INCOME-TAX OFFICER vs. MAGIC SOFTWARD ENTERPRISES INDIA PVT. LTD., PUNE

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.

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/-.

strategic search strategy and has merely cherry picked high profit

making companies on the comparable companies selected in A.Y. 2008-

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.”

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.

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.

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.”

reversing the order of CIT(A).

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.

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.