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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU
Before: SMT. ASHA VIJAYARAGHAVANS & SHRI. S. JAYARAMAN
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
This is an appeal filed by the assessee against the order of DRP dt.06.06.2012, for the assessment year 2008-09.
IT(TP)A.1256/Bang/2012 Page - 2
The assessee is engaged in the business of computer
software development and consultancy in providing software services and maintenance to various clients engaged in running hospitals. During the year under consideration, it had entered into international transactions.
The TPO gave a show-cause notice dt.07.10.2011 to the assessee giving reasons for rejecting cost plus method
and CUP method and proposing TNMM to arrive at the ALP.
After considering the assessee’s reply etc., the TPO substituted TNM method in the place of the Cost Pus Method
(CPM) used by the assessee and consequently rejected the CUP method and then determined the ALP.
4. Aggrieved, the assessee approached the DRP and the DRP by its order dt.06.06.2012, inter alia, upheld the order
of TPO. Being aggrieved with the order of ITO, Ward -11(2),
Bengaluru, dt.31.07.2012, in pursuance of DRP order, the assessee is in appeal before this Tribunal. Its grounds of appeal are as under :
IT(TP)A.1256/Bang/2012 Page - 3 IT(TP)A.1256/Bang/2012 Page - 4
Assessee has also filed an additional ground which is as follows:
“The Learned. TPO and DRP erred in rejecting the “comparable Uncontrolled Price” method adopted by the appellate (sic), correct one is appellant) as the most appropriate method of substantiating the arm’s length nature of the international transactions.”
Heard the AR and the DR. It is seen that this issue arose in the assessee’s case in a y 2007-08 which has been the subject matter before the DRP and the DRP has upheld the TNMM Method . The relevant portion of the DRP’s order for this A. Y is extracted as under:
The assessee has stated that the Prowess and Capitaline data bases are dead and lifeless data bases. These allegations do not merit consideration, These data bases have been used in TP proceedings for several years The assessee has also not stated how it has arrived at such a conclusion. It appears that the main grievance arising to the assessee in this ground is the substitution of TNMM method in place of the Cost Pus Method (CPM) used by the assessee and the consequent rejection of the CUP method. This issue also arose for AY 2007-08 which has been the IT(TP)A.1256/Bang/2012 Page - 5 subject matter before the DPP TNMM Method has been upheld by the DRP. The reason why the CPM method cannot be applied to the assessee a case is as under: 1 The CPM method presents some practical difficulties in identifying the costs incurred for the provision of service like whether an indirect cost is towards rendering services or it is an enterprise level expense.
2 While applying CPM the taxpayer should have considered all direct and indirect costs incurred In respect of the services rendered by it. But, it is apparent from details given by the taxpayer that it did not include all the direct and indirect costs while computing gross mark up. The details of expense excluded were simply not available. Thus it was difficult to say whether the grass profit worked out in the case of the comparables is at the same level as that of the taxpayer.
3 As per the agreement, the taxpayer's cost of providing services included all costs that have been incurred by the taxpayer. All these expenses are reimbursed on cost plus basis. The tax payer is forgetting that it is also getting a percentage on other costs which have been excluded by the taxpayer in CPM So the cross margin shown by the taxpayer distorts the true picture of its financials for which TNMM method is the most appropriate method as It captures all expenses except interest, coinciding the cost base of the tax payer for reimbursement (as per the agreement and invoices raised by the tax payer).
The CPM method presents some difficulties in proper application, particularly in the determination of costs. Although it is true that an enterprise must cover its costs over a period of time to remain in business, those costs may not be the determinant of the appropriate profit in a specific case for any one year. While in many cases companies are driven by competition to scale IT(TP)A.1256/Bang/2012 Page - 6
down prices by reference to the cost of creating the relevant goods or providing the relevant service, there are other circumstances where there is no discernible link between the level of costs incurred and a market price. So, when pricing of services is determined by market forces and it is almost constant across the industry, the cost plus method cannot be the most reliable or appropriate method.
2) Hence, for the above detailed reasons, CPM was rejected as the most appropriate method. And TNMM was utilized especially when the reliable data either in the taxpayer's case or in the comparable cases is not available for ascertaining the direct and indirect cost of production of services. The other methods such as CUP, Resale Price Method and Profit Spilt Method are also rejected due to the non availability of data and non applicability in the facts and circumstances of the case. Thus the TNMM was the most appropriate method in the facts and circumstances of the taxpayer's case. Accordingly objection no.4 is rejected.
7) Ground of Objection-5: The draft order passed without regard to the internal instructions issued by the Department that no ALP adjustment need to be made in a routine manner when the quantum of international transactions with the Associated Enterprises is less than Rs.15 crores, itself constitutes an arbitrariness in the passing of the order and the assessee objects on this ground also.
1) Before the DRP in its submission dated 02/06/2012 the assessee has stated that the total consideration involved which was proposed to be disallowed by the TPO was Rs. 1,77,19,075/- Which is far below the threshold limitation provided by the Board. Consequently it was submitted that the reference to the TPC was had and the order of the TPO suggesting adjustments to the declared IT(TP)A.1256/Bang/2012 Page - 7 income was without jurisdiction and implementation of the same by the AC was again without jurisdiction. The assessee’s submissions are not acceptable. The international transaction in terms of section 92CA was referred by the AO with the permission of the GT to the IPO. Once such expediency has been expressed by the AO and the CIT to refer a matter to the TPO nothing in the section 920A prohibits the making of such reference The instruction to which the assessee refers is only an internal matter for guidance of Officers and there Is no statutory prohibition to the making of such reference or the order of the TPO on such reference. Accordingly this ground is rejected
8) Ground of Objection-6: The TPO / AO has arrived arbitrary margin of 23.65% and applied on the cost incurred to arrive at the proposed ALP & has made the arbitrary adjustment of Rs.1.44 crore, which the assessee vehemently objects as it is against the principles of natural justice and against the principles of practical business operations. This assumes the very impracticable possibility of business always on profit & assured profit which is incorrect.
Ground of Objection-7 : In view of the above, it is prayed before the Dispute Resolution Panel to consider the merits of the case. ground of appeal and the hardship to the assessee and drop the additions made by the TPO and AO and issue adequate directions to them accordingly u/s.144C and finalise the assessment.
1) Objections 6 & 7 are dealt with together, The TPO has arrived at the margin of 23.65% which is nothing but the average of OP/IC percentage. Such margin has been arrived at after considering the taxpayers objection, in this connection the adjustment was brought to the notice of taxpayer vide show cause notice dated 07/10/2011. Since the assessee has not specifically brought to the notice of this Panel its objections to the margin proposed by the TPO it IT(TP)A.1256/Bang/2012 Page - 8 is not possible to deliberate on this matter further. It should also be noted that sufficient opportunity has been afforded to the assessee from the records of the TPO. Accordingly objection 6 & 7 are rejected.”
From the above, it is clear that the DRP considered all the issues raised by the assessee , including the rationale for TNMM, on which we could not find any infirmity. Thus, the assessee has not made out a case in its favour.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 30th day of September, 2016.