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Lubrizol Advanced Materials India Private Ltd. (Formerly known as Indiamalt Pvt. Ltd.) P.O. Manjusar, Tal. Savli, Distt. Baroda, Gujarat. V/S The D.C.I.T, Circle 1(2), Baroda-390007
December, 13th 2013
                                             1      ITA No 3320/AHD/2010
.                                                   A.Y. 2006-07
    IN THE INCOME TAX APPELLATE TRIBUNAL " B " BENCH, AHMEDABAD
    (BEFORE SHRI D. K. TYAGI, J.M. & SHRI ANIL CHATURVEDI, A.M.)


                              I.T. A. No. 3320/AHD/2010
                             (Assessment Year: 2006-07)

         Lubrizol Advanced                V/S The D.C.I.T, Circle 1(2),
         Materials India Private Ltd.         Baroda-390007
         (Formerly known as
         Indiamalt Pvt. Ltd.)
         P.O. Manjusar, Tal. Savli,
         Distt. Baroda, Gujarat.

         (Appellant)                             (Respondent)


                                PAN: AAACI4361B


            Appellant by        : Shri Dhanesh Bafna
            Respondent by       : Shri O.P. Vaishnav, CITD.R.

                                    ( )/ORDER

Date of hearing                         : 23-10-2013
Date of Pronouncement                   : 06-12-2013

PER SHRI ANIL CHATURVEDI,A.M.


    1.      This appeal is filed by the Assessee against the order of Dispute
            Resolution Panel (DRP), Ahmedabad dated 13.09.2010 for A.Y. 2006-
            07.


    2.      The relevant facts as culled out from the material on record are as under;
                                                     2        ITA No 3320/AHD/2010
.                                                             A.Y. 2006-07

    3.   Assessee is a company engaged in the business of manufacture of Cassia
         Gum Powder and Guar Gum Powder. It filed its return of income for
         A.Y. 06-07 on 30.12.2006 declaring total income of Rs. 66,50,170/-. As
         the value of international transactions entered by Assessee with it's
         (Associated Enterprise) A.E's exceeded Rs. 5 crore, reference u/s.
         92CA(1) was made for determination of Arms's Length Price (ALP) to
         TPO. TPO vide order u/s. 92CA(1) made an upward adjustment of Rs.
         19,45,136/-. Assessee thereafter agitated the matter before DRP. DRP
         vide order dated 24.09.2010 issued directions u/s. 144C(1) of the Act.
         Pursuant to the directions of DRP, assessment u/s 143(3) r.w.s. 144C(5)
         was framed vide order dated 08.10.2010. Aggrieved by the aforesaid
         order, Assessee is now in appeal before us and has raised the following
         grounds:-
         1.   On the facts and circumstances of the case and in law, the learned Deputy Commissioner of
              Income-tax, Circle1(2), Baroda ("DCIT") has erred in concluding the assessment under section
              143(3) of the Income tax Act, 1961 ("the Act"), in pursuance to the directions of the Learned
              Dispute Resolution Panel ("Ld. DRP") under section 144C(5) of the Act.
         2.   The Learned DCIT erred on facts and in law in confirming the addition of Rs. 17,37,400/- to the
              income of the Appellant by determining the arms's-length price of the Appellant's international
              transaction of provision of marketing support services at Rs. 1,48,13,649 instead of Rs.
              1,30,76,249/- as determined by the Appellant as follows:-
              2.1 in rejecting the contemporaneous documentation maintained by the Appellant as required
                   under the Indian TP regulations;
              2.2 not allowing the use of multiple year data as prescribed under Rule 10B(4) of the Rules read
                   with the OECD TP Guidelines and determining the arm's length price on the basis of
                   financial information of the comparables for only FY 05-06.
              2.3 Denying the (+/-)5% range benefit available under proviso to setion 92C(2) of the Act.
         3.   The Learned DCIT erred on facts and in law in disallowing community welfare expenses of Rs.
              5,06,950/- although such expenses have been incurred by the Appellant in course of its business
              and are allowable under section 37 of the Act.
         4.   Without prejudice to Ground no.3, the learned DCIT erred on facts and in law in not adding such
              amount of Rs. 5,06,950/- to profits of the business for computing deduction under section 10B of
              the Act.
         5.   The learned DCIT erred on facts and in law in reducing brokerage of Rs. 1,00,318 on sea freight
              charges from eligible profits of business for computing of deduction under section 10B of the Act.
         6.   The learned DCIT erred on facts and in law in reducing refund of excess insurance charges of Rs.
              64,125/- from eligible profits of business for computing deduction under section 10B of the Act.
         7.   The learned DCIT erred on facts and in law in computing short interest under section 244A of the
              Act on the refund due to the Appellant.
         8.   The learned DCIT erred on facts and in law in initiating penalty proceedings under section
              271(1)(C) of the Act.
                                        3      ITA No 3320/AHD/2010
.                                              A.Y. 2006-07



         Ground no. 1 is general and therefore requires no adjudication.


              Ground no. 2 and its sub grounds are is with respect to
            determination of ALP


    4.   During the year under review, Assessee had provided support services in
         connection with marketing of products to its Associated Enterprises (AE)
         worth Rs 1,30,76,249/-. For bench marking the support services,
         Assessee carried out search on the marketing support service and after
         applying qualitative and quantitative filters short listed 4 companies
         namely Ace Software Exports Ltd, CSS Technology Ltd, Healica Bio
         Science Ltd and Vakrangee Software Ltd as comparables for the purpose
         of benchmarking international transactions of the company as according
         to the Assessee the aforesaid companies were having similar activities as
         that of Assessee. On the basis of functions performed, assets deployed
         and risks assumed by the Assessee, Transactional Net Margin Method
         (TNMM) was chosen by the Assessee as the most appropriate method.
         PBIT (Profit Before Interest and Tax) on Cost was taken as Profit Level
         Indicator (PLI) and it was accordingly worked at 5.12%. TNMM method
         chosen by the Assessee was also accepted by the Transfer Pricing Officer
         (TPO). In addition to the companies chosen as comparables, TPO
         considered 4 more companies namely KALS Info Systems Ltd, Lucid
         Software Ltd, Bodhtree Consulting Ltd and Accel Transmatics Ltd as
         comparables and after considering the 8 companies (4 selected by
         Assessee and 4 selected by TPO) noted that the average PLI of the
         companies worked out to 20.76% and the Assessee was therefore show
                                   4      ITA No 3320/AHD/2010
.                                         A.Y. 2006-07

    caused and asked as to why the PLI of 20.76% not be adopted and the
    Arm's Length Price (ALP) of services rendered to AE be recomputed
    accordingly. Assessee interalia submitted that the activities of the 4
    companies selected by TPO were not comparable with that of the
    Assessee as they were engaged in the business of software development.
    It was further submitted that for selection of company by the Assessee, it
    had applied quantitative filter of turnover/gross profit of not more than
    Rs 50 crores. It was further submitted that Vakrangee Software Ltd,
    though selected by the Assessee should be rejected since its turnover was
    in excess of Rs 50 crores and was not meeting the quantitative filter for
    FY 2005-06. The submissions of the Assessee of excluding Vakrangee
    Software Ltd was not found acceptable to the TPO as he was of the view
    that Vakrangee Software Ltd was selected by the Assessee itself and its
    turnover was Rs 51.15 crore, which was nearer to the limit of Rs 50 crore
    accepted by the Assessee. He also rejected the submission of excluding
    the 4 companies selected by the TPO as according to the TPO the nature
    of business was similar to that of Assessee. He accordingly worked out
    the ALP of services made to AE at Rs 1,50,21,381/- as against the
    transaction value of Rs 1,30,76,249/- and since the value of services
    worked out by him did not fell within the range of +/-5% as per the
    proviso to s. 92C(2) of the Act, he suggested upward adjustment of Rs
    19,45,136/- to the total income vide order dated 14.10.2009 passed u/s
    92CA(3) and the same was made by the AO in the draft assessment order
    passed u/s 143(3) rws 144C of the Act. Aggrieved by the aforesaid order,
    Assessee carried the matter before Dispute Resolution Panel (DRP). DRP
    vide order dated 13.9.2010 partly agreed with the submissions by holding
    as under:
                                                 5         ITA No 3320/AHD/2010
.                                                          A.Y. 2006-07
    4.We have considered the order of the TPO/AO and submissions of the assessee. Grounds of objections
    No. 3 to 12 have been preferred by the assessee company against the Transfer Pricing adjustments
    proposed by the TPO/AO. Briefly, the assessee has two divisions. In the manufacturing division
    speciality products fiom agriciilture input are being manufactured, while in the ITES/BPO division,
    provision of support services in connection with marketing of the products to AE in Europe are carried
    on. For benchmarking the support services, the assessee company carried out a search based on broad
    functionl comparability using ITES and BPO as broadly comparables on functional analysis. The
    assessee finally selected 4 companies as comparables viz. :
    1.ACC Software Export Ltd.
    2.CSS Technology Ltd.
    3.Healica Bio Science Limited
    4.Vakrangee Software Limited
    The TPO accepted all the above companies selected by the assessee as comparables, but adopted 4
    additional comparables, in respect of support service activities. A notice was issued to tie assessee and
    after taking into consideration the objections of the assessee, the TPO proposed an addition of Rs.
    19,45,136/-. From the order of the TPO, it is noticed that the TPO has not rejected the transfer pricing
    analysis of the assessee, but added additional 4 comparables and applied arithmetic mean of the
    operating profit to cost, as PLI to compare that of the Assessee (Indian Party) to arrive at the above
    referred adjustment of Rs. 19,45,136/-.
    5.It is seen that the TPO has not provided the assessee with the search process carried out by him to
    arrive at the final 8 comparable companies, which consisted of 4 companies selected by the assessee
    and the other 4 companies selected by the TPO and considered as comparable companies. During the
    course of DRP proceedings, the TPO was specifically asked to point out the search process through
    which those 4 companies were selected as it was stated hy him in the TP order that those 4 additional
    comparables were identified on independent search. The TPO showed his inability to do so. It was
    verified by the TPO from the Transfer Pricing Report submitted by the assessee during the course of
    TP proceedings that these additional 4 companies have not been selected out of the companies rejected
    in the qualitative analysis done by the assessee. It is trite law that the TPO cannot indulge in "cherry
    picking" (Toshiba India Pvt. Ltd). Further, the TPO has not disturbed or objected to, or rejected the
    search process carried out by the assessee, by which it selected the comparables, In fact, all the 4
    comparables chosen by the assessee were accepted by the TPO. Provisions of Section 92C(3) of the
    Income-tax Act, lay down the conditions under which the TPO can reject the comparables chosen by
    the assessee and conduct a fresh search. None of the conditions laid down under the above section are
    shown to have been violated by the assessee. In Circular No. 12/2001 dt. 23/8/2001, it has been
    specifically reiterated that the Assessing Officer can have recourse to Section 92C(3) of the Act, only
    under the circumstances enumerated under Clauses (a) to(d) of that sub-section and in the event of
    material information or document in his possession on.the basis of which an opinion can be formed
    that any such circumstance existed. In all other cases, the value of the international transaction should
    be accepted. As none of the circumstances enumerated in clause (a) to (d) of Sec.92C(3) of the Act are
    shown to have existed, relying upon the decision in the case of Mentor Graphics Noida P Ltd. Vs.
    DC1T (112-TTJ-408 (Delhi) and ACIT vs MSS India Pvt. Ltd. [2009] (TIOL-416-ITAT-Pune), the TPO
    could not have added further 4 comparables to the comparables already chosen by the assessee after
    due search process. The AO is directed to exclude the additional 4 comparables selected by him.
    It is seen that the Assessee has itself selected Vakrangee as one of the 4 comparable selected by it after
    FAR analysis. The only reason for its exclusion in the final set of comparables is that assessee has
    applied a quantitative filter of companies to be selected as comparables being less than 50 crore
    turnover. It is seen that for a service income of Rs. 1,30,76,249/- the upper quantitative filter of Rs.50
    crores has been applied without giving any reasons as to why such quantitative filter of 40 times the
    sales is required. More importantly, it is required to be seen as to whether upper quantitative filter has
    any role to play in the selection of comparables. In the FAR analysis done to select comparables,
    comparison of assets have an important role to play. The underlying logic is that with the application
    of similar assets, similar or almost similar sales are achieved. The quantitative filter applied for
    selection of comparables even out the comparables using similar assets. However, in ITES industry,
    these quantitative filters have no role to play as the rates are charged per hour, in any case, if an
    adhoc upper filter of 50 crores is applied, the mere difference in receipt of 1 or 2 crore would not
    make any difference, if the comparable is, otherwise, functionally similar. As the assessee has himself
                                                      6         ITA No 3320/AHD/2010
.                                                               A.Y. 2006-07
         selected this comparable as functionally similar, it cannot be rejected merely because it does not fall in
         assessee's own adhoc filter.
         9.4 In. view of the above, the final set of comparables which is now directed to be taken for
         benchmarking the international transaction following TNMM are as under. The PLIs (Operating
         Profit/Operating expenditure) of these comparables for F.Y. 2005-06 as computed by the assessee,
         itself have also been mentioned hereunder.
                  Sr. No.           Name o the Company                       PLI (OP/OC) (%)
                  1                 Ace Software Exports Ltd.                7.81
                  2                 CSS Technergy Ltd                        19.84
                  3                 Vakrangee Software Ltd.                  29.62
                                                        Arithmetic Mean 19.09%


         10. The assessee has also contended that benefit of +/-5% be allowed to it in the ALP. We have
         considered this issue, proviso to Section 92C (2) of the I.T. Act provides that where more than one
         price is determined by the most appropriate method, the arm's length price shall be taken to be the
         arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the
         arithmetical mean by an amount not exceeding 5% of such arithmetical mean. The Transfer Pricing
         provisions were brought on the statute by the Finance Act, 2001 w.e.f. 1.4.2002. It is with a view to
         avoid hardship to the tax payers in the initial years of implementation of these provisions, the
         Government of India, through a press note issued by the Ministry of Finance (Dept. of Revenue) on
         22.08.2001 , expressed its intention of not making, any adjustment if the price adopted by the assessed
         was up to 5% less or up to 5% more than the arm's length price determined by the A.O. Immediately
         thereafter, the Central Board Of Direct Taxes (CBDT) issued the Circular No.12 dtd.23. 08 2001
         specifying that the A,O. shall not make any adjustment to the price shown by the assesses, if such price
         was up to 5% less or up to 5% more than the arm' s length price determined by the A.O. and in such
         cases, the price declared by the assessee may be accepted. In the present case it is seen that the ALP of
         the international transactions undertaken by the assessee is beyond the 5% margin of the price of
         International Transaction computed by the assessee. The proviso to Section 92C(2) has been, amended
         w.e.f. 1/10/2009. In the case of Global Vantedge (I) Ltd. Vs. DCIT (2010)1 ITR(Trib) 326 (Del) the
         benefit of adjustment of + 5% rejected by the CIT(A)s was confirmed by the ITAT even though counsel
         for the assessee made a special submission about the benefit of adjustment of + 5%/-5% . Therefore, in
         view of the provisions of the law, details and intentions as are evident from the press note of Govt. of
         India as well as circular of the CBDT, as aforementioned the benefit of the safe harbour of +5/-5% is
         not available to the assessee.


    5.   Aggrieved by the order of DRP, Assessee is now in appeal before us.


    6.   Before us, the Ld A.R. submitted that the company is engaged in
         business process outsourced activities and the services provided by the
         Assessee to its AE are purely auxiliary and preparatory in nature. He
         further submitted that ALP was computed by Assessee as per the
         provisions of section 92 to 92F of the Act, which requires the
         computation to be based on the information available in the public
         domain upto the date of filing of return. He further submitted that
                                    7       ITA No 3320/AHD/2010
.                                           A.Y. 2006-07

    Assessee for the purpose of computation of average net margins of the
    comparable companies had considered multiple year data i.e. data
    pertaining to prior two years for the reason that the data for the relevant
    year was not available at the time of conducting search process. He
    further submitted that the TPO considered only the data pertaining to the
    financial year in which the international transactions were entered by the
    Assessee i.e. financial year ending 31st March 2006 as being the data that
    is contemporaneous and appropriate for computing the margin of the
    comparable companies. He further submitted that if single year data (i.e.
    for year ended 31st March 2006) was considered for benchmarking, then
    Vakrangee Software Ltd, as a comparable company should have been
    excluded as it did not meet the quantitative criteria for the reason that its
    turnover for year ending 31.3.2006 was Rs 51.15 crore which was in
    excess of the upper limit on the turnover criteria (Rs 50 crore) applied for
    all other companies for carrying out benchmarking of the international
    transactions of the Assessee. He further submitted that in year ended 31st
    march 2006, the turnover of Vakrangee Software Ltd was from Software
    and Database related services segment, which was different from the
    activities of the Assessee and therefore also it was not comparable with
    the Assessee. He further submitted that for AY 07-08, though the
    Assessee had selected Vakrangee Software as comparable but the same
    was not considered as comparable by the TPO in support of which he
    placed on record the relevent extract of the order of TPO dated
    30.9.2010. He further submitted that even though the Assessee has taken
    Vakrangee Software Ltd as a comparable in its TP study but however
    before Tribunal it can raise a ground for its exclusion on account of non
    comparability and for which it relied on the decision of Special Bench in
                                                      8         ITA No 3320/AHD/2010
.                                                               A.Y. 2006-07

         the case of DCIT Vs Quark Systems Pvt Ltd 2010 TIOL 31 ITAT Chd
         (SB). He also placed on record a copy of the aforesaid order. He therefore
         urged that Vakrangee Software should be excluded for the calculation of
         average OP/TC % .





    7.   The Ld D.R. on the other hand submitted written submissions. The
         relevant portion of the written submissions are as under:
         Ground no. 2.1
         2.1 In this regard, it can be seen that the TPO had not rejected the entire documentation prepared by
         the assesse. From perusal of the order it can be seen that the TPO had accepted the selection of tested
         party, the selection of most appropriate method and the selection of profit level indicator as the ratio
         of PBIT to cost. The only dispute in this case is with respect to consideration of four more comparables
         by the TPO, in addition to the comparables selected by the assessee.
         2.1.1 In this regard it is also important to note the provisions of section 92C(3) which are reproduced
         below:
         "(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is,
         on the basis of material or information or document in his possession, of the opinion that--
         (a) the price charged or paid in an international transaction [or specified domestic transaction] has
         not been determined in accordance with sub-sections (1) and (2); or
         (b) any information and document relating to an international transaction [or specified domestic
         contained in sub-section (1) of section 92D and the rules made in this behalf; or
         (c) the information or data used in computation of the arm's length price is not reliable or correct; or
         (d) the assessee has failed to furnish, within the specified time, any information or document which he
         was required to furnish by a notice issued under sub-section (3) of section 92D,
         the Assessing Officer may proceed to determine the arm's length price in relation to the said
         international transaction [or specified domestic transaction] in accordance with sub-sections (1) and
         (2), on the basis of such material or information or document available with him:"
         2.1.2From perusal of the above provisions, it is clear that if the AO/TPO is in possession of
         material/information/documents, on the basis of which is of the opinion that one of the four conditions
         as mentioned in the above section are not fulfilled then the AO/TPO is empowered to determine the
         arm's-length nature of international transactions on the basis of such material/information/document j
         available with him. During the course of proceedings, the TPO was in possession of the information in
         relation to the four new comparables identified by him, according to which those comparables
         operated in the similar business like the assessee company, an assertion which is made in para 3 of
         the show cause notice provided to the assessee. Since, the assessee had only considered four
         comparables, on the basis of TP documentation prepared by it, it is clear that without consideration of
         the four new comparables identified by the TPO in addition to the comparables identified by the
         assessee, the information and the data used in the computation of arm's-length price would not remain
         correct since the arm's-length PLI is required to be considered as the mean PLI of all the comparables
         identified. Non-consideration of certain comparable companies would lead to a situation in which the
         mean PLI would be incorrect and consequently the determination of arm's-length price would be
         incorrect. Consequently, the provisions of section 92C(3)(c) would be applicable and thus the TP
         documentation prepared by the assessee would be liable to be rejected to the extent found erroneous.
         2.1.3 In addition to the above, it is further seen that the assessee has used the multiple year data in its
         TP documentation for determining the arm's-length price for the international transactions. As
         discussed in detail below with respect to ground number 2.2, the use of multiple year data in
         determination of arm's-length price is contrary to law and consequently it will lead to a situation in
         which the data/information used in the determination of arm's-length price would be incorrect, leading
                                                9        ITA No 3320/AHD/2010
.                                                        A.Y. 2006-07
    to the applicability of the provisions of section 92C(3)(c) and therefore on this ground also the TP
    documentation prepared by the assessee would be liable to be rejected to the extent found erroneous.
    2.1.4 There can be a ground of objection that the data not available with the assessee at the time of
    preparation of documentation, could not be used by the TPO while carrying out his benchmarking. As
    per provisions of Indian Transfer Pricing regulations, the requirement of maintenance of
    documentation is cast on the assessee and the purpose of same is only limited to support the
    justification of arms length price analysis carried out by the assessee; the same CANNOT fetter the
    power of TPO to consider other comparables which are outside the documentation kept by the
    assessee. In this respect it is pertinent to note the following proposition held in the case of Kodiak
    Networks (India) private limited (15ITR610) (51SOT191) (Bangalore Tribunal) (2012) and Genisys
    Integrating Systems (India) Private Limited vs DCIT (ITA No. 1231) (Bangalore Tribunal)(2019)
    where this issue is discussed in details by the Hon'ble benches:
    "12.1 As far as the data to be used by the TPO while determining the ALP is concerned, we find that it
    is covered by the provisions of Rule -10D sub-rule-4 of the IT Rules, 1962. Sec.92C provides the
    method for computation of ALP and prescribes five methods for computing the ALP and also any other
    method as may be prescribed by the Board. Sec.92D provides that every person who has entered into
    an international transaction shall maintain and keep such information and documents in respect
    thereof and the Board may also prescribe the period for which the information and documents shall be
    kept and maintained and the AO and the CIT(A) may in the course of any proceedings under the Act,
    require any person who has entered into an international transaction to furnish any information and
    documents in respect thereof Thus, it can be seen that the requirements is only to maintain and keep
    the information and documents relating to international transactions so that they are available as and
    when required during any proceedings under the Act. The section does not provides that the
    information and documents are to be kept and maintained for a period of 8 years. Rule 10-D of sub-
    sec. 1 specifies the documents and information which are to be kept and maintained by the assessee
    and sub-rule-2 thereof provides that nothing contained in sub-rule-1 shall apply in a case where the
    aggregate .value as recorded in the books of accounts, the international transactions entered into by
    the assessee does not exceed 1.00 crore rupees. Sub-rule-3 provides the supporting authentic
    documents which are to be kept and maintained and sub-rule-4 thereof provides that the information
    and documents specified under sub-rule 1 & 2 should as far as possible be contemporaneous and
    should exists latest by thle "specified date" referred to in clause-4 of 92F. Clause-4 of sec.92F gives
    the definition of "specified date" to have the same meaning as assigned to 'due date' in Explanation-2
    below sub-sec. 1 of sec.139. Explanation-2 to sec.139 defines 'due date' in a case of a company to be
    '30th day of September of the assessment year'. The assessee before us is a company and therefore, as
    on '30 day of September' of the relevant assessment year, the assessee is supposed to maintain
    information and documents. After going through the above provisions of law, it is clear that the Act
    has not provided for any cut off date upto which only the information available in public domain has to
    be taken into consideration by the TPO, while making the TP adjustments and arriving at arm's length
    price. The assessee as well as the,revenue are both bound by the Act and the Rules there under and
    therefore, as provided under the Act and Rules they are supposed to be taking into consideration,
    the contemporaneous data relevant to the previous year in which the transaction has taken place. The
    assessee had strenuously argued that the provision of sec.92D and Rule-10D is defeated if, the TPO
    takes the data which is available in the public domain after the specified date and the ALP would be
    fluid and there would be no certainty for the same. We are unable to agree with the arguments of the
    learned counsel for the assessee. The ALP has to be determined by the TPO in accordance with law
    and the Act provides that the TPO shall take into consideration the contemporaneous data. The
    assessee is only required to maintain the information and documents as may be necessary relating to
    the international transactions so that it can be made available to the TPO or the AO or any other
    authority in any proceedings under the Act. By providing a specified date in the Act, the obligation
    is cast upon the assessee to keep and maintain the documents for that period. But, it does not restrict
    the TPO frommaking enquiries thereafter, for determining the correct ALP. Having held so, we
    come to the next question, as to whether the TPO can make his own research and call for
    information from various entities without the knowledge of the assessee. Under sub-sec(3) & (7) of
    sec.92CA, the TPO is entrusted with all the powers under clauses (a) to (d) of sub-sec.l) of sec.(3) or
    sub-sec.(6) of sec.133 to call for and gather any information as may be required. When he is making
    the search for a relevant comparable, the TPO can issue notices to the parties whom he considers as
                                                10         ITA No 3320/AHD/2010
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    relevant to gather requisite information and on being satisfied with regard to relevancy of the
    material which can be used against the assessee only then the assessee has to be given an
    opportunity of presenting its objections "
    2.1.4.1 Thus, it can be seen that the power of the TPO to select comparable is not limited to the
    documentation kept by the assessee and he is well within his powers to examine other sources to find
    out the comparables.The rigours of rule 10 D(l),(2) and (3) apply to the assessee and not to the TPO.
    2.1.5 In Para-5.9 the OECD prescribes the maintenance of documentation on the basis of information
    available to the tax payer at the time of establishment of transfer price rather than justification of the
    same. In the instant case, the assessee is trying to justify its transfer price by the use of independent
    external comparable rather than determine its transfer price. This is a crucial difference which the
    assessee has not noticed.This issue assumes importance in the present context. In a case where
    transfer price is set before entering into the transaction, the only data that can be taken into account is
    the data available to the assessee i.e. the data which was available in public domain and therefore in
    this context the availability of data with the assessee assumes importance. On the contrary in a case
    where the transaction has already been entered into at a price which is sought to be justified as ALP,
    then reliance on the "availability " of data with the assessee or the same being in public domain
    becomes misplaced. When the transactions has already been entered at a price which is sought to be
    justified then that price should be justifiable on the basis of any data (available from any source) and
    at any point of time (before or after the preparation of TP documentation by the assessee) with the
    conditions being that the data should be of the same period in which the transaction has been entered
    into and the data should be "comparable". Therefore, the contention, if any, regarding the fetter on the
    power of the TPO to use data available to him but not available to the assessee, at the time of TP
    documentation is misplaced and erroneous.
    2.1.6 Thus, on the basis of discussion made above till this point,it becomes clear that by not
    considering some of the comparables subsequently identified by the TPO, the analysis carried out by
    the assessee was incorrect and thus the TPO was right in considering the new comparable entities. It is
    also seen that there is no bar on the power of the TPO to select any entity as comparable, even when
    the same may or may not have been available to the assessee while carrying out its TP documentation.
    2.1.7 As far as the issue regarding the selection of comparables found by the TPO is concerned, it can
    be seen that OECD guidelines 2010 prescribe two different kind of approaches for selecting potential
    comparables. One of such approach is called "additive approach" in which the person carrying out
    search process make list of third parties which are believed to carry out potential comparable
    transactions. The information is then collected on such transactions to determine their comparability.
    In the guidelines, it is also acknowledged that such an approach gives well focused results. The
    guidelines further go on to suggest that the additive approach or other approach being deductive
    approach may not be preferable over each other and the key requirement should be identification of
    potential comparable. By its very nature the "additive approach" is bound to face allegations of
    "cherry picking". However, it must also be noted that the Indian transfer pricing regulations do not
    prescribe any method or procedure required to be adopted for the identification of comparable
    transactions. Consequently, there can be no hard and fast rule to find out the comparables only on the
    basis of "deductive approach" using a database. From the perusal of para 3.41 of the OECD
    guidelines which details the "additive approach", it is clear that there is no requirement for selection
    of companies for "additive approach" only from public domain. The TPO can identify comparables on
    the basis of data/information available with hinu Therefore, based on the above discussion the
    assertion that the selection of potential comparables by the TPO is necessarily required to be carried
    out using a structured deductive process is neither prescribed in the Indian law nor prescribed in the
    OECD guidelines. The only requirement is that the "comparables' so identified should satisfy the
    factors of comparability, mentioned in rule 1 OB(2).Therefore, the contention of the assessee
    regarding non consideration of the new comparables identified by the TPO merely on the basis that the
    same have not been identified on the basis of any structured search process is without any legal basis.
    The same is therefore, required to be rejected
    2.1.8 The issue regarding the comparability of the companies is commented upon below.
    Ground no. 2.2
    The use of data for the period other than the relevant financial year along with the use of multiple
    year data is contrary to law. The provisions of Rule 10B(4) of Income Tax Rules prescribe that for the
    purposes of benchmarking international transaction the data of comparables used would be the data
                                                    11         ITA No 3320/AHD/2010
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       for the year in which international transaction took place and more commonly known as
       contemporaneous data. The provision of Rule 10B (4) is reproduced here under:-
       10B Determination of arm's length price under section 92C
       (1)......................
       (2)......................
       (3)......................
       (4) The data to be used in analysing the comparability of an uncontrolled transaction with an
       international transaction shall be the data relating to the financial year in which the international
       transaction has been entered into:
       Provided that data relating to a period not being more than two years prior to such financial year may
       also be considered if such data reveals facts which could have an influence on the determination of
       transfer prices in relation to the transactions being compared.
       2.2.1 The use of the word "shall", in the main provision of the Rule, makes it clear, in no uncertain
       terms that the use of current financial year data (i.e. the financial year in which international
       transaction was actually entered into) is a mandatory requirement of law in the comparability analysis
       under the Indian Transfer Pricing regulations. The proviso to the said Rule makes it an exception in
       allowing the use of data for the preceding two years, if and only if, it is proved that such data reveals
       facts, which could have an influence on the determination of transfer price. Therefore, the exception
       comes into play only when proof of such influence is brought on record.
       2.2.2 The mandatory requirement under law to use, contemporaneous documentation has a solid
       economic sense in the way that contemporaneous transactions reflect similar economic conditions.
       Therefore, the use of current financial year data is more relevant and ·· appropriate for ensuring a
       higher degree of comparability of uncontrolled transactions for arriving at the arm's length price in
       respect of the international transaction. The importance of contemporary economic and market
       conditions on price setting mechanisms is also reflected in the provisions of Rule 10B (3) of the Rules.
       The price settling mechanism is a business decision and circumscribed by settled economic
       parameters. Under transactions in open market
       conditions, prices are set by contemporary economic realities of demand, supply, market structure and
       other relevant factors. In this light, the statute has guided the preparation and maintenance
       documentation using contemporaneous data used at the time of setting the price of the international
       transaction between associated enterprises by using the most appropriate method prescribed under the
       Income Tax Act. However, the TP regulations also allow for documentation on the basis of ex-post
       analysis to supplement such documentation, for justifying the prices already set at the time of the
       transaction. Nonetheless, initial documentation prepared at the time of entering into the international
       transaction is primary and ex-post documentation is supplementary in nature. It is incumbent upon the
       taxpayer to demonstrate on the basis of contemporaneous documentation at the time of
       fixing/determining transfer prices, that:
    a) The compensation for the operations of an enterprise has been determined on the basis of
       contemporaneous data available then; and
    b) The compensation is commensurate to the functional profile (i.e. functions performed, assets employed
       and risks assumed.
       2.2.3 The OECD Guidelines in Para 1.49 to 1.51 have acknowledged the use of multiple year data
       under special circumstances. Use of multiple year data is considered useful to iron out the fluctuations
       caused by business/economic/product life cycle. However, the existence of any such cycle and anatomy
       thereof need to be aptly demonstrated by the assessee so as to prove that usage of multiple year data
       provides such impetus to the Transfer Pricing analysis which the usage of single year data would not
       argument.
       2.2.4 A re-look at the provisions of section 92D (1) clearly states that, every person entering into an
       international transaction is required to keep and maintain such information and document, in respect
       thereof, as being prescribed under the Rules. Corresponding Rule 10D(1) of the Rules, requires
       maintenance of a record of the analysis performed to evaluate comparability as well as a record of the
       actual working carried out for determining the ALP. Rule 10D (4) of the Rules, requires that the
       information and documentations to be maintained under rule 10D (1), should be contemporaneous as
       far as possible and should exist latest by the due date of filing of the Income-tax Return. Hence, even in
       terms of the relevant section of the Income Tax Act and Rules the importance and pedestal assigned to
       the initial documentation in contemporary parlance prepared at the time of settling the price of the
                                                      12         ITA No 3320/AHD/2010
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         international transaction is clearly brought out. It needs to be appreciated that the requirement of the
         existence of information and documentation by the due date of filling of return, does not override the
         provisions of Rule 10B (4) of the rules regarding mandatory use of current financial year data for
         conducting comparability analysis.
         2.2.5 Notwithstanding anything contained in the discussion above, multiple year data cannot be
         encouraged as a matter of rule and is only to be used under well documented circumstances. There is
         nothing in the Act that prohibits the analysis of the transfer price of the international transaction by
         the transfer pricing officer using data of the current year. Moreover, it is mandatory and absolute
         requirement of law to use the current financial year data. Also, the TPO not only has the power but is
         also bound by duty to determine ALP by using the current financial year data in the comparability
         analysis, even if such data was not available to the assessee in the public database; at the time of
         preparation of transfer pricing report. In the case of CIT vs. British Paints India Ltd reported in 188
         ITR 44, it has been held that it is not only the right but the duty of the Assessing Officer, to act in
         exercise of his statutory power, for determining, what in his opinion, is the correct taxable income. The
         same appears to be relevant under the current factual situation as well.
    2.2.6 The assessee has not brought on record any cogent, relevant and reliable evidence to prove that the
    data for preceding two years revealed facts,' which could have an influence on the determination of ALP.
    The existence of any product/economic/business cycle affecting the performance of the assessee and those
    of the comparables has not been documented for, by the assessee. It may be pertinent to mention here that
    the assessee has only given general statements to substantiate its claim that the use of multiple year data
    affects the data for the year under consideration. The assessee has simply stated that the past years data
    would affect the current and future decisions of the company. However, it important to note that no
    documentary evidence for the same was brought on record. It may be out of place to mention the onus for
    maintaining such documents specifically on the assessee and this proposition is clearly brought out by the
    judgment delivered in the case of Aztec Software & Technology Services Ltd. vs. ACIT Cir. II (1) (2007)
    107 ITO 141 (Bang) (SB). The relevant portion of the judgment is given below.
    Having regard to the statutory provisions, it is clear that burden to establish that international transaction
    -was carried at ALP is on the taxpayer. He, has also to furnish comparable transactions, apply appropriate
    method for determination of ALP and justify the same by producing relevant material and documents
    before the revenue authorities. In case revenue authorities are not satisfied with the ALP and the
    supporting documents / information furnished by the taxpayer, the authorities have ample power to
    determine the same and make suitable adjustments. The responsibility of determination of ALP is shifted to
    the revenue authorities who are to determine the same in accordance with statutory regulations. [Para
    127]
    There is criticism that the Legislature is not justified in placing onerous burden on the taxpayer to maintain
    detailed documents and to justify that transaction was carried at ALP. It is contended that this is like
    insisting upon production of self-incriminating evidence and is uncalled for. This criticism, is without any
    valid basis. It is to be remembered that international transactions carried by taxpayer are cross-border
    transactions. The departmental authorities in India are required to deal with and determine ALP of
    transactions carried in Asia, Europe, America, Australia, other developed and under-developed countries
    in Africa, etc. It is very difficult, if not impossible for them to find relevant data of an exact or of a similar
    transaction or that profit is made not only by the taxpayer, but also by other similarly situated uncontrolled
    enterprises. Knowledge of economic conditions prevailing at the place where transactions are carried is
    also essential The very nature of this job of collection of data is such that the assessee is in the best position
    to gather the requisite information. [Para 128]
    The taxpayer, on the other hand, as a party to the transaction has full knowledge of the transaction carried
    on and profit earned by him. As a person associated with that particular line of business activity, the
    assessee is reasonably expected to be not only aware about nuances of that business, but also about
    economic conditions and peculiar circumstances, if any, of that business. He is likely to know even about
    comparable uncontrolled transactions. ............
    2.2.7 Considering the above discussion, it is clear that the assessee has not discharged its onus in the
    proceedings for substantiating how the use of earlier year data affected the data for the year under
    consideration in the case of comparables.
    2.2.8 The assessee did not use the current year data in the bench marking analysis submitted by it at all. In
    this respect, it was submitted that the same could not have been used by the assessee as the data was not
    available at that time. In this respect it can be seen that rule 10B(4) is very categorical in the use of data to
                                                     13         ITA No 3320/AHD/2010
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    be used for analysis to the data relating to financial year in which transaction was taken place. Since the
    assessee did not substantiate how the use of earlier years data affected the current years data, the
    application of proviso is not triggered at all. Without prejudice and in addition to the above, it is seen that
    the proviso only provides an option to the assessee of using earlier years data but there is no compromise
    on the mandatory use of the current years data. Thus, it can be seen that last two years data can be used on
    addition to the current year's data that too only if the effect of earlier data can be shown on the current
    year's data. It can be seen that in the transfer pricing analysis, the assessee has not used the current year
    data at all. By not using the current year data at all, the transfer pricing document is against the
    provisions of rule 10B (4) of the Income tax rules.
    2.2.9 The issue relating to use of current year data is well settled now in view of the decision of the Special
    Bench of Bangalore Tribunal in the case of Aztee Software & Technology Services Ltd. (2007) 294 ITR
    (AT) 32 and reaffirmed by the Delhi Bench of Income Tax Appellate Tribunal in the case of Mentor
    Graphics Private Limited (2007) 109 ITD (101) which stipulated that the comparability analysis is to be
    conducted on the basis of current year data. Other cases where it was held so are:
    i. Honeywell limited 2009-TIOL-104-ITAT-Pune
    ii.Customer Services India Pvt limited 2009-TIOL-424-ITAT-Delhi
    iii. Schefenacker motherson limited 2009-TIOL-376-ITAT-Delhi
    iv. Panasonic India Pvt limited 2010-TII-47-ITAT-Del-TP
    v. Geodis Overseas P Limited 201 l-TII-34-ITAT-Del-TP
    vi.    Haworth India Pvt limited ITA No. 5341/Del/2010
    vii.      TNT India Pvt limited 2011TII-39-ITAT-BANG-TP
    viii NGC Network India Pvt Limited 2011-TII-45-ITAT-Mum-Intl
    ix ADP Private Limited 201 l-TII-44-ITAT-Hyd-TP
    x. Deloitte Consulting India Pvt Ltd. 1082 and 1084/Hyd/2010.
    xi.     ACIT vs Birlasoft Ltd 47 SOT 437
    Whether expression 'shall' has been employed in this rule 10B(4), which make it abundantly clear that
    current year data of an uncontrolled transaction is to be used for purpose of comparability, while
    examining international transactions with associate enterprises - Held, yes
    xii.      Exxon Mobil Company India (P.) Ltd. Vs DCIT 46 SOT 294
    Whether data relating to current year has to be considered for determining transfer pricing - Held, yes -
    Whether however, if an assessee wants to take previous year's data, then burden is on assessee to
    demonstrate that previous year's data contained certain facts which would influence determination of
    transfer pricing - Held, yes
    xiii.     Symentac Software Solutions Pvt Ltd 46 SOT 48
    While determining ALP, TPO used financial information of comparables which was not available at time of
    TP study done by assessee, but available at time of assessment Updated data were provided by assessee
    itself and TPO had gathered no information Whether act of considering said information by TPO did not
    amount to violation of any provision of law - Held, yes - Whether it is manifest from Rule 10B(4) that
    generally data of financial year in which international transaction has been entered into is to be used for
    analysing comparability of uncontrolled transaction in order to determine ALP; proviso to Rule 10B(4)
    does not mandate to always consider two more years' data of comparables in such analysis - Held, yes -
    Whether there is a rationale for using data of comparables pertaining to same period during which
    international transactions took place because it will rule out effect of difference in economic and market
    conditions prevailing/exist at different time period and therefore, there is no error or illegality by taking
    into consideration only data of financial year in which international transaction has been entered into -
    Held, yes
    2.2.10 In addition to the discussion already made above, certain new judicial decisions in support of the
    stand taken by the revenue are given below:
     a. Use of current year data
     1. ACITvsBirlasoft Ltd 47 SOT 437
    2. Bindview India Pvt Ltd. ITA no 1386/PN/10 Pune Tribunal
    3. M/s Genisys Integrating Systems (India) Pvt. Ltd, I.T.A. No.l231(Bang.)/2010
    4. Actis Advisers Pvt. Ltd.,IT A No. 5277/Del/2011
    5. Sandstone Capital Advisors P Ltd ITA No.6315/Mum/2012
    Ground no 2.3
    Issue regarding allowance of± 5% variation as standard deduction
                                                     14        ITA No 3320/AHD/2010
.                                                              A.Y. 2006-07
    1.   The proviso to section 92C(2) of the I.T. Act provides that where more than one price is determined by
         the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such
         prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an
         amount not exceeding 5% of such arithmetical mean.
    2.   The Transfer Pricing provisions were brought on the statute by the Finance Act, 2001 w.e.f. 1.4.2002.
         It is with a view to avoid hardship to the tax payers in the initial years of implementation of these
         provisions, the government of India, through a press note issued by the Ministry of Finance (Dept. of
         Revenue) on 22.08.2001, expressed its intention of not making any adjustment if the price adopted by
         the assessee was up to 5% less or up to 5% more than the arm's length price determined by the A.O.
         Immediately thereafter, the Central Board Of Direct Taxes (CBDT) issued the Circular No.12
         dtd.23.08.2001 specifying that the A.O. shall not make any adjustment to the price shown by the
         assessee if such price was up to 5% less or up to 5% more than the arm's length price determined by
         the A.O. and in such cases, the price declared by the assessee may be accepted. In the present case it is
         seen that the ALP of the international transactions undertaken by the assessee falls beyond the 5%
         margin of the price of International Transaction computed by the assessee. The proviso to Section
         92C(2) has been amended w.e.f. 1/10/2009.
         In the case of Global Vantedge (P) Ltd. Vs. DCIT (2010)1 ITR (Trib) 326 (Del) the benefit of
         adjustment of + 5% rejected by the CIT(A)s was confirmed by the ITAT even though counsel for the
         assessee made a special submission about the benefit of adjustment of + 5% . It was again decided by
         the Hon'ble Delhi tribunal in the case of Marubeni India Pvt. Ltd (2011-Tn-36-ITAT-Del-TP) that:
         "The benefit of+/- 5 % as per proviso to Section 92C of the Act cannot be considered to be a standard
         universal deduction allowed in each and every case which the assessee exceeds the permissible limit
         and falls outside the arm's length. The proviso provides a relief to the taxpayer at the time of
         determining the ALP. Therefore, this option is available to the assessee only when assessee is
         computing the ALP and not when the A O/TPO is computing the ALP".
         The same view is upheld in the following judgements:
         i.        ST Microelectronics(2011-TII-63-ITAT-Del-TP)
         ii.       DCIT vs. Deloitte Consulting India Pvt. Limited (ITAT Hyderabad)
         4 Further it has been held in a plethora of judgments that the benefit of +/- 5% is to be given only
         when where more than one price is determined by the most appropriate method .The deduction is not
         to be given when only one arms length price is determined. Similar view is propounded in the follo
         wing judgments:
         i.        UE Trade Corporation (India) (2011-TII-04-ITAT-Del-TP)
         ii.       Haworth (India) Pvt Ltd. A.Y. 2006-07 (ITA No. 5341/Del/2010)
         iii.      ADP Private Limited (2011-TII-44-ITAT-Hyd-TP)
         iv.       Perot Systems TSI (India) Ltd 2010-TIOL-15-Del
         v.        Essar Steel Ltd. (2011-TII-17-ITAT-Vizag-TP
         5.This issue is also decided in favour of the revenue in a recent decision in the case of M/s. Deloittee
         Consulting India Pvt. Ltd. as under:
         "31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the
         ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the
         comparable price should be reduced by 5% for determining the ALP. We have gone through the
         submissions and also the case law relied upon by him. He pointed out that the amendment made under
         section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned
         Departmental Representative objected to the above proposition and submitted that under the proviso,
         no standard deduction has been provided to the assessee company. In our considered view, the
         tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the
         arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it
         exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing
         the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving
         deduction of 5%. Our view is supported by the recent decision of the Delhi Bench of the Tribunal in the
         case of M/s. ST Microelectronics Private Limited vs. CIT (A) XX, New Delhi and others (supra). We
         also find that the issue is covered in favour of the revenue by the decision of co-ordinate Bench in the
         case of ADP Private Limited, Hyderabad vs. DCIT, Hyderabad (ITA No.l06/Hyd/2009 and ITA
         No.l55/Hyd/2009 dated 25-2-2011, to which one of us was a party of that order and the same is
         binding on us. Since the decision of co-ordinate Bench is binding on us, we are not inclined to follow
                                                15         ITA No 3320/AHD/2010
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    the decisions rendered by other Benches of this Tribunal which are relied on by the learned counsel
    for the assessee. We are also in agreement with the elaborate findings of the first appellate authority in
    dealing with this issue and accordingly we do not see any infirmity in his order. Hence, the grounds
    raised by the assessee on this issue are rejected.
    6.Again in a very recent judgement delivered in the case of DCIT Vs Roche Diagnostics 19
    Taxmann.com 192 (Mum)(2012),it has been held that the ± 5% variation is not to be allowed as
    standard deduction. The issue is discussed in the judgment as below:
    "25. It is important to mention that the proviso to section 92C(2) has been enshrined to make the
    assessee's declared price as acceptable if the ALP so determined is within plus minus 5% range of
    such price. It is not in the nature of any standard deduction or standard addition which has to be
    invariably allowed or made. Only if the price charged by the assessee is within plus minus 5% of the
    average profit of comparable cases, that this benefit of plus minus 5% is to be granted.
    In case it is beyond such plus minus 5% range, then the difference between the assessee's price and
    ALP calls for addition. We make it clear that if the average price of uncontrolled transactions is say
    Rs. 100 and the assessee has paid Rs. 104 or Rs. 105 then no addition is called for as it falls within +
    5% range. If however, the assessee has paid Rs. 106, then addition for Rs. 6 is warranted irrespective
    of any benefit for plus minus 5%."
    7 In another recent judgment in the case of Johnson Mattney India (P) Ltd. 20 taxmann.com 39(Del)
    good discussion is made on this issue which is reproduced below
    "14. We have heard both the sides on the issue. Various Benches of ITAT had decided the issue. In the
    case of DCITv. Deloitte Consulting India Pvt. Ltd., the ITAT, Hyderabad Bench 'A' in lTA
    No.1082/Hyd./2010 has decided this issue as under :-
    31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the
    ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the
    comparable price should be reduced by 5% for determining the ALP. We have gone through the
    submissions and also the case law relied upon by him. He pointed out that the amendment made under
    section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned
    Departmental Representative objected to the above proposition and submitted that under the proviso,
    no standard deduction has been provided to the assessee company. In our considered view, the
    tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the
    arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it
    exceeds the said tolerance band, then ALP adjustment is not required to be computed after allowing
    the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving
    deduction of 5%. Our view is supported by the recent decision of the Delhi Bench of the Tribunal in the
    case of M/s. ST Microelectronics Private Limited v. CIT (A) XX, New Delhi and others (supra). We
    also find that the issue is covered in favour of the revenue by the decision of co-ordinate Bench in the
    case of ADP Private Limited, Hyderabad v. DGIT, Hyderabad(ITA No.l06/Hyd/2009 and ITA
    No.l55/Hyd/2009 dated 25-2-2011, to which one of us was a party of that order and the same is
    binding on us. Since the decision of co-ordinate Bench is binding on us, we are not inclined to follow
    the decisions rendered by other Benches of this Tribunal -which are relied on by the learned counsel
    for the assessee.,;We are also in agreement with the elaborate findings of the first appellate authority
    in dealing with this issue and accordingly we do not see any infirmity in his order. Hence, the grounds
    raised by the assessee on this issue are rejected."
    In the case of Ms. ST Microelectronics Pvt. Ltd. v. Addl. CITin ITA Nos.1806 & 1807/Del.2008 & Ors.,
    the ITAT, Delhi Bench 'G', New-Delhi in its order dated 03.06.2011 has also considered the similar
    issued and decided as under :-
    "44. With the assistance of learned representatives, we have gone through the record carefully.
    Learned CIT(Appeals) in assessment year 2003-04 has examined this issue in detail. He observed that
    in order to avoid hardships to the assessees in the initial years of implementation of the TP provisions,
    the Government of India, through a press note issued by the Ministry of Finance on 22nd August 2001
    expressed its intention that no adjustment could be made if the transfer price adopted by the assessee
    was within the band of± 5% of the ALP determined by the Assessing Officer. CBDT had issued
    Circular No. 12 on 23.8.2001 specifying that Assessing Officer shall not make any adjustment to the
    price shown by the assessee if it is within the ±5% band, the effect of the Circular was that transfer
    price shown by the assessee was not to be disturbed if it was up to 5% less in case of receipt and up to
    5% more in case of outgoing. The relaxation extended by this Circular was in substance brought on to
                                                16         ITA No 3320/AHD/2010
.                                                          A.Y. 2006-07
    the statute by the Finance Act 2002 by amending the proviso to sec. 92C(2) with retrospective effect
    from 1.4.2002. It provides a tolerance band. It also suggests that there will be no TP adjustment in
    cases of marginal variation up to ± 5% but substantial variation would result in appropriate TP
    adjustment. Learned CIT(Appeals) has explained the meaning of tolerance band which read as under :
    "Whether there is an international transaction involving sale of a product or export of services, there
    would be a credit entry in the profit & loss account. By allowing a margin of (-) 5% for such a
    transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that
    profit from the transaction is not understated beyond the tolerance level of(-) 5%.
    Whenever there is an international transaction involving purchase of a product or import of services,
    there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such
    a transaction, a taxpayer is permitted to have a debit entry which is not above 105% of the ALP so that
    profit from the transactijon is not understated beyond the tolerance level of (+) 5%.
    11.18.3 The decision rule contained in the proviso to the sec. 92C(2) of the Act containing a tolerance
    band is akin to a similar decision rule of confidence interval used in the theory of statistical inference.
    Under that theory, a 5% level of significance would provide for a tolerance band consisting of 95% &
    105% of the arithmetical mean and these points are known as "Critical Values". The rule is one of
    "All" or "Nothing" kind of a situation. If a computed value falls within the tolerance band, a favorable
    inference is drawn. The decision rule contained in the proviso to section 92C(2) of the Act thus is a
    "All" or "Nothing" kind of rule. After all in the transfer pricing analysis, a sample set of comparables
    along with the distribution of profitability of this set is examined and an inference is sought to be
    drawn about the appropriateness of profitability shown by a taxpayer. Therefore, statistical inference
    theory based on sampling is directly applicable to the benchmarking analysis carried out in the
    transfer pricing analysis with the help of a sample set of comparables. There is no scope for any
    "standard deduction" under this rule. In other words, if the ALP falls outside the tolerance band, TP
    adjustment would have to be made for the difference between the ALP determined by the A.O. based on
    the arithmetical mean of the prices and the price shown by the assessee".
    45. The contention of the learned counsel for the assessee "was that arithmetic mean of the
    comparable price should be reduced by 5% for determining the ALP. He pointed out that in 2009, the
    proviso appended to section 92C has been amended but this amendment would be applicable
    prospectively, because the basis of determination of ALP in respect of international transaction get
    changed. This amendment effects imposing a new liability by taking the option away from the
    taxpayers. Thus, according to the learned counsel for the assessee, the amended proviso is not
    applicable. On the other hand, Learned DR has submitted that under the proviso no standard
    deduction has been provided to the assessee.
    46. On due consideration of the facts and circumstances and perusal of the proviso introduced in 2002
    as well as in 2009, we are of the view that this tolerance band provided in the proviso is not to be
    construed as a standard deduction. In the present appeals, learned TPO has adopted the arithmetic
    mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee.
    If that arithmetic mean falls within the range of alleged tolerance band then there may not be any
    adjustment but if it exceeds the ultimate adjustment is not required to be computed after Reducing the
    arithmetic mean by 5%. The actual working is to be taken. Learned First Appellate Authority has
    considered this aspect elaborately in assessment year 2003-04 and after going through his order, we
    do not see any merit in the ground of appeal raised by the assessee in all these three assessment years.
    Considering all these decisions of ITAT Benches and pleadings on both the sides, we are of the view
    that this tolerance band provided in the proviso is not to be construed as a standard deduction. In this
    case, the TPO has adopted the arithmetic mean of several comparables for taking out a PLI which
    would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of tolerance
    band then there may not be any adjustment but if it exceeds then ultimate adjustment is not required to
    be computed after reducing the arithmetic mean by 5%. The actual working is to be taken into
    consideration. Considering all these facts, the appeal of the assessee is also dismissed on this ground.
    "
    8 It is also pertinent to note the amendment carried out in the Finance Act 2012 wherein the issue is
    clearly dealt with. It was held in some of the judgments delivered by Hon'ble Tribunals that the
    amendment carried out by Finance Act 2009 is only prospective in nature and thus is applicable only
    for AY 2009-10 onwards. However by carrying out the below mentioned amendment, the dispute has
    been laid to rest. The relevant portions of the amendment in section 92C is produced below:
                                                17        ITA No 3320/AHD/2010
.                                                         A.Y. 2006-07
    "(2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2)
    Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year
    and the variation between the arithmetical mean referred to in the said proviso and the price at which
    such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the
    assessee shall not be entitled to exercise the option as referred to in the said proviso."
    9. Thus as far as the issue of applicability of standard deduction of+/-5% is concerned, in view of the
    discussion above; the same cannot be granted and the contention therefore is rejected.
    3.     Issue regarding the comparability of entities
    3.1       It can be seen from the table on page 7 of the TPO's order that the entities considered as
    comparable by the assessee were engaged in providing computer software services. As a matter of fact
    the same is also clear from the search process carried out by the assessee itself. Annexure 4A of the TP
    study report in which the comparable entities selected by the assessee can be seen show the following
    extract:
          S. No.     Company name                   Economic Activity               NIC Code
          1          Ace Software Exports Ltd. Computer software                    72200
          2          C S Software Enterprise Computer Software                      72200
                     Ltd.
          3          Crisil marketwire limited      ITES/BPO                        722
          4          Vakrangee Software Ltd.        Computer software               72200





    3.1.1 From perusal of the above, it can be seen that the assessee has itself considered the entities
    engaged in providing computer software services comparable to itself. In such a case, the contention
    raised by the assessee regarding the incomparability of the comparables selected by the TPO on the
    basis that they were engaged in providing "computer software" is hypocritical and misleading. Once
    a FAR is considered as comparable by the assessee while selecting its own comparables, it cannot take
    a u-turn and find faults in the comparables selected by the TPO were engaged in providing computer
    software services, and consequently incomparagle to the assessee, is in contravention to the
    comparables selected by the assessee itself. If the comparables considered by the assessee by the TPO
    are also required to be considered and they cannot be rejected solely on the basis that they were
    engaged in providing computer software services.
    3.1.2. No comments can be made on the specific comparables, unless the objections on the same can
    be learnt from the assessee's side.
    4 Before parting it is also important to note the observations made by the Hon. Special Bench in the
    case of Aztec Software & Technology Services Ltd 107 ITD 141(Bangalore) (SB). The relevant portion
    of the same is reproduced below:
    "Having regard to the purpose of the legislation and application of similar enactment world over, it
    must further be held that adjustments made on account of ALP by tax authorities can be deleted in
    appeal only if the appellate authorities are satisfied and record a findins that ALP submitted by the
    assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the
    revenue authorities (A.O./TPO), addition on account of adjustments' cannot be deleted. This is
    because the mandate of section 92(1) is that in every case of international transaction, incdme has to
    be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically
    accepted, the appellate authorities on the basis of material available on record have to determine ALP
    themselves. Subject to statutory provisions, appellate authorities can direct lower revenue authorities
    to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of
    international transaction has to be determined in every case.
    4.1 On the basis of the above, if it is found that the benchmarking carried out by the TPO is incorrect,
    it should not automatically mean that the comparability analysis carried out by the assessee is
    acceptable. If the comparables considered by the TPO are not found to be comparables on the basis
    that they were engaged in providing computer software services, it should not automatically mean, that
    the comparables considered by the assessee are correct since the majority of the comparables were
    also engage in providing computer software services. At this juncture it is also important to note that
    in case TNMM is used as the most appropriate method, the comparable size should be such which
    would lead to a reliable estimate of the arms length price. A single comparable should not be
    considered unless it is exactly similar to the transactions undertaken by the assessee.lt was held in the
                                                     18        ITA No 3320/AHD/2010
.                                                              A.Y. 2006-07
         case of SAP LABS India (P.) Ltd [2011] 44 SOT 156 (Bang.)- - Three comparables are not a reliable
         sample size. Thus unless the comparable is an exact comparable, a very small comparable size should
         not be used. Thus, even if it is held that the computer software entities are incomparable, it should not
         automatically lead to the correctness of the assessee's justification of ALP on the basis of one
         comparable.


    8.   Apart from the written submissions as above, Ld D.R. further submitted
         that the facts in the case of Quark Systems (supra) which has been relied
         upon by the Ld A.R. are distinguishable and therefore cannot be applied
         to the facts of the present case. He thus supported the order of AO and
         DRP.


    9.   We have heard the rival submissions and perused the material in record.
         It is an undisputed fact that for the purpose of TP study, Assessee has
         considered Vakrangee Computer Software as a comparable but however
         later on it was submitted that the same should be excluded as it was
         functionally not comparable with the Assessee moreso when the nature of
         its activities was not functionally comparable with that of the Assessee.
         Before us the Revenue has submitted that once a FAR is considered as
         comparable by the Assessee while selecting its own comparables, it
         cannot take a U turn and find faults in the comparables selected by the
         TPO on the basis of same FAR. We find that before the Sp. Bench of
         Tribunal in the case of Quark System (supra), the Assessee had raised an
         issue that one of the independent comparable which was included by the
         Assessee as also by the TPO had wrongly been included in the
         comparable and therefore should be excluded. The relevant portion of the
         order of the Hon. Special Bench on the aforesaid is as under:
         21. Shri S.D. Kapila, learned Special counsel for the assessee vehemently opposes the admission of
              the additional ground regarding excluding of Datamatics Technologies Ltd at this stage. He
              submits that Datamatics Technologies Ltd was included in the list of comparable given by the
              assessee himself, therefore, there is no good reason for the assessee to back out from the same. In
                                           19        ITA No 3320/AHD/2010
.                                                    A.Y. 2006-07
    all fairness, he did accept that the computation of operating profits of Datamatics Technologies
    Ltd is indeed vitiated in as much as operating profits of 5.79 cores have not been taken into
    account to arrive at correct figure of operating profits As a result of this error, the net operating
    profit to cost ratio which is actually 93 06% as against 138.46% adopted by the IPO. Learned
    Special counsel however, submits that tinkering with the loss of comparables at this stage and a
    fresh determination as to which comparable be accepted and which one should not be accepted
    will lead to revising the transfer pricing analysis conducted by the assessee himself. He submits
    that such an exercise will open floodgates of uncertainty to the settled assessments of transfer
    pricing cases. Shri Kapila also submitted that the onus was on the assessee to give all the
    relevant details to the TPO. which he obviously and admittedly did not do nor did he do so at the
    stage to proceedings before the CIT(A). Shri Kapila submits that these is no material on record
    to show that even before the CIT (A) such details were ever filed As regards the question of intra
    Associated Enterprises transaction being involved in the turnover of the Datamatics, Shri Kapila
    submits that this issue was never taken up before any of the authorities below. The details were
    also not available in the Prowess database and have come to the light only as a result of detailed
    balance sheet of Datamatics Technologies Ltd company filed now by the assessee. In such
    circumstances, according to the learned special counsel we should not entertain a grievance
    regarding exclusion of Datamatics Technologies Ltd in the comparables without prejudice to this
    opposition learned counsel fairly submits that in the event the Tribunal is pleased to admit this
    ground of appeal, the matter can at best be remitted to the file of the Assessing Officer for the
    limited purpose of examining the relevant fact regarding Datamatics Technologies Ltd. Learned
    counsel further submits that in case we are inclined to remit the matter to the file of the Assessing
    Officer, he has no objection to the matter being restored to the file of the Assessing Officer as
    such but an exercise should be for the limited purposes of examining specific points as the bench
    may deem fit but it should not be for the purposes of revisiting the entire transfer pricing analysis
    it is also submitted that the question as to what-further adjustments need to be made in the profits
    so as to eliminate the impact of variations between the assessee and the comparables cannot be
    addressed at this stage as it would amount to revisiting entire transfer pricing study, and that the
    remand should be confined to the question as to whether or not a particular comparable can be
    taken into account or not.
    30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that
    "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its
    inclusion was raised before the TPO or before the learned CIT (Appeals) in appeal. Therefore,
    the taxpayer should not be permitted to raise additional ground and ask for exclusion of the
    above enterprise in the determination of the average margins. We are unable to accept above
    contention. In the first place, these are initial years of implementation of Transfer Pricing
    Legislation in India and taxpayers as well as tax consultants were not fully conversant, with this
    new branch of law when proceedings were initiated or even at appellate stage. Besides, Revenue
    authorities, including TPO were required to apply statutory provisions and consider for purposes
    of comparison functions, assets and risks (turnover), profit and technology employed by the
    tested party and other enterprises taken as comparable Statutory duty is cast on them to
    undertake above exercise. This has not been done in this case. We would only say that prima
    facie, as per the material, to which reference has been drawn by Shri Agarwal, Datamatics does
    not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as
    comparable in its T P audit, the taxpayer is entitled to point out to the Tribunal that above
    enterprise has wrongly been taken as comparable in fact there are vast differences between
    tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies"
    representing extreme positions. If Imercius Technologies, has suffered heavy losses and,
    therefore, it is not treated as comparable by the tax authorities, they also have to consider that
    the Datamatics has earned extraordinary profit and has a huge turnover. Besides differences In
    assets and other characteristics referred to by Shri Aggarwal. The Income Tax Appellate
    Tribunal is a fact finding body and, therefore has to take into account all the relevant material
    and determine the question as per the- statutory regulations.
    31. In the case of CIT vs Bharat General Reinsurance Co. Ltd 81 ITR 303, the Hon'ble Delhi
    High Court, observed as under:
                                           20         ITA No 3320/AHD/2010
.                                                     A.Y. 2006-07
     'It is true that the assessee itself had included that dividend income in is return for the year in
     question but there is no estoppel in the Income Tax Act and the assessee having itself challenged
     the validity of taxing the dividend during the year of assessment in question it must be taken that
     it had resiled from the position which it had wrongly taken while filing the return. Quit apart
     from if, it is incumbent on the income tax department to find out whether a particular income was
     assessable in the particular year or not. Merely because the assessee wrongly included the
     income in its return for a particular year, it cannot confer jurisdiction on the department to tax
     that income in that year even though legally such income did not pertain to that year."
     32 In the case of R.B.Jessa Ram Fateh Chand vs. CIT 81 ITR 409, it has been found and
     observed as under:
     "Mr Brijial Gupta appearing for the department pointed out that the assessee itself filed separate
     returns for the two parts of a single accounting period. The assessee applied for registration for
     the first period only. The assessment for the second period proceeded as against an unregistered
     firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a
     single assessment under section 26(1) ought to have been made. Now, there cannot be an
     estoppel against statute. If in fact the procedure adopted by the Income-tax Officer was incorrect,
     the defect is not cured by the attitude taken up by the assessee "
    33 In the case of CIT vs. C.Parakh & Co. (India) Ltd. 29 ITR 661, their Lordship of Supreme
    Court made the following observations:
    'On the question of the admissibility of the deduction of Rs 1,23,719, the contention of the
    appellant is that as the respondent had itself split up the commission of Rs 3,12 699 paid to the
    managing agents, and appropriated Rs 1,23,719 thereof to the profits earned at Karachi and had
    debited the same with it, it was not entitled to go back upon it, and claim the amount as a
    deduction against the Indian profits. We do not see any force in this contention. Whether the
    respondent is entitled to a particular deduction or not will depend on the provision of law relating
    thereto, and not on the view which it might take of its rights, and consequently, if the whole of the
    commission is under the law liable to be deducted against the Indian profits, the respondent
    cannot he estopped from claiming the benefit of such deduction, by reason of the fact that it
    erroneously allocated a part of it towards the profits earned in Karachi. What has therefore to be
    determined is whether, notwithstanding the apportionment made by the respondent in the profit
    and loss statements, the deduction is admissible under the law."
    34 In the case of CIT vs. V.M.R.P.Firm, Muar (SC) 56 ITR 67, the following observations of their
    Lordship of Supreme Court are as under:
    "The decision in Amarendra Narayan Roy Vs CIT AIR 1954 Cal 271 has no bearing on the
    question raised before us. There the concessional scheme tempted the assesses to disclose
    voluntarily ail his concealed income and he agreed to pay the proper tax upon it. The agreement
    there related to the quantification of taxable income but in the present case what is sought to be
    taxed is not a taxable income. The assessee in such a case can certainly raise the plea that his
    income is not taxable under the Act We, therefore, reject this plea."
    35 In Para 4.16 of latest report, the OECD provides the following guidelines.
    "In practice, neither countries nor taxpayers should misuse the burden of proof in the manner
    described above Because of the difficulties with transfer pricing analysis, it would be appropriate
    for both taxpayers and tax administrations to take special care and to use restraint in relying on
    the burden of proof in the course of the examination of a transfer pricing case. More particularly,
    as a matter of good practice the burden of proof should not be misused by tax administrations or
    taxpayers as a justification for making groundless or unverifiable assertions about transfer
    pricing. A tax administration should be prepared to make good faith showing that its
    determination of transfer pricing is consistent with the arm's length principle even where the
    burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good
    faith showing that their transfer pricing is consistent with the arm's length principal regardless of
    where the burden of proof lies."
    36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they
    emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment
    though such mistake is the result of evidence adduced by the taxpayer.
                                                    21        ITA No 3320/AHD/2010
.                                                             A.Y. 2006-07
             37. When substantial justice and technical considerations are pitted against each other, the cause
             of substantial justice deserves to be preferred. For the other side cannot claim to have a vested
             right in injustice being done due to some mistakes on its part.
             38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped
             from pointing out that Datamatics has wrongly been taken as comparable. While admitting
             additional ground of appeal raised by the assessee to require us to consider whether or not
             Datamatics should be included in the comparable, we make no comments on merit except
             observing that assessee from record has shown it's prima-facie case. Further claim may be
             examined by the Assessing Officer. This course we adopt as objection to the inclusion of
             Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we
             deem it fit and proper to remit the matter to the file of the Assessing Officer for consideration of
             claim of the taxpayer and make a de novo adjudication of the arm's length price after providing
             reasonable opportunity of being heard to the assessee. We order accordingly.


    10.   Thus it is seen that Respected Sp. Bench of the Tribunal after relying on
          various decisions of Apex Court and High Courts has held that tax payer
          is not stopped from pointing out a mistake in the assessment though such
          mistake is the result of evidence adduced by the taxpayer. It has further
          held that when substantial justice and technical considerations are pitted
          against each other, the cause of substantial justice deserves to be
          preferred. Further the other side cannot claim to have a vested right in
          injustice being done due to some mistakes on its part. In view of the
          aforesaid facts and considering the peculiarity of the facts of the present
          case and relying on the aforesaid decision of Special Bench, we are of the
          view that Vakrangee Software should be excluded while working out the
          OP/TC%. We therefore restore the matter to the file of AO for fresh
          consideration after considering the foregoing and thereafter decide the
          issue as per law and after giving a reasonable opportunity of hearing to
          the Assessee. Thus this ground of the Assessee is allowed for statistical
          purposes.


          Ground No 3 & 4 are interconnected and therefore considered together:
                                                      22        ITA No 3320/AHD/2010
.                                                               A.Y. 2006-07

    11.   AO noticed that Assessee has incurred Rs 506950/- under the head
          "Community welfare expenses". Assessee was asked to substantiate its
          claim and how the same was allowable u/s 37(1) of the Act. Assessee
          interalia submitted that the expenditure was incurred for school building
          and toilet at the village which was near the vicinity of the Assessee's
          factory and was for the benefit of the villagers. AO did not agree with the
          contention of the Assessee. He was of the view that the expenses had
          nothing to do with the business of the Assessee and further there was no
          contractual obligation of the Assessee to incur the expenses. He
          accordingly disallowed the expenses. Aggrieved by the draft order of
          AO, Assessee carried the matter before DRP. DRP upheld the draft order
          of AO by holding as under:
          11.10 The assessee's submissions have been considered carefully, but the sane are found not
          acceptable. From the facts of the case it can be seen that the AO had disallowed the claim of the
          assessee on the ground that the said expenditure was not for the business purposes of the assessee
          company and there was no liability for the assessee's company to incur such expenditure. The payment
          under considerations can at best be treated as application of income. Further, any voluntary payment
          where there is no legal liability to make such, payments cannot be considered to be expenditure for
          the purposes of business. Reliance in this respect is placed on the decision of the Hon'ble SC in the
          case of C1T vs. Birla Bros. ( P)Ltd. reported in 77 ITR. 751, whereby the Hon. SC held as under
          "Neither under custom nor under any statutory provision or any contractual obligation was the
          assessee bound to guarantee the loan advanced by the bank to the selling agent. It is difficult to see
          how it was in the interest of the assessee's business that the guarantee was given. There -was even no
          material to establish that the managed company was under any legal obligation to finance the selling
          agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible
          in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the
          carrying on of the assessee's business. It is equally difficult to appreciate the observations of theHigh
          Court that it was in the larger interest of the assessee's business that the guarantee was given. In our
          opinion the view of the Appellate Tribunal was based on a complete misapprehension of the true legal
          position. The High Court also fell into the same error. The allowance which was claimed did not fall
          within section 19(2)(o). No attempt was made nor indeed could it be usefully made to claim any
          allowance under section 10(2)(xv) of the Act. For the reasons given above the correct answer to the
          question referred should be in the negative and against the assessee.
                                                      23         ITA No 3320/AHD/2010
.                                                                A.Y. 2006-07
          11.11     The Hon'ble Bombay High Court while adjudication similar issue in the case of Standard
                    Mills Co. Ltd. vs. CIT reported in 209 ITR 85 (Bom), after relying upon its decision Voltas
                    Ltd. vs. CIT, reported in 207 ITR 47 (Bom) has held as under:-
          "By this reference under s, 156(1) of the, IT Act, 1961, made at the instance of the assessee, the
          Tribunal has referred the following three questions of law to this Court for its opinion:
          (i) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the
          expenses amounting to Rs. 22,507, Rs. 85, 777 and Rs. 10,077 incurred by the assessee for various
          social welfare measures were not allowable as revenue expenditure for the asst. yrs. 1975-76, 1976-77
          and 1977-78 respectively ?
          (ii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the
          amount of Rs. 1,55, 569 paid by the assessee-company to the erstwhile occupant of the land acquired
          from the Bombay Municipal Corporation in exchange of the assessee's land was not allowable as
          revenue expenditure ?
          iii) Whether, on the facts and in the circumstances of the case, the Tribunal had rightly held that the
          assessee is not entitled to weighted deduction under s. 35B of the IT Act, 1961, in respect of export
          freight and expenses amounting to Rs. 33,10,138 and (ii) Bank guarantee commission amounting to Rs.
          3,000 for the asst, yr. 1977-78?"
          11.12 In view of above mentioned factual and legal position. We do not find any infirmity in the
          proposed addition of Rs. 5,06,950/- on account of community welfare expense and hence the same is
          confirmed.



    12.   Aggrieved by the order of DRP, Assessee is now in appeal before us.


    13.   Before us, the Ld. A.R. reiterated the submissions made before DRP and
          further submitted the expenses was incurred for the purpose of better
          relationship with the workers and employees of the Assessee as many of
          the employee are habitant of nearby area and their children are studying
          in that school. He further submitted that existence of contractual
          obligation is not a prerequisite for allowability of expenditure u/s 37(1)
          of the Act. He also placed reliance on the decisions which were cited
          before DRP. The ld. D.R. on the other hand supported the order of A.O.
                                                      24          ITA No 3320/AHD/2010
.                                                                 A.Y. 2006-07

    14.   We have heard the rival submissions and perused the material on record.
          It is an undisputed fact that the expenses have been incurred for the
          construction of school building and toilet block in the village. The
          incurring of expenditure has not been doubted or has been held to be
          bogus by the Revenue. The submission of the assessee that the expenses
          has been incurred for better relationship with the workers and employees
          of the assessee has not been controverted by Revenue by bringing any
          contrary material on record.


    15.   In the case of Mysore Kirloskar Ltd. vs. CIT (1987) 166 ITR 836 (Kar)
          one of the question before the H'ble High Court was whether the amount
          donated by the Assessee to the education trust was allowable as
          deduction?. The H'ble High Court held as under:
          "There is yet one more thing to be remembered while applying s. 37(1). The expenditure claimed
          therein need not be "necessarily" spent by the assessee. It must be incurred "voluntarily" and without
          any "necessity", but it must be for promoting the business. In other words, if the expenditure has been
          incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the
          deduction would be permissible under s. 37(1). Again the words "for the purpose of business" used in
          s. 37(1) should not be limited to the meaning of "earning profit alone". Business expediency or
          commercial expediency may require providing facilities like schools, hospitals for the employees or
          their children or for the children of the ex-employees. The employees of today may become the ex-
          employees tomorrow. Any expenditure laid out or expended for their benefit, if it satisfies the other
          requirements, must be allowed as deduction under s. 37(1). The fact that somebody other than the
          assessee is also benefited or incidentally taken advantage of by the provision made, should not come in
          the way of the expenditure being allowed as a deduction under s. 37(1). But nevertheless, it must be an
          'expenditure' allowable for deduction under the Act."


    16.   Considering the totality of facts and relying on the aforesaid decision of
          the H'ble High Court, we are of the view that in the present case the
          expenditure incurred by the assessee as community welfare expenses is
          allowable. Thus this ground of the Assessee is allowed.
                                         25     ITA No 3320/AHD/2010
.                                               A.Y. 2006-07



             Ground no 5 & 6 are interconnected and is with respect to
          computation of deduction u/s 10B:


    17.   During the course of assessment proceedings AO noticed that Assessee
          has received brokerage on sea freight of Rs 1,00,318/- and insurance
          claim of Rs 64,125/- and had considered both of them as part of profit of
          the business for computing deduction u/s 10B. AO was of the view that
          the aforesaid amounts did not have the attributes of profits derived from
          the business of the undertaking of export of articles or things and
          therefore cannot be considered to be part of profit for deduction u/s 10B.
          He accordingly reworked the profit of the business by excluding the
          same. Aggrieved by the order of AO, Assessee carried the matter before
          DRP. DRP upheld the order of AO and therefore the Assessee is now
          before us.


    18.   Before us, the Ld. A.R. submitted that brokerage on sea freight charges
          were nothing but merely discount availed by the Assessee and refund of
          insurance charges were in the nature of refund of excess amount paid to
          insurance company and claimed as deduction. He further submitted that
          the aforesaid transactions were reduction in actual expenses incurred in
          connection with the business of export of manufactured goods and
          therefore should not be reduced from the amount of profit for working
          out deduction u/s 10B. He further placed reliance on the Special Bench
          decision in the case of Maral Overseas Ltd Vs ACIT (2012) 146 TTJ
          (Ind) (SB) 129. The Id. D.R. on the other hand relied on the order of AO
          and DRP.
                                                      26         ITA No 3320/AHD/2010
.                                                                A.Y. 2006-07



    19.   We have heard the rival submissions and perused the material on record.
          Before us the nature of income as submitted by the Assessee has not been
          controverted by Revenue. The contention of the Revenue is that the
          income cannot be said to be derived from the eligible undertaking and
          hence is not allowable. We find that before Special Bench in the case of
          Maral Overseas (supra) one of the question was as to whether the
          undertaking is eligible for deduction on export incentive received by it.
          The Special Bench has decided the issue by holding as under;-
          "It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in
          respect of profits and gains as are derived by a 100% EOU. Further, section 10B(4) of the Act
          stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the
          provisions of sub-section(4) of section 10B of the Act mandate that deduction under that section shall
          be computed by apportioning the profits of the business of the undertaking in the ratio of export
          turnover by the total turnover. Thus, even though sub-section(1) of section 10B refers to profits and
          gains as are derived by a 100% EOU, the manner of determining such eligible profits has been
          statutorily defined in sub-section(4) of that section. Both sub-sections(1) and (4) are to be read
          together while computing the eligible deduction u/s10Bof the Act. We cannot ignore sub-section (4) of
          section 10B which provides specific formula for computing the profits derived by the undertaking from
          export. As per the formula so laid down, the entire profits of the business are to be determined which
          are further multiplied by the ratio of export turnover to the total turnover of the business. In case of
          Liberty India, the Hon. Supreme Court has dealt with the provisions of section 80IA of the Act wherein
          no formula was laid down for computing the profits derived by the undertaking which has specifically
          been provided under sub-section (4) of section 10B while computing the profits derived by the
          undertaking from the export. Thus the decision of the Hon. Supreme Court is of no help to the revenue
          in determining the claim of deduction u/s 10B in respect of export incentives.



    20.   Thus it is seen that the respected Special Bench of the Tribunal has held
          that once an income forms part of the business of the undertaking, the
          same would be included in the profits of the business of the undertaking
          and will be eligible for deduction. Respectfully following the aforesaid
          Special Bench decision, we are of the view that the Assessee is eligible
                                          27      ITA No 3320/AHD/2010
.                                                 A.Y. 2006-07

          for deduction on the brokerage on sea freight and insurance claim which
          it has credited to its profit and loss account. Thus this ground of the
          Assessee is allowed.


          Ground no 7 is consequential and therefore does not require adjudication.


    21.   In the result the appeal of the assessee is allowed for statistical purposes.

           Order pronounced in Open Court on 06 - 12 - 2013.


          Sd/-                                                  Sd/-
   (D.K. TYAGI)                                       (ANIL CHATURVEDI)
JUDICIAL MEMBER                                      ACCOUNTANT MEMBER
Ahmedabad.                    TRUE COPY
Rajesh

Copy of the Order forwarded to:-
1.    The Appellant.
2.    The Respondent.
3.    The CIT (Appeals) ­
4.    The CIT concerned.
5.    The DR., ITAT, Ahmedabad.
6.    Guard File.
                                                           By ORDER



                                                    Deputy/Asstt.Registrar
                                                      ITAT,Ahmedabad

 
 
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