Ld. DR praying for consideration and adjudication of the aforesaid issue.
It is submitted that the Instructions (supra) issued by CBDT are mandatory and applicable to the impugned year and binding on the AO. The TP adjustment made by the AO without reference to TPO u/s.92CA is contrary to the instructions and is therefore clearly unsustainable.
The aforesaid proposition is upheld and the issue is squarely covered by the decision of jurisdictional Bombay High Court in the case of M/s. S.G. Asia Holdings (India) P. Ltd. reported in Tax Sutra TS-922-HC-
6 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
2018 (BOM) –TP wherein Hon’ble HC has upheld the order of ITAT holding the TP adjustment bad in law and dismissed Revenue’s appeal (Copies of the decision of Hon’ble Bombay High Court, Hon’ble Mumbai ITAT and Instructi0n 3/2003 placed). 8. It is prayed that on the backdrop of identical set of facts the TP adjustment made by the AO in the order of assessment u/s.143(3) without mandatory reference to TPO u/s.92CA of the Income Tax Act be deleted.”
Ld. DR for the Revenue relied on the order of AO and prayed for
reversing the order of CIT(A).
On hearing both the parties on this limited issue of jurisdiction in
matters relating to the TP adjustments, we find in principle, the order of
the CIT(A) is deficient to the extent of the ground-wise adjudication. Of
course, the appeal was allowed in favour of the assessee. In our view,
the end result of the appeal before CIT(A), does not justify the said
deficiency. To that extent, considering the grievance of the assessee, the
application of the assessee dated 16-08-2017 under Rule 27 of the ITAT,
Rules, 1963 is admitted for adjudication. However, for removal of the
deficiencies in the order of CIT(A), remanding the grounds to the file of
CIT(A) for want of one more round of adjudication may be the likely
outcome.
7.1 Further, on the issue of referral of the TP cases to the TPO, we
have examined the same raised by the Ld. AR for the assessee on the
issue of requirement of making a referral to the TPO u/s.92CA read with
CBDT Instruction No.03/2003, dated 20-05-2003. We find this
objection raised by the assessee is already answered by the
jurisdictional High Court in the case of M/s.S.G. Asia Holdings (India)
Pvt. Ltd. (supra). For the sake of completeness, the contents of Para
No.10 of the said judgment is extracted as under :
7 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
“10. However, in our opinion, no controversy as wide as is projected before us would arise simply because it is undisputed that there is circular. It is undisputed that it gave certain instructions and in the event the transaction is an international transaction, then, all the relevant provisions of the IT Act would be applicable. The instructions were issued by the Central Board of Direct Taxes (CBDT). The factual finding in this case is that, given the nature of the transaction, these instructions were applicable. If they were applicable, then, there ought to be some solid ground for ignoring a mandate flowing therefrom. The mandate is that the Assessing Officer should make a reference to the Transfer Pricing Officer. That is to make the transfer pricing adjustment. In this case, no such reference was made despite the facts warranting so. There is no acceptable or justifiable reason on record for refusing to abide by this condition in the CBDT Circular. Once the circular goes unchallenged and binds the Revenue, then, in the absence of all this, the Tribunal held that the Assessing Officer Officer’s order cannot be sustained. He could not have proceeded to make the transfer pricing adjustment.”
Considering the settled legal position on this part of the legal
issue, we are of the opinion that the objections raised by the assessee
under Rule 27 of the ITAT Rules, 1963 is sustainable to this extent. The
mandate is clear and the AO is under the obligation to make a referral to
the TPO and the same is not done in this case. Reasons are given for
this failure. Therefore, this part of the arguments apply to Rule 27 of the
ITAT Rules, 1963 stands allowed in favour of the assessee.
Consequently, the other aspect passing of a speaking order by the
CIT(A) on the grounds raised before him and their adjudication becomes
an academic importance. Therefore, the issues relating to passing of a
speaking order raised by the assessee in the application under Rule 27
of the ITAT, Rules, 1963 on this part of the issue are dismissed as
academic. Thus, the issues raised in the said application stands partly
allowed.
Considering our outcome on the mandatory requirement of making
a reference to the TPO u/s.92CA of the Act, adjudication of the issues
raised by the Revenue becomes an academic exercise and therefore, the
8 ITA No.1834/PUN/2014 Magic Software Enterprises India Pvt. Ltd.,
Revenue appeal stands dismissed. Accordingly, the grounds raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced on 10th day of October, 2018.
Sd/- Sd/-
(िवकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �ाियक सद�/JUDICIAL MEMBER लेखा सद�/ACCOUNTANT MEMBER पुणे / Pune; िदनांक / Dated : 10th October, 2018. Satish
आदेश की 'ितिलिप अ)ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��थ� / The Respondent. 2. 3. The CIT(Appeals)-IT/TP, Pune 4. The CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “ए” ब"च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड% फ़ाइल / Guard File. 6.
आदेशानुसार / BY ORDER,
// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.