SAS INSITUTE (I) P. LTD,MUMBAI vs. ASST CIT CIR 3(3), MUMBAI

This appeal filed by the assessee on 8.11.2012 is against the order of the AP / TPO / DRP for the A for the AY 2008-2009.

In this appeal, assessee raised 16 grounds in toto. At the outset, Shri M.P. Lohia, Ld Counsel for the assessee brought our attention to the grounds raised

The DRP and the AO ought to have held that the transfer pricing adjustment under Chapter X of the Act cannot exceed the net value of the international transaction.”

Referring to the above grounds, Ld Counsel for the assessee submitted that these grounds revolve around the following issues viz (i) either the lower authorities are justified in thrusting on the assessee the TNMM method without rejecting the assessee‟s most appropriate method of CUP method; (ii) if the lower authorities are justified in picking up the comparables, which are prim facie functionally distinct and different; (iii) whether the Officers are justified in not restricting the TP adjustments to the transactions with the Associated Enterprises (AEs) only.

Briefly stated relevant facts necessary for adjudicating the issues are that the assessee is primarily engaged in the business of distribution of software and consultancy. Assessee entered into international transactions with the AEs involving both the receipts and expenditure. The same are extracted as under:- S.No. Nature of International transaction Value (Rs.) Method 1. Purchase of manuals 6,04,672/- CUP 2. Royalty paid @ 50% of license 16,57,93,146/- CUP 3. Software licensing expense under 37,06,293/- TNMM 4. Software License Revenue 7,18,50,060/- TNMM received from global contract 5. International expenses fees 1,16,25,556/- CPM received

Assessee provided segmental results involving (i) consultancy and training; (ii) software licensing revenue segment. There is no dispute so far as the segmental results of consultancy and training. The dispute is only with reference to the software licensing revenue segment. Assessee found CUP method is most appropriate one for the above international transactions at Sl. Nos. 1 & 2 of the above table. For Sl. Nos. 3 & 4, assessee applied TNMM method in benchmarking the transactions. Finally, with reference to the international expenses fees, which is at Sl.No. 5 of the above table, CPM (Cost Plus Method) was applied.

During the proceedings before the TPO, assessee heavily relied on the TP studies of the assessee. However, TPO rejected the same without giving any justification as to why CUP method is not most appropriate. Consequently, out of the comparables provided in the TP studies, the TPO shortlisted 3 out of the 6 comparables and quantified the adjustments as under:-

Assessee reflected loss of Rs. 47% in software licensing division. In the TP studies, relying on 6 comparables data, assessee held that the same is at Arm‟s Length. However, TPO noticed that in only 3 of the said 6 comparables, the contemporaneous data was verified. He, accordingly, shortlisted the 3 comparables for TP studies and found a weighted average comes to 26.72%. Accordingly, the adjustments were initially worked out to Rs. 21,68,27,189/-. Considering the mistakes in the said calculations quo the OP / NS, the same was rectified and enhanced the adjustment to Rs. 25,34,35,434/-. Subsequently, the said calculations were rectified vide the order dated 9.11.2011 u/s 154 read with section 92CA(3) of the Act. Para 7 of the rectification order is relevant in this regard and the same reads as under:- “7. Thus, overall adjustment in this case is enhanced from previous figure of Rs. 21,68,27,189/- to Rs. 25,34,35,434/- through this rectification.”

During the proceedings before the DRP, assessee raised the issues shortlisted above. Regarding the method of accounting, DRP gave a finding that the assessee has agreed in favour of the TNMM method in place of CUP method adopted by the assessee. Contents of para 7.3 of the DRP‟s order are relevant in this regard and the same read as under: “7.3. As already noted, both the assessee and the TPO / Assessing Officer agreed that the Arm‟s Length Price in respect of the Software Distribution and licensing segment is to be computed through TNMM.”

Eventually, DRP issued guidelines u/s 144C(5) of the Act confirming the adjustments made by the TPO / AO vide order dated 22.8.2012. Aggrieved with the above order of the AO / TPO / DRP, assessee filed the appeal before the Tribunal with the above extracted grounds.

During the proceedings before us, Shri M.P. Lohia, Ld Counsel for the assessee brought our attention to the above international transactions and submitted that the international transactions at Sl. No.1 being “purchase of manuals”, the value is very small and the same is not very significant. However, referring to the international transaction at Sl. No. 2, being “Royalty paid at 50% of the license”, Ld Counsel for the assessee submitted that the assessee is a distributor of licensed software and the same is sole to the third parties for consideration. 50% of the said consideration being „license fees‟ is remitted to the AE abroad when assessee benchmarked the said transaction being intangibles in nature applying the CUP (Comparable Uncontrolled Price) method. In this regard, Ld Counsel for the assessee brought our attention to OECD instruction in support of the above. The contents of Page 67 of the paper book are relevant in this regard and the relevant lines are extracted as under:- “.........As per the guidance notice issued by the Institute of Chartered Accountants of India, CUP method can be adopted in case of intangibles and the same is based on the OECD guidelines on the intangibles vide para 6.23 of the said guidelines.” 11. Further, Ld Counsel for the assessee demonstrated that the said orders are deficient on why the CUP method is inapplicable to such intangible based international transactions. Digging the mistakes in the orders of the TPO, Ld Counsel for the assessees demonstrated that the TPO benchmarked whole of the income receipts without restricting to the international transactions only. In this regard, Ld Counsel for the assessee brought our attention to the judgment of the jurisdictional High Court in the case of Thyssen Krupp Industries India Pvt Ltd vs. CIT (ITA No.2201/2013), dated 2.12.2015 [page 660 of the paper book is relevant], and submitted that the following question was answered in favour of the assessee. “(a) Whether on the facts and in the circumstances of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs).”

The answer to the above question s given in para 5 of the said judgment and the said para reads as under: “5. In the above view, as per the provisions of the Act in respect of transfer pricing are self evident, Question No.(a) as proposed does not give rise to any substantial question of law. Thus, not entertained.”

This is relevant with reference to Ground nos. 13 and 14 of the appeal. It is the argument of the ld Counsel for the assessee that these Ground nos. 13 and 14 have to be allowed in favour of the assessee in view of the above judgment of the Hon‟ble jurisdictional High Court in the case of Thyssen Krupp Industries India Pvt Ltd (supra). Further, Ld Counsel for the assessee submitted that the rejection of the assessee‟s CUP method and RPM method without giving reasons by the TPO / AP is improper and not in the interest of the justice. Explaining the logic, Ld Counsel for the assessee argued that rejection of the assessee‟s comparables on the basis of absence of contemporaneous data without giving reasons is also unsustainable. He argued vehemently stating that the comparables such as (i) Alphageo (India) Ltd; (ii) Mahindra Consulting Engineers Ltd; (iii) N T P C Electric Supply Co. Ltd, which were eventually considered for benchmarking the transactions with AE is again appropriate as these comparables are eventually difference qua the royalty payment to the AEs and others. Ld Counsel for the assessee argued stating that the finding of the DRP given in para 7.3 extracted above prima facie is wrong. He also mentioned that the TPO erroneously held that the assessee applied TNMM method to all the transactions, which is prima facie wrong. In this regard, Ld Counsel for the assessee brought our attention to the contents of para 6 of the TPO‟s order and the same are relevant here. 14. On the other hand, Ld DRs for the Revenue relied on the orders of the AO / TPO / DRP. On the issue of TPO‟s failure to provide reasons in the TPO‟s order while rejecting the CUP method, they accepted to the absence of relevant discussion on the issue. They, however, criticised the applicability of the CUP method / RPA method to the royalty and other transactions. Ld DRs further argued and reasoned that the assessee in India cannot be compared with the others located in the rest of the world as the present assessee does not have authority to grant sub-distribution unlike the other AEs. However, they are of the opinion in view of the deficiency in the TPO / AO, the matter has to be set aside to the file of the AO / TPO. Regarding the comments of the DRP in vide para 7.3 of their order (supra), they are silent on the issue. During the rebuttal time, Ld DR submitted that the matter can be set aside if the Bench so desires.

We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant paper books filed before us. The undisputed facts are that the TPO has not given any reasons for rejecting the CUP / RPA methods adopted by the assessee in respect of „royalty‟ and other international transactions. It is also a fact that the TPO travelled in the wrong presumption that the assessee used TNMM method for benchmarking the transactions as evident from the language used in the order of the TPO. It is undisputedly wrong as the TP study indicates the application of different methods for different transactions by the assessee, which are already extracted and placed in the above paras of this order. The aggregation approach of benchmarking the international transactions by the TPO is not sustainable as per the today‟s legal position. It is a trait law that the transactions have to be independently benchmarked applying the appropriate method in benchmarking of the transactions. We also perused the submissions of the assessee before the TPO wherein it was categorically submitted by the assessee that the reasons for rejection of the CUP and RPA methods should be given to the assessee and the same is part of the submissions. But, either the AO or the TPO / DRP is bothered to furnish the same. In fact, as seen from para 7.3 of the DRP order, the onus is kept on the assessee by mentioning that the assessee agreed for substituting the TNMM method as an appropriate method, which is not proper. Considering the above deficiencies, inaccuracies and incompleteness, we are of the opinion the matter should be set aside to the file of the TPO / AO for fresh adjudication of the above referred Ground Nos. 8, 9 and 10. AO / TPO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. In the set aside proceedings, AO / TPO is directed not to resort repeating of the same additions without passing a speaking order on the following issues which are connected to the grounds raised