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
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. A.Y. 2006-07
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
. A.Y. 2006-07
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
. A.Y. 2006-07
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
. A.Y. 2006-07
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
. A.Y. 2006-07
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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