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Aithent Technologies Pvt. Ltd., A-16/9,Vasant Vihar, New Delhi. Vs. DCIT, Circle 1(1), CR Building, New Delhi.
June, 15th 2015
           DELHI BENCHES : I-1 : NEW DELHI


                      ITA No.5846/Del/2011
                     Assessment Year : 2007-08

Aithent Technologies Pvt. Ltd., Vs. DCIT,
A-16/9,Vasant Vihar,                Circle 1(1),
New Delhi.                          CR Building,
                                    New Delhi.

  (Appellant)                           (Respondent)

           Assessee By       :   Shri Akhilesh Gupta, Partner
           Department By     :   Shri Vivek Wadekar, CIT, DR &
                                 Ms Y. Kakkar, Sr. DR

        Date of Hearing            :   10.06.2015
        Date of Pronouncement      :   12.06.2015

     This appeal by the assessee is directed against the final order

passed by the Assessing Officer (AO) on 31.10.2011 u/s 143(3) read
                                                          ITA No.5846/Del/2011

with section 144C of the Income-tax Act, 1961 (hereinafter also called

`the Act') in relation to the assessment year 2006-07.

2.   The first issue raised in this appeal is against the addition of

Rs.8,61,31,210/- made by the AO on account of transfer pricing


3.   Briefly stated, the facts of the case are that the assessee, an Indian

company, was incorporated on 3.11.2000 and has a branch office in

Canada. The assessee is a wholly owned subsidiary of Aithent Inc.,

USA. The assessee is engaged in development of computer software.

Seven international transactions were reported in Form No.3CEB, which

have been enlisted by the Transfer Pricing Officer (TPO) in his order

dated 26.10.2010.     The assessee benchmarked these international

transactions and demonstrated them to be at arm's length price (ALP) by

following the Transactional Net Margin Method (TNMM). The last two

transactions, namely, Reimbursement of expenses and Apportionment of

administrative expenses, etc., are not in dispute.         The first five

transactions are of rendering software development services by the

                                                          ITA No.5846/Del/2011

assessee to its associated enterprises (AEs). The assessee, apart from

having head office in India has also a branch office in Canada providing

software development services to its AE in the USA. The assessee also

paid for certain consulting services rendered by its AE to its Canada

branch. For the time being, we are not considering the international

transaction of unsecured interest free loan for which an adjustment of

Rs.87,90,467 was recommended by the TPO. In so far as the above

transactions of rendering software development services and receiving

consulting services, to the exclusion of interest free loan are concerned,

the assessee used certain comparables and showed that these transactions

were at arm's length price. The assessee's total revenue from services

rendered as per its Profit & Loss Account, a copy of which is available

on page 58 of the paper book, stands at Rs.36,63,45,769/-. The assessee

received a sum of Rs.13.67 crore, as per page 485 of the paper book,

from its associated enterprises (AEs). This shows that the remaining

amount of Rs.22.96 crore (Rs.36.63 crore minus Rs.13.67 crore) was the

revenue earned from non-AEs (unrelated parties). The TPO altered some

of the comparables chosen by the assessee and computed the arm's
                                                        ITA No.5846/Del/2011

length margin of his final set of comparables at 23.56% of the operating

cost. This arm's length margin was applied on total revenues earned by

the assessee at Rs.36.63 crore (inclusive of revenues from non-AEs).

That is how, he proposed transfer pricing adjustment of Rs.8,61,31,210/-

on this score. The assessee remained unsuccessful before the DRP on

various issues including the selection of comparables made by the TPO.

However, the assessee's claim for not considering depreciation on

building let out to outsiders as an operating cost, was accepted by the

DRP and a direction was given to the TPO, which aspect will be

discussed infra. The assessee is aggrieved against the determination of

the ALP and the resultant addition made by the AO.

4.     We have heard the rival submissions and perused the relevant

material on record. It is observed that while computing the arm's length

price (ALP) of the assessee's international transactions under this

segment, the TPO applied arm's length margin on the total transactions

undertaken by the assessee inclusive of the revenue received from non-


                                                          ITA No.5846/Del/2011

5.    We have noticed above that the assessee has a branch office in

Canada and there are some transactions between the head office in India

and the branch office in Canada. These transactions have also been

taken into sweep for the purposes of making the transfer pricing

adjustment. There is no dispute on the fact that the assessee has offered

its total income for taxation, which also comprises of the revenues from

its Canada branch. In other words, the figures of expenses and incomes,

assets and liabilities of branch office in Canada have been merged with

such figures of head office in India. It is the merged figures of both the

head office and branch office taken together as one unit, that have been

taken into consideration for all practical purposes including the

computation of total income and the transfer pricing analysis.

6.   The first question for our consideration is whether the transactions

between the head office in India and branch office in Canada can be

considered as international transactions, even though the assessee

inadvertently reported the same so as a matter of abundant caution. The

answer is obviously in negative because section 92B(1) categorically

                                                           ITA No.5846/Del/2011

provides that: `For the purposes of this section and sections 92, 92C,

92D and 92E, an "international transaction" means a transaction

between two or more associated enterprises ........'. A bare perusal of

the definition of `international transaction' brings to light that for

treating any transaction as an international transaction, it is sine qua non

that there should be two or more separate AEs. When we consider the

definition of `International transaction' given in section 92B along with

the meaning of the AE given in section 92A, it clearly transpires that in

order to describe a transaction as an `international transaction', there

must be two or more separate entities.

7.     It is simple and plain that no person can transact with self in

common parlance. As such, one cannot earn any profit or suffer loss

from self. The same is true in the context of business as well. Neither

any person can earn income nor suffer loss from self. It is called the

principle of mutuality. When expanded commercially, the proposition

which follows is that there can be no profit from trade with self. This has

been fairly settled through a catena of judgments from the Hon'ble Apex

                                                          ITA No.5846/Del/2011

Court including Sir Kikabhai Prem Chand VS CIT (1953) 24 ITR 506

(SC) and also the Hon'ble High Courts. In Betts Hartley Huett & Co.

Ltd. (1979) VS. CIT 116 ITR 425 (Cal), it has been held that there cannot

be a valid transaction of sale between branch office and head office and

hence profit on such sales is not includible in assessee's computation of

total income. Similar view has been taken in Ram Lal Bechairam VS.

CIT (1946) 14 ITR 1 (All).      Even if for a moment, we accept the

contention of the Revenue as correct that the head office earned profit

from its branch office, then such profit earned would constitute

additional cost of the Branch office. On the aggregation of the accounts

of the Head office and branch office, such income of the HO would be

set off with the equal amount of expense of the BO, leaving thereby no

separately identifiable income on account of this transaction.

8.    Reverting to the extant context, we find that when the assessee is

only one entity, then such inter se dealings between the head and the

branch office cease to be commercial transactions in the primary sense,

what to talk of an `international transaction', whose pre-requisite is a

                                                          ITA No.5846/Del/2011

transaction between two or more associated enterprises. Since the office

in Canada is only a branch office and not a separate entity distinct from

the assessee, the transactions between the head office in India and

branch office in Canada cannot be considered as international


9.   There is hardly any need to accentuate that there can be no estoppel

against law.     Merely because the assessee took an inadvertent

appreciation of the transactions with self as international transactions,

that cannot prevent it from claiming before the authorities that the

correct legal position should prevail.    In view of the fact that the

assessee's office in Canada is its branch office, the transactions between

the head office and the branch office, under the provisions of the Act,

cannot be considered as international transactions. We, therefore, hold

that the TPO was not justified in determining the ALP of the

international transaction of `Software Product Development/Software

Consultancy Services' by applying the average operating profit margin

of the comparables to the cost base of transactions with its AE, which

                                                          ITA No.5846/Del/2011

also included the transactions with the branch office in Canada. Such

cost base is directed to be considered as exclusive of transactions with

the Canada branch. We, therefore, set aside the impugned order to this


10.   It is uncontroverted, as is also apparent from the TPO's order, that

the transfer pricing adjustment has been made by considering the total

costs incurred by the assessee in respect of both the controlled and

uncontrolled transactions with the associated enterprises (AE) and non-

AEs. An addition towards transfer pricing adjustment can be made by

comparing the assessee's profit rate from the international transaction

with that of comparable uncontrolled transactions. Under the TNMM,

the process is simple in initially finding out the operating profit margin

of the assessee and then the average adjusted operating profit margin of

comparable cases.    Such adjusted profit margin of the comparables

constitutes benchmark margin, which is then compared with the

operating profit margin from the assessee's international transactions

with its AE. It is not permissible to make transfer pricing adjustment by

                                                          ITA No.5846/Del/2011

applying the average operating profit margin of the comparables on the

assessee's universal transactions entered into with both the AE and non-

AEs. As the entire exercise under Chapter-X is confined to computing

total income of the assessee from international transactions having

regard to the arm's length price, there is no scope for computing the

income even from non-international transactions having regard to the

ALP. As the TPO has computed the transfer pricing adjustment qua all

the transactions carried out by the assessee with reference to the base of

`total costs', also inclusive of costs relevant for transactions with non-

AEs, we vacate the impugned order on this issue and restore the matter

to the file of AO/TPO for recalculating the amount of addition of

transfer pricing adjustment by taking into consideration the international

transactions only under this segment to the exclusion of transactions

with Canada Office and non-AEs.

11.   The assessee has assailed the inclusion of some companies in the

list of comparables. The TPO is directed to consider the arguments of

the assessee and then decide as per law as to whether such companies

                                                         ITA No.5846/Del/2011

are comparable or not. Needless to say, the assessee will be allowed a

reasonable opportunity of hearing by the TPO/AO.

12.   The second issue raised in this appeal is against considering

depreciation on building as operating cost, which building was let out

and some rental income was also earned therefrom. We do not find any

discussion in the order passed by the TPO on this issue. The assessee

argued before the Dispute Resolution Panel (DRP) that depreciation on

building let out to some third party should be excluded from the total

operating costs. The DRP has discussed this aspect on page 2 of its

Directions given on 3.9.2011 directing the TPO: `to verify and exclude

the excess amount and recomputed ALP as per law and facts.' It is

noticed that such direction given by the DRP has not been given effect to

by the TPO/AO. There is no discussion in the final assessment order

passed by the AO on 31.10.2011 giving effect to the TPO's order on this

aspect of the matter. The ld. AR contended that both the TPO as well as

the AO failed to give effect to the direction given by the DRP which is

binding on them.

                                                                  ITA No.5846/Del/2011

13.       In such circumstances, the question arises as to whether the

direction given by the DRP is mandatory or directory on the TPO/AO.

In order to find an answer to this question, we need to have a look at the

mandate of section 144C(13), which is as under:-

         "(13) Upon receipt of the directions issued under sub-section (5), the
         Assessing Officer shall, in conformity with the directions, complete,
         notwithstanding anything to the contrary contained in section
         153 or section 153B, the assessment without providing any further
         opportunity of being heard to the assessee, within one month from the
         end of the month in which such direction is received."

14.      A bare perusal of this provision indicates that upon receipt of the

directions issued by the DRP under sub-section (5) of section 144C, the

AO has to complete the assessment in conformity with the directions so

given. In other words, the assessing authority is bound by the directions

given by the DRP and these directions are mandatory and not directory

in nature. Reverting to the facts, once the DRP directed the TPO to

exclude the excess amount of depreciation, it was incumbent upon him

to give effect to such direction notwithstanding his contrary view on the


                                                          ITA No.5846/Del/2011

15.     Here, we want to note that the Finance Act, 2012 has inserted

sub-section (2A) to section 253 w.e.f. 1.7.2012 providing remedy to the

Department against the direction given by the DRP which is not

acceptable to it. This sub-section provides that the Commissioner may

direct the AO to appeal to the Tribunal against the order if he objects to

any direction issued by the DRP in respect of any objection filed on or

after 1.7.2012 by the assessee u/s 144C(2), in pursuance of which the

AO has passed an order completing the assessment. The insertion of this

provision reaffirms that the direction given by the DRP u/s 144C(5) is

binding on the AO who, under sub-section (13) of section 144C, is

bound to complete the assessment in conformity with the direction

given by the DRP. It is only in the secondary stage after the completion

of assessment, as per which the Revenue, if aggrieved against direction

given by the DRP, can appeal before the tribunal against the order

passed by the AO giving effect to such direction. In any case, the

direction given by the DRP has to be honoured by the AO while

finalizing the assessment u/s 143(3) read with section 144C(13) of the

Act. Coming back to the facts of the instant case, we find that the
                                                          ITA No.5846/Del/2011

direction given by the DRP for verifying and excluding the excess

amount of depreciation has not been adhered to by the TPO/AO, which

position is contrary to law. As such, we set aside the impugned order on

this score and remit the matter to the file of the AO/TPO for passing an

order in conformity with the direction given by the DRP. We want to

make it explicit that we have not undertaken the exercise of examining

any aspect of the actual amount of the excess depreciation liable for

exclusion. The DRP has also simply directed the TPO to verify this

aspect, and, then, exclude the excess amount of depreciation in

determining the ALP of the international transaction.        As such, the

Officer is not only entitled but also duty bound to verify the correctness

of the claim lodged by the assessee before excluding the excess amount

of depreciation.

16.   The next issue raised in this appeal is against the treatment of

hypothetical interest on security deposits as income u/s 28(iv) of the Act.

The facts apropos this ground are that the assessee was found to have let

out its property on receiving an interest-free security deposit of

                                                          ITA No.5846/Del/2011

Rs.77,25,480/-. The AO determined interest rate of 15% which, in his

opinion, should have otherwise led to increase in the annual letting value

of the property. Initially he discussed the inclusion of this amount in the

annual letting value of the property, but, later on, he switched over to

section 28(iv) and, finally, included a sum of Rs.11,58,822/- in the

assessee's total income towards notional interest on interest free deposit.

The assessee challenged the view taken by the AO in the draft order

before the DRP, who, vide para 3.3 of its direction, directed the AO to

delete this addition. It was held that neither the ALV of the property can

be increased u/s 23 with the notional interest nor section 28(iv) can be

applied. However, we find from the final assessment order passed by

the AO that the addition of Rs.11.58 lac has still been made.

17.   Again, it is amply clear that the direction given by the DRP for

deletion of this addition has not been taken into consideration by the AO

while finalizing the assessment.      We have noticed above that the

direction given by the DRP is binding on the AO in terms of section

144C(13).    Adopting the discussion made above, we hold that the

                                                          ITA No.5846/Del/2011

addition of Rs.11.58 lac is not warranted because of the direction given

by the DRP for the deletion of the addition. This ground is allowed.

18.   The last issue in this appeal is against the addition on account of

transfer pricing adjustment towards interest on interest free loan given

by the assessee to its AE. The TPO observed that the assessee advanced

some interest free loan to its AE. He applied interest rate of 14% on such

amount for working out the TP adjustment of Rs.87,90,467/-.              The

assessee remained unsuccessful before the DRP and the AO in his final

order made the above addition.

19.   After considering the rival submissions and perusing the relevant

material on record, we find that this is a recurring issue coming from the

earlier years, which has been decided by the Tribunal in assessee's own

case for the preceding years. In its order for the AY 2002-03, the

Tribunal restored this matter for a fresh consideration in the light of

certain directions. Similar view has been repeated by the Tribunal vide

para 16 on page 10 of its order for the immediately preceding

assessment year, namely, 2006-07, by remitting the matter to the file of

                                                           ITA No.5846/Del/2011

the AO/TPA. In the absence of any distinguishing facts for this year vis-

à-vis the earlier years, respectfully following the precedent, we set aside

the impugned order and remit this matter to the file of AO/TPO for a

fresh determination of the transfer pricing adjustment, on the basis of the

directions given by the Tribunal for such earlier years.

20.    At this juncture, we want to clarify that the direction given by the

Tribunal in earlier years should be seen in the light of the recent

judgment delivered by the Hon'ble Delhi High Court on 27.3.2015 in

CIT vs. Cotton Naturals (I) Pvt. Ltd. In this case, it has been held by the

Hon'ble Delhi High Court that the currency in which the loan is to be re-

paid normally determines the rate of return on the money lent, i.e. the

rate of interest. As such, we direct the TPO to compute the rate of

interest to be applied in conformity with the aforesaid judgment of the

Hon'ble Delhi High Court in Cotton Naturals (I) Pvt. Ltd. (supra), if the

earlier Tribunal order does not accord with its ratio. In so far as the

quantum of loan is concerned, the assessee did not agitate the same.

                                                                 ITA No.5846/Del/2011

21.       In the result, the appeal is partly allowed.

          The order pronounced in the open court on 12.06.2015.

               Sd/-                                             Sd/-
   [A.T. VARKEY]                                      [R.S. SYAL]
 JUDICIAL MEMBER                                  ACCOUNTANT MEMBER

Dated, 12th June, 2015.
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                         AR, ITAT, NEW DELHI.

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