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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI C.N. PRASAD,
आदेश / O R D E R PER C.N. PRASAD, JM:
This appeal is filed by the assessee against the Direction of the DRP-III, Mumbai dated 11.12.2013 pertaining to assessment year 2009-10.
The assessee has raised following grounds of appeal in respect of Transfer Pricing Adjustment in its appeal:
“1. The impugned order passed by the learned Assessing Officer u/s. 143(3) of the Act and the impugned directions issued by the Hon’ble DRP u/s. 14C(5) of the Act are bad in law and against the principles of natural justice.
2. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the upward adjustments of Rs. 26,13,95,031 made by the learned Transfer Pricing Officer ('TPO') while determining the arm's length price ('ALP') in respect of provision of information technology enabled services to its associated enterprises.
3. The learned AO / Hon'ble DRP erred in law by making the transfer pricing addition without providing an adequate opportunity of being heard and in complete disregard of principle of natural justice.
Rejection of audited segmental results and following an entity level approach and not making additions only to international transactions
4.1. The learned AO/ Hon'ble DRP erred in law and in facts, by confirming the addition of Rs. 26,13,95,031/-made by the TPO being transfer pricing adjustment by completely disregarding the signed segmental accounts of the Appellant.
4.2. The learned AO/ Hon'ble DRP erred, in law and in facts, by not appreciating the fact that as per AS 17- Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006, pertaining to "Small and Medium Sized Company", in absence of any statutory requirements, the Appellant is not required to prepare segmental accounts as part of its annual accounts and proceeded to upheld TPO's stand that said segmental accounts ought to be part of Appellant's annual accounts.
4.3. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the adoption of entity level approach to determine the ALP of international transactions undertaken by the Appellant with its associated enterprises and not appreciating the fact that under the TNMM method, comparison of net profit margin realized from international transactions or aggregate of international transactions is required and not comparison of operating margins of the enterprise as a whole.
4.4. The learned AO/ Hon'ble DRP erred, in law and in facts, by failing to make transfer pricing addition only to the international transactions of the appellant and ignored judicial precedents in this regard.
4.5. The learned AO/ Hon'ble DRP erred in law and on facts by making transfer pricing additions even in respect of transactions with non-associated enterprises. a. Rejection of bench marking analysis performed by the Appellant
5.1. The learned AO / Hon'ble DRP erred on the facts and circumstances of the case and in law, in confirming the TPO's stand of rejecting the search process methodology followed by the Appellant as per the provisions of law and conducting a new search process.
5.2. The learned AO / Hon'ble DRP erred, in law and in facts, by confirming the TPO's stand of rejecting the independent comparable companies selected by the Appellant in its transfer pricing study report without providing any cogent reasons or pointing out any deficiencies in the said report as required per provisions of section 92C(3) of the Act. b. Selection of erroneous comparable companies by the TPO 6.1. The learned AO / Hon'ble DRP erred, in law and in facts, by confirming the fresh comparable search analysis conducted by the learned TPO, without having regard to the functions performed, assets employed and risks assumed.
6.2. The learned AO / Hon'ble DRP erred, in law and in facts, by not appreciating that, in conducting the fresh comparability analysis, the learned TPO has erred in using data which was not available as on the specified date {as defined in Section 92F{iv} of the Act}.
6.3. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the selection of alleged comparable companies earning abnormally high profits/super profits by the TPO;
6.4. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding selection of alleged comparable companies which are functionally different / disproportionate to the appellant.
6.5. The learned AO / Hon'ble DRP erred, in law and in facts, by disregarding the differences in risk profile and working capital of the Appellant and the alleged comparable companies selected by him, by not allowing the risk adjustment and working capital adjustment,
Brief facts are that the assessee is in the business of providing computer aided software solutions, maintenance and imaging services to Oil & Gas companies, similar services were provided to AEs. During the financial year 2008-09, the assessee company had provided IT Enabled Services to its associated enterprises amounting to Rs. 3,70,55,707/-. The assessee has bench marked its international transaction under TNMM by using operating profit/operating cost as the Profit Level Indicator (PLI). The assessee identified a set of 25 comparable companies with arithmetic mean of 20.54%. The assessee arrived at its segment profitability in respect of IT enabled services at 27.54% and therefore contended that its international transactions are at arm’s length. However, the TPO did not accept the contention of the assessee and he observed that segmental profitability for the year ended 31.3.2009 was not produced by the assessee. He also observed that copy of Annual Report for financial year 2008-09 submitted by the assessee was also does not contain any segmental reporting. Therefore, he rejected segmental PLI calculated by the assessee and adopted entity level PLI of the assessee and arrived at operating profit to operating cost at 60.81%.
3.1. The TPO was of the view that since assessee’s business does consists of providing computer aided exploration and production coupled with software products and services to the oil and gas industry which is a high end knowledge oriented IT enabled services and since assessee’s set of comparables was not into such activates, the assessee’s set of comparables was found not acceptable. A show cause notice dated 21.12.2012 was issued proposing new set of 9 comparable companies to bench mark international transaction. He observed that assessee filed submissions on 41.2013 regarding all other points listed in the show cause notice except on the proposed comparable companies provided by the TPO. Therefore, the TPO proceeded with these 9 comparables for bench marking the international transactions and arrived at operating profit/operating cost margin and arrived at arithmetic mean of 69.76%. Thus, the TPO arrived at an adjustment of Rs. 26,13,95,031/- by passing order u/s. 92CA(3) of the Act on 16.1.2013.
A Draft assessment order was passed on 12.3.2013 by the Assessing Officer proposing the adjustment in respect of arm’s length price in relation to the international transactions with AE as computed by the TPO. The assessee filed objections before the DRP on 19.4.2013 contending that there is violation of principles of natural justice in rejecting segmental accounts submitted by the assessee, in adopting entity level approach by the TPO and also contended that the 9 comparable companies selected by the TPO are wrong comparables. However, the DRP rejecting all the submissions of the assessee affirmed the order of the TPO in arriving at the adjustment of 26.12 crores in respect of the international transactions with its AEs.
The Ld. Counsel for the assessee at the outset submits that the TPO erred in not providing sufficient time to furnish response to the show cause notice issued by him. Referring to page-131 of the Paper Book submits that the TPO issued show-cause notice dated 21.12.2012 requiring the assessee to show cause by 3.1.2013 as to why an adjustment should not be made by bench marking the transaction with the 9 comparables in the field of Information Technology Enabled Services. The Ld. Counsel for the assessee submits that the 9 comparables proposed by the TPO are as under:
S. No. Comparable Name 1. Accentia Tech. 2. Aditya Birla Minacs Worldwide Ltd. 3. Coral Hub Ltd. 4. Cosmic Global Ltd. 5. Cross Domain 6. Datamatics Glob. eClerx Services Ltd. 7. 8. Excel Infoways Ltd. 9. Genpact India (Pvt. Company with unlimited liability) 5.1. The Ld. Counsel for the assessee further referring to page-128 to 130 of the Paper book submits that assessee by letter dated 4.1.2013 filed Transfer Pricing study including segmental profitability before the TPO. The Ld. Counsel for the assessee further submits that the assessee had raised its further objections vide statement dated 15.1.2013 wherein rebuttals were raised against the comparables selected by the TPO. However, at the time of filing the said letter, the assessee’s authorized representative was informed that the TP order has been issued and hence the said submission cannot be taken on record. Therefore, the Ld. Counsel for the assessee submits that no opportunity of being heard was given to the assessee for furnishing the detailed analysis of the alleged comparable companies selected by the TPO and the reasons why the same should be rejected was not considered. Therefore, the Ld. Counsel for the assessee submits that TPO erred in passing his order by disregarding the details filed before him and without accepting further details and without opportunity of being heard which has lead to denial of natural justice to the assessee.
6. Coming to the merits of the case, the Ld. Counsel for the assessee submits that during the financial year ended March 31st 2009, assessee had provided IT Enabled services in the Software supply and support/maintenance services and imaging services to its associated enterprises namely Paradigm BV and Paradigm Australia aggregating to Rs. 3,70,55,707/- but the TPO proceeded to make an upward adjustment by considering entity level approach for determining the arm’s length price of the international transactions and not appreciating the fact that, under TNMM method, the Transfer Pricing addition, if any, ought to be restricted to the international transactions only. The Ld. Counsel for the assessee further submitted as under:
The learned TPO rejected the TP documentation submitted by the Appellant and undertook a fresh benchmarking and made an upward adjustment of Rs.26, 13,95,031 by determining the arm's length margin at 69.76% vide order dated 16 January 2013 ("TP order") issued under section 92CA(3) of the Income-tax Act, 1961. The learned TPO also re-computed the operating profit 1 (loss) of the Appellant at Rs. (12,17,40,195/-) i.e. loss of (60.81 %) on total cost, by considering entity level profits rather than restricting the adjustment only to the AE transactions thereby making an adjustment of of Rs. 26,13,95,031 at entity level. It is well settled that transfer pricing adjustment is warranted only qua the transactions with AEs and not non-AEs. Thus, the TPOI AO has grossly erred in making an addition of Rs. 26,13,95,031 which is 7 times or 705% of the international transaction value on entity level rather than restricting it to the international transaction under review. The AO passed a Draft Assessment Order dated 12 March 2013 after considering the TP order issued under section 92CA(3) of the Act dated 16 January 2013 wherein the TPO made an upward adjustment of Rs. 26,13,95,031. Against the said draft assessment order dated 12 March 2013 the Appellant filed its objections before the Hon'ble Dispute Resolution Panel-Ill, Mumbai ('DRP'). The said appeal of the Appellant was disposed-of by the Hon'ble DRP vide its Directions dated 11 December 2013 passed under section 144C(5) of the Act, confirming the action of the TPO and AO and upheld the transfer pricing adjustment of Rs. 26,13,95,031. Being aggrieved by the order of the AO dated 31 December 2013 pursuant to the directions by the Hon'ble DRP passed under section 143(3) r.w.s. 144C(13) of the Act, the Appellant has filed an appeal with the ITA T.
B. Appellant's contentions raised before the Hon'ble bench B.1.1 Rejection of audited segmental results and following an entity level approach and not restricting additions only to international transactions. 1) As mentioned above, the TPO rejected the audited segmental accounts (STPI revenues) duly were forming part of the TP documentation (as "Annexure 5" therein) of the Appellant submitted during the course of the transfer pricing assessment proceedings before the TPO.
2. In view of the facts and under the circumstances of the case and in law, it is humbly submitted that the learned TPO erred in not appreciating the fact that as per AS 17- Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006, pertaining to "Small and Medium Sized Company", in absence of any statutory requirements, the Appellant is not required to prepare segmental accounts as part of it's annual accounts. 3) It would also be appreciated that the segmental accounts were forming part of the TP documentation (as "Annexure 5" therein) which was lost sight off by the learned TPO / AO. Further, during the course of the proceedings before the Hon'ble DRP, the audited segmental accounts were re-submitted however, the same were not considered. These segmental accounts are certified by the same chartered accountant who had also issued audited segmental for the previous year i.e. AY 2008-09 when the then TPO had accepted the same, inspite of it not forming part of the annual report even in the previous year. Considering that there is no change in circumstances and the segmental were accepted in previous year, the same ought to have been accepted for the year under consideration as such. B.1.2. No transfer pricing adjustment! minimal transfer pricing adjustment 1) Without prejudice to the other contentions raised by the Appellant and considering the facts of the circumstances and in law, the Appellant believes the audited segmental accounts filed before the TPO and the transfer pricing adjustment, if any, ought to be restricted to the international transactions undertake by the Appellant with its AE is squarely covered in favour of the Appellant as adjudicated by the jurisdictional High Court in the following cases: • Tara Jewels Exports Pvt. Ltd. (ITA No. 1814 of2013) • Sumit Diamond (India) Pvt. Ltd. (ITA No. 1647 of2013) • Ratilal Becharlal & Sons [2016] 65 taxmann.com 155 • Petro Araldite Pvt. Ltd (ITA No. 1804 of2013) • Thyssen Krupp Industries India Pvt. Ltd. (ITA No. 2201 of2013)
6.1. The Ld. Counsel for the assessee further submits that out of 9 comparables taken by the TPO, 4 comparables were rejected by various benches of the Tribunal for the reason that either they are not into IT enabled services or rejected they are functionally different or they earned abnormal profits etc. The Ld. Counsel for the assessee submitted detailed reasons for exclusion of the alleged 4 comparable companies with decisions of various Tribunal’s and Courts as under:
Sr.No. Alleged Reason for rejection Case laws comparables • 1 Accentia High turnover and Saunay Jewels Pvt. Ltd. Technologies extraordinary activity during reported in [2010]42 SOT 4 Limited the year under review. (Jurisdicational ITAT) • Indo American Jewellery Limited reported in [2010] 131 TTJ 163 (Jurisdictional ITAT) • LG Soft India Private Limited (ITA No.1121/Ban/2011) (Bangalore ITAT) • Hon’ble Jurisdictional Tribunal in the case of Vodafore India Services P. Ltd. (formerly ‘3Global Services P. Ltd) reported in [2014] 30 ITR(Tribunal) 218 The comparable company is engaged in Medical • Rampgreen Solutions Pvt. Transcription and software Ltd. reported in [2015] 377 sales(KPO) which cannot be ITR 533 compared to the assessee being an ITeS service provider. Hence rejected on • Equant Solutions India (P) the basis that the said Ltd. reported in [2016] (ITA comparable is functionally No.1202/Del/2015)-Delhi different and cannot be Tribunal. considered to ITes provider. • • 2 Coral Hub Functionally different Brigade Global Services Pvt. Ltd(formerly (KPO); Ltd. reported in [2013] 143 • known as Vishal Very low employee cost ITD 59 –(Hyderabad ITAT); • Information ratio; and Capital IQ Information Technologies • Abnormal Systems (India) Pvt. Ltd. Ltd.) reported in [2013] 25 ITR(Tribunal) 185 3 Excel Infoways (Hyderabad ITAT) • Limited HSBC Electronic Data Processing India Limited (ITA No.1624/Hyd/2010) – (Hyderabad ITAT) • Zavata India Pvt. Ltd. reported in [2013] 25 ITR (Tribunal) 504 (Hyderabad ITAT) • 4 Eclerx Services KPO which cannot be Rampgreen Solutions Pvt. Ltd compared to BPO and high Ltd. reported in [2015] 377 turnover. ITR 533-Delhi Tribunal • Global e-Business Operations (P) Ltd. reported in [2015] (ITA No.1678/Bang/2012) Bangalore Tribunal. • Maersk Global Centres
(India) Private Limited reported in [2014] 31 ITR(Tribunal)1/147 ITD 83/161 TTJ 137 (Special Bench) • Avineon India Pvt. Ltd. reported in [2014] 29 ITR(Tribunal) 404 Hyderabad ITAT) • Cognizant Technology services Private Limited reported in [2013] 28 ITR(Tribunal) 125/151 ITD 191 (Hyderabad ITAT)
6.2. The Ld. Counsel for the assessee further submits that based on the above reasons for rejection of the comparable companies if these 4 comparables are excluded the final position would be as under:
Sr. TPO's comparables upheld by DRP Margin as computed by TPO No. 1 Accentia Technologies Ltd. Ought to be excluded on high turnover 2 Aditya Birla Minacs Worldwide Ltd 23.75% (Formerly known as Transworks) 3 Coral Hub Ltd. (formerly known as Vishal Ought to be excluded on functionally Information Technologies Ltd.) different 4 Cosmic Global Ltd 48.20% 5 Crossdomain Solutions Pvt. Ltd. 29.40% 6 Datamatics Global Services Ltd. 17.46% 7 Eclerx services Ltd. Ought to be excluded on high turnover 8 Excel Infoways Ltd. Ought to be excluded on functionally different and abnormally profits of 290.11% Average 29.70% Applicant’s (OP/OC) ratio 27.54% (considering segmental accounts) Transfer Pricing adjustment NIL (since it falls within +/- 5% tolerance band)
Therefore, the Ld. Counsel for the assessee submits that on exclusion of the above 4 comparables, the average margin comes to 29.70% as against the assessee’s operating profit operating cost ratio by considering segmental accounts at 27.54% and in such circumstances since it falls within the plus or minus 5% tolerance band there would not be any transfer pricing adjustment.
The Ld. Departmental Representative submits that proper opportunity was given by the TPO for submission of information and infact the assessee has furnished details on 4.1.2013 as was recorded by the TPO except for the query as to why the 9 set of comparables should not be adopted for Benchmarking the international transactions. The Ld. Departmental Representative submits that he has no serious objection in setting aside the assessment for denovo consideration by the TPO and the AO.
We have heard the rival contentions, perused the orders of the authorities below and the submissions made before us. The Assessee provides computer aided software solutions, maintenance and imaging services to its AE which provided services to oil and gas companies operating in India and was granted permission for setting up 100% EOU under STPI scheme. The assessee was categorized as ITES service provider. However, during the year under consideration, the assessee applied for debonding of STPI unit due to recession. The assessee provided the aforesaid services only up to June 30, 2008 during the year under consideration. During the financial year ended March 31, 2009, the assessee had provided IT enabled Services viz. software supply and support / maintenance services and imaging services to its 'Associated Enterprises' (hereafter referred to as 'AE(s)') Paradigm BV and Paradigm Australia aggregating to Rs 3,70,55,707/. These services were provided till the existence of the STPI unit i.e. for 3 months upto June 30, 2008. The assessee earned revenue of Rs. 3,70,55,707/- from the international transaction entered into during the year under review. The said international transaction was benchmarked using TNMM as the most appropriate method in its transfer pricing documentation ("TP documentation").
The assessee had also prepared audited segmentals relating to AE transactions which formed part of the said TP documentation, disclosing an operating profit of Rs. 80,01,270/- which worked out to 27.54% ,on its operating cost of Rs.2,90,54,437/- applying Operating profit/Operating cost ('OP/OC') as the Profit Level Indicator ('PU'). The assessee identified a set of 25 comparable companies with arithmetic mean of 20.54 percent and accordingly the international transactions entered into between the assessee and its AE were considered to meet the arm’s length test. The said segmentals were submitted before the lower authorities.
The learned TPO at para 5.1. of his order contended that the audited annual report of the assessee did not contain any segmental reporting and rejected the audited segmental (i.e. STPI unit) filed during the course of the transfer pricing assessment proceedings. However failed to appreciate the assessee had already filed segmental accounts as part of its TP documentation. The adjustment, if any ought to have been restricted to the international transactions under review. The international transactions under review were undertaken only for a period of 3 months during the year under consideration i.e. from April 01, 2008 till June 30, 2008. The assessee contended that these transactions were a mere roll over of the same agreement and undertaken based on same terms and conditions and at the same rates which were applicable for prior year i.e. AY 2008- 09 wherein the international transactions were considered to be at ALP and the segmental accounts were also accepted by the then TPO. The adjustment suffered in prior year i.e. AY 2008-09 was only on account of reimbursement of expenses. We observed from the records that the international transaction under review is Rs. 3,70,55,707/-, but the TPO proceeded to make an upward adjustment of Rs. 26.13 crores by considering entity level approach for determining the arm's length price of the international transaction and not appreciating the fact that under TNMM method, the transfer pricing addition, if any, should be restricted to the international transactions only.
The learned TPO rejected the TP documentation submitted by the assessee and undertook a fresh benchmarking and made an upward adjustment of Rs.26,13,95,031/- by determining the arm's length margin at 69.76% vide order dated 16 January 2013 ("TP order") issued under section 92CA(3) of the Income-tax Act, 1961. The learned TPO also re-computed the operating profit 1 (loss) of the assessee at Rs. (12,17,40,195/-) i.e. loss of (60.81 %) on total cost, by considering entity level profits rather than restricting the adjustment only to the AE transactions thereby making an adjustment of Rs. 26,13,95,031/- at entity level. It is well settled that transfer pricing adjustment is warranted only qua the transactions with AEs and not non-AEs. Thus, the TPO/ AO grossly erred in making an addition of Rs. 26,13,95,031/- which is 7 times or 705% of the international transaction value on entity level rather than restricting it to only the international transactions under review.
It is the contention of the Ld. Counsel for the assessee that the TPO has not given proper opportunity and sufficient time to furnish necessary details called for. The submission of the Ld. Counsel for the assessee was that a show cause notice was issued at the fag-end of December, 2012 i.e. on 21.12.2012 requiring the assessee to furnish the details by 3.1.2013. The assessee furnished some of the details on 4.1.2013 and approached the TPO for furnishing further details on 15.1.2013 but however it was contended that by that time it was informed that TP order was issued and therefore further submissions were not taken on record. What we noticed from the TPO’s order was that the order was passed on 16.1.2013. The time gap between the issue of show cause notice and passing of assessment order was hardly 26 days which is not even a month and the TPO has provided only one opportunity for filing the required information in these 26 days which in our opinion there is lack of proper opportunity and sufficient time provided to the assessee for furnishing requisite details, principles of natural justice were not adhered in completing the transfer pricing adjustment. Even on merits, we find that when the assessee has furnished segmental reports, the Transfer Pricing Officer should not have adopted the entity level reports for bench marking the international transaction. We are also at loss to understand how the Transfer Pricing adjustment can be made at Rs. 26.13 crores when the assessee earned revenue of Rs. 3.71 crores from the international transactions during the Assessment Year under consideration from its AEs.
12. The Jurisdictional High Court in the case of CIT Vs Sumit Diamond (India) Pvt. Ltd. in Income Tax Appeal No. 1647 of 2013 dated 11.1.2016 observed as under:
2. The Appellant has urged the following questions of law, for our consideration:- (A): Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that out of the total turnover of Rs.117,45,35,364/- export turnover eligible as international
transaction to Rs.89.92 crores only, rest, Rs.27.52 crores being domestic transaction was outside the scope of examination of ALP? (B): Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that AO/TPO were not justified in excluding gain on foreign exchange fluctuation from the total revenues for the purpose of computing OP/OC? 3 Regarding Question(A):- (a) The Respondent Assessee is engaged in the business of trading in diamonds including exports. In the subject assessment year, the Respondent Assessee had international transactions with its Associated Enterprises(AE) in U. S. A. This resulted in the Assessing Officer making a reference to the Transfer Pricing Officer(TPO) to ascertain the correct Arm Length Price(ALP) of the transactions. (b) The TPO enhanced the consideration in respect of its international transaction to arrive at the ALP on operating margin at 7.32%. The Assessing Officer passed final assessment order in accordance with the findings of the TPO for the subject Assessment Year. (c) Being aggrieved, the Respondent Assessee carried the issue in Appeal to the Tribunal. The Tribunal, by the impugned order, held that even if the operating margin at 7.32% arrived at by the TPO is acceptable, the same has to be loaded only in respect of the international transaction segment(exports) only entered into by the Respondent Assessee with its A. E.. In the light of the above, the Tribunal restored the issue to the Assessing Officer to compute the ALP on international transactions only and not disturb transactions with non AE's . (d) The grievance of the Revenue before us is that the Tribunal could not have restricted the application of the ALP only to International Transaction entered into by the Respondent Assessee with its A.E.. However, the aforesaid grievance of the Revenue is no longer res integra, as this Court has in CIT v/s M/s Tara Jewels Exports Pvt Ltd (Income Tax Appeal No.1814 of 2013) decided on 5th October, 2015 and CIT v/s Thyssen Krupp Industries India Pvt Ltd (Income Tax Appeal No.2201 of 2013) decided on 2nd December, 2015), has taken a view that the ALP adjustment arrived at is only to be restricted to the international transaction entered into by the Respondent and could not apply to transactions entered into with non-A.E. This is for the reason that in terms of Chapter-X of the Act the mandate is to redetermine the consideration only with regard to International transaction with A. E.”
In the case of CIT Vs M/s. Tara Jewels Exports Pvt. Ltd in Income Tax Appeal No. 1814 of 2013 dated 5.10.2015, the Jurisdictional High Court held as under:
“5. On appeal, the Tribunal by the impugned order recorded the fact that the only grievance of the respondent-assessee before it was the application of the margin of 4.79% computed by the TPO under the TMM across all it’s sales and not restricted only to the international transactions entered into by it with it’s AE. The Tribunal by the impugned order held that the entire exercise of determining the ALP is done in accordance with Chapter X of the Act and in particular to Sec. 92A and 92B of the Act require the transfer pricing adjustment to be done only in respect of the transaction entered into between the respondent-assessee with it’s AEs and not with the non-AEs. In the above circumstances, the Tribunal set aside the order of the Assessing Officer/TPO and directed the Assessing Officer to compute the ALP by enhancing the consideration by 4.79% only in respect of the international transactions entered into between the respondent-assessee with it’s AEs only.
The question as proposed by the revenue does not seems to arise from the impugned order of the Tribunal nor is the method of determination of ALP on application of TNM arriving at the margin of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondent-assessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent-assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it’s sales and not restricted to the international transactions entered into by the respondent-assessee with it’s AEs. It is evident from the provisions of Chapter X of the Act that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with it’s AEs. Thus no fault can be found with the order of the Tribunal.”
When the assessee has furnished segmental profits, the entity level profits cannot be considered for bench marking international transactions in view of the Jurisdictional High Court decision.
Therefore, respectfully following the said decisions, we hold that the ALP of the assessee should be determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessments keeping in view the decisions of the Jurisdictional High Court and various other Tribunals in rejecting various comparables selected by the TPO after providing adequate opportunity of being heard to the assessee.
Coming to the domestic issues the assessee is challenging the order of the DRP in sustaining the upward adjustment of Rs. 82,84,696/- on account of invoices raised on ONGC without appreciating that the same were pending acceptance/approval by ONGC.
15.1. It is the contention of the assessee that assessee had received the acceptance/approval by ONGC in the subsequent year i.e. Assessment Year 2010-11 and assessee recognized the said amount as its revenue and has been offered to tax accordingly. Therefore, it was the submission that since this amount is already offered to tax in the Assessment Year 2010-11, the same should not be taxed in the Assessment Year 2009-10. Therefore, the Ld. Counsel for the assessee submits that the matter may be restored to the Assessing Officer for fresh adjudication.
15.2. The Ld. Departmental Representative has no serious objection in setting aside the same to the Assessing Officer.
15.3. On hearing both the parties, we hold that the Assessing Officer should examine this matter afresh in the light of the submission that the said amount has already been taxed in the Assessment Year 2010-11. Therefore, we restore this issue to the file of the Assessing Officer for fresh adjudication. We make it clear that this amount should be taxed either in the Assessment Year 2010-11 or in the Assessment Year 2009-10 but not in both Assessment Years since it amounts to double taxation. The Assessing Officer shall consider and decide accordingly.
The last issue in the appeal of the assessee is in respect of the addition made on account of remission of liability.
16.1. It is the submission of the assessee that the said remission of liability was taxed in the Assessment Year 2008-09 also by the Assessing Officer and the matter under appeal. The Ld. Counsel for the assessee submits that the assessee has correctly offered this remission of liability during the current assessment year to tax. Therefore, the Ld. Counsel for the assessee submits that since this amount was already taxed in the Assessment Year 2008-09 which is under appeal, the decision whether to be taxed in the Assessment Year 2009-10 should be taken based on the outcome of the decision for the Assessment Year 2008-09. Therefore, he submits that the matter may be restored to the file of the Assessing Officer.
16.2. The Ld. Departmental Representative has no serious objection for restoring this issue to the file of the Assessing Officer.
16.3. Considering the submissions of both the parties, we restore this issue to the file of the Assessing Officer who shall pass necessary order keeping in view of the fact that this amount was already taxed in the Assessment Year 2008-09 against which appeal is pending and if assessee succeeds in Assessment Year 2008-09, the Assessing Officer shall tax this amount in Assessment Year 2009-10 as offered by the assessee himself. In case, if the assessee fails in the Assessment Year 2008-09, the Assessing Officer shall not make addition of this amount in the current Assessment Year i.e. 2009-10. Thus we restore this matter to the file of the Assessing Officer with a direction to pass consequential orders accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purpose.
Order pronounced in the open court on 13th July, 2016.