M/s. SCM Microsystems (India) Pvt Ltd., CHENNAI V. ACIT, CHENNAI

CO 198/CHNY/2012

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8462 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 10 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 15-04-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 05-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R VIJAYARAGHAVAN
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary; Reasonable cause; Condonation of delay
• Section: 92C; 43B; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE , ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.774/MDS/2011 & CROSS OBJECTION NO.198/MDS/20 12 (IN ITA NO.774/MDS/20 11) ( ASSESSMENT YEAR : 2005-06) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-VI(1), AAYAKAR BHAVAN, NEW BLOCK, 121, M.G.ROAD, 7 TH FLOOR, CHENNAI-600 034. VS. M/S. SCM MICROSYSTEMS (INDIA) PVT.LTD. MODULE NO.506, TIDEL PARK, MODULE NO.4, CANAL TANK ROAD, TARAMANI, CHENNAI-600 113. PAN: AABCS3064Q (APPELLANT) (RESPONDENT/CROSS OBJECTOR ) APPELLANT BY : MR. SHAJI P.JACOB, ADDL. CIT RESPONDENT BY : MR . R.VIJAYARAGHAVAN, ADVOCATE DATE OF HEARING : 18 TH FEBRUARY, 2013 DATE OF PRONOUNCEMENT : 15 TH APRIL, 2013 O R D E R PER VIKAS AWASTHY, JM: THE APPEAL HAS BEEN FILED BY THE REVENUE IMPUGNING THE ORDER OF THE CIT(A)-V, CHENNAI DATED 24.01.201 1 PASSED UNDER SECTION 143(3) READ WITH SECTION 92C(4) OF T HE INCOME TAX ACT, 1961. THE ASSESSEE HAS FILED CROSS OBJECT ION IN SUPPORT OF THE ORDER OF THE CIT(A). HOWEVER, THE CR OSS OBJECTION HAS BEEN FILED WITH THE DELAY OF 550 DAYS . AN AFFIDAVIT IN SUPPORT OF APPLICATION FOR CONDONATION OF DELAY IN FILING OF CROSS OBJECTION CITING REASONS FOR THE DE LAY HAS ALSO ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 2 BEEN FILED. WE HAVE PERUSED THE GROUNDS FOR DELAY I N FILING OF THE CROSS OBJECTION AND ARE SATISFIED THAT THERE I S A REASONABLE CAUSE FOR DELAY IN FILING OF THE CROSS OBJECTION. IN THE INTEREST OF JUSTICE, WE CONDONE THE DELAY OF 550 DAYS IN FILING OF THE CROSS OBJECTION. THE APPLICATION FOR CONDONATION OF DELAY IS THUS, ALLOWED AND THE CROSS OBJECTION IS ADMITTED TO BE HEARD ON MERITS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A WHOLLY OWNED SUBSIDIARY OF M/S. SCM MICROSYSTEM GRO UP UK LTD. THE ASSESSEE IS ENGAGED IN PROTOTYPE DESIGN DEVELOPMENT AND RELATED SUPPORTED ACTIVITIES BASED ON TECHNICAL SPECIFICATIONS AND PRODUCT IDEAS OBTAINED FROM THE AFFILIATES. IT ALSO UNDERTAKES PRODUCT DEVELOPMENT OF SMART CARD AND BIO-METRIC READERS. THE ACTIVITIES OF THE ASSESSEE INCLUDE DESIGN, DEVELOPMENT AND TESTING OF ASICS, H ARDWARE AND SOFTWARE. IT ALSO MAINTAINS THE SMART CARD AND BIO-METRIC PRODUCTS DEVELOPED BY THIRD PARTIES. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005-06 ON 29.10.2005 DECLARING ITS INCOME AS ` 12,89,760/-. THE ASSESSEE IN ITS RETURN HAS ALSO DISCLOSED INCOME OF ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 3 ` 1,61,29,367/- FROM BUSINESS AND CLAIMED THE ENTIRE SAID AMOUNT AS DEDUCTION UNDER SECTION 10B OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTI CE UNDER SECTION 143(2) WAS ISSUED TO THE ASSESSEE ON 30.10 .2006. THE ASSESSING OFFICER MADE ADDITION TO THE INCOME R ETURNED BY THE ASSESSEE ON ACCOUNT OF TELECOMMUNICATION CHA RGES, AMOUNT CONTRIBUTED BY THE ASSESSEE TOWARDS EMPLOYEE S PROVIDENT FUND BEYOND DUE DATE AND ADJUSTMENT TOWA RDS ARMS LENGTH PRICE. AS REGARDS COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS, THE ASSESSI NG OFFICER REFERRED THE ISSUE TO THE TRANSFER PRICING OFFICER. THE TPO VIDE ORDER DATED 30.7.2008 MADE ADDITION TO THE TU NE OF ` 55,88,944/- IN RESPECT OF INTERNATIONAL TRANSACTION S. THE ASSESSEE ENTERED INTO A SERVICE AGREEMENT DATED 1. 4.2004 WITH ASSOCIATED ENTERPRISES IN SINGAPORE. AS PER TH E AGREEMENT COMPENSATION FOR THE SERVICES RENDERED BY THE ASSESSEE COMPANY WAS TO BE CALCULATED BY ADOPTING C OST PLUS AN APPROPRIATE MARK-UP. AN ADDENDUM TO SERVI CE ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 4 AGREEMENT WAS SIGNED BETWEEN THE PARITES ON 1.8.200 4 SPECIFYING APPROPRIATE MARK-UP AT 17%. THE ASSESSEE FOR THE ASSESSMENT YEAR 2005-06 ARRIVE D AT OPERATING PROFIT /TOTAL COST OF 15.5% TO BENCHMA RK THE INTERNATIONAL TRANSACTION BY FOLLOWING TRANSACTION AL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM). VIDE LETTER DATED 28.5.2008, THE ASSESSEE WAS REQUIRED T O SHOW CAUSE WHY THE COST PLUS AGREED MARK UP OF 17% NOT A DOPTED TO BENCHMARK THE INTERNATIONAL TRANSACTIONS WITH TH E ASSOCIATED ENTERPRISES BASED ON THE SERVICE AGREEME NT WITH SCM, SINGAPORE. THE ASSESSEE VIDE LETTER DATED 15. 7.2008 GAVE DETAILED REASONS FOR ADOPTING TNMM AND ALSO G AVE REASONS FOR VARIATIONS BETWEEN AGREED MARK UP OF 17 % AND THE FINAL CALCULATION AT 15.5%. THE TPO REJECTED TH E SUBMISSIONS OF THE ASSESSEE AND MADE ADDITION TO TH E TUNE OF ` 55,88,944/-. THE ASSESSING OFFICER VIDE ASSESSMENT ORDER DATED 22.12.2008 MADE ADDITION OF THE AFORESAID AMO UNT IN ACCORDANCE WITH TPOS ORDER APART FROM THE ADDITION S MADE BY HIM. ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 5 3. AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSE SSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) VIDE IMPUGNED ORDER PARTLY ALLOWED THE APPEAL OF THE ASS ESSEE. THE CIT(A) WHILE DECIDING THE APPEAL OF THE ASSESSE E PARTLY ALLOWED THE GROUND OF EXCLUSION OF TELECOMMUNICATIO N CHARGES FROM THE EXPORT TURNOVER WHILE COMPUTING TH E DEDUCTION UNDER SECTION 10B OF THE ACT. THE CIT(A) RELYING ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL I N THE CASE OF M/S. SAK SOFT LIMITED REPORTED AS 20 DTR 514 : 3 13 ITR (AT) 353 DIRECTED THAT ` 5.00 LAKHS BEING ESTIMATED TELECOMMUNICATION CHARGES SHOULD BE EXCLUDED FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. THE SECOND GROUND OF APPEAL BEFORE THE CIT(A) WAS WITH REGARD TO DISALLOWANCE O F EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AFTER DUE DATE. THE CIT(A) FOLLOWING THE DECISION OF THE TRIBUNAL IN TH E CASE OF M/S. ATLAS CYCLES (HARYANA) LTD., REPORTED AS 2010- TIOL-140- ITAT-DEL DELETED THE ADDITION MADE BY THE ASSESSING OFFICER STATING THAT EVEN THOUGH THE AMOUNT WAS REMITTED BE LATEDLY I.E. BEYOND THE DUE DATE BUT BEFORE THE DUE DATE FO R FILING OF ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 6 TAX RETURN OF INCOME IS ALLOWABLE AS DEDUCTION. I N RESPECT OF THIRD GROUND I.E. TRANSFER PRICING ADJUSTMENT, THE CIT(A) ACCEPTED THE SUBMISSIONS OF THE ASSESSEE AND DELET ED THE ENTIRE ADDITION MADE BY THE TPO. AGGRIEVED AGAINST THE ORDER OF THE CIT(A), THE REV ENUE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL . 4. SHRI SHAJI P.JACOB APPEARING ON BEHALF OF THE RE VENUE SUBMITTED THAT THE CIT(A) HAS ERRED IN DIRECTING TH E ASSESSING OFFICER TO EXCLUDE ` 5.00 LAKHS AGAINST ` 6,46,123/- FROM EXPORT TURNOVER ATTRIBUTABLE TO TELECOMMUNICATION C HARGES FOR DELIVERY OF PRODUCT OUTSIDE INDIA. THE DR SUBMITTED THAT THE INVOICE RAISED BY THE ASSESSEE INCLUDES THE COST OF PRODUCT INCLUDING ALL EXPENSES AND MARGIN OF PROFIT IRRESPE CTIVE OF WHETHER THE EXPENSES ARE MENTIONED IN THE INVOICE O R NOT. THEREFORE, IT WOULD BE INCORRECT TO SAY THAT THE AS SESSEE HAS NOT CLAIMED AND GOT REIMBURSED THE INTERNET EXPENSE S INCURRED FOR THE DELIVERY OF PRODUCTS OUTSIDE INDIA . WITH REGARD TO CONTRIBUTION OF THE ASSESSEE TOWARDS EMPLOYEES P ROVIDENT FUND, THE DR SUBMITTED THAT IT HAS BEEN ADMITTED BY THE ASSESSEE THAT THE AMOUNT HAS BEEN DEPOSITED BEYOND THE ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 7 DUE DATE. THEREFORE, IT HAS TO BE DISALLOWED UNDER SECTION 43B READ WITH SECTION 36(1)(VA) OF THE ACT. ON THE THIRD GROUND OF TRANSFER PRICING ADJUSTMENT, THE DR SUBMI TTED THAT AS PER THE SERVICE AGREEMENT, ARMS LENGTH PRICE WA S TO BE CALCULATED ON THE BASIS OF COST PLUS 17% AS A MARK- UP. HOWEVER, THE ASSESSEE DEVIATED FROM THE COST PLUS T O TNM METHOD WITHOUT ANY JUSTIFICATION. THE ASSESSEE HAS ACHIEVED PROFIT OF 15.5% ONLY. THE EXPLANATION OF THE ASSES SEE THAT REVENUE RECOGNITION WAS POSTPONED AS PER ACCOUNTING STANDARD-9 IS NOT TENABLE. THE DR POINTED OUT THAT THE TPO IN HIS ORDER HAS CATEGORICALLY STATED THAT IN THE T RANSFER PRICING DOCUMENTS, IT HAS BEEN MENTIONED THAT SCM GROUP COMPANIES GENERALLY PAY IN ADVANCE BEFORE THE COMMENCEMENT OF THE PROJECT AND SINCE THE SCM IS BA SED ON A COST PLUS METHOD AS PER THE SERVICE AGREEMENT, IT HAS AN ASSURED COMPENSATION SO IT IS NOT EXPOSED TO ANY PR ICE RISKS. THE DR FURTHER STATED THAT THE CIT(A) HAS ERRED IN STATING THAT TPO HAD NOT GIVEN REASON AS TO WHY THE COST PLUS M ETHOD IS BETTER THAN TNM METHOD. THE DR STRONGLY RELIED ON THE ORDER ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 8 OF TPO AS FAR AS CALCULATION OF ARMS LENGTH PRICE IS CONCERNED. 5. ON THE OTHER HAND, SHRI R.VIJAYARAGHAVAN APPEARI NG ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE TPO HAS E RRED IN MAKING ADDITION ON ACCOUNT OF ARMS LENGTH PRICE. A LTHOUGH IN THE SERVICE AGREEMENT COST PLUS METHOD HAS BEEN MEN TIONED, BUT THERE IS NO BAR IN ADOPTING TNM METHOD, AS TNM METHOD IS ONE OF THE APPROVED METHODS UNDER SECTION 92C OF THE ACT FOR DETERMINING ARMS LENGTH PRICING IN RELATION TO INTERNATIONAL TRANSACTIONS. HE SUBMITTED THAT ONE OF THE METHODS PROVIDED UNDER THE MECHANISM IS TO BE APPLIED FOR BENCHMAR KING COMPARABLE UNCONTROLLED TRANSACTIONS. ONE OF THE M OST APPROPRIATE METHODS PROVIDED UNDER SECTION 92C OF T HE ACT HAS TO BE APPLIED FOR TRANSFER PRICING ARRANGEMENT FOR INTERNATIONAL TRANSACTIONS. IN THE INSTANT CASE, TH E ASSESSEE HAD GIVEN JUSTIFICATION BEFORE THE TPO FOR ADOPTING TNMM FOR DETERMINING THE ARMS LENGTH PRICING WITH ASSOCIATE D ENTERPRISES. THE COUNSEL FOR THE ASSESSEE CONTENDE D THAT THE ASSESSEE HAS TAKEN FINANCIAL DATA OF 87 COMPAN IES AND THE ARITHMETIC MEAN PROFIT LEVEL INDICATOR FOR THES E COMPANIES ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 9 IS 13.1% AS AGAINST THE ASSESSEES MARGIN OF 15.5%. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT IT IS CLEARLY EVIDENT FROM THE TRANSFER PRICING DOCUMENTS THAT THE ASSESSEE HAS DONE BILLING @ 15.5% OVER COST AND NOT AT THE AGREED RATE OF 17%, THEREFORE, THERE IS NO QUESTION OF TAKING MARK UP OF 17%. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THA T THE ASSESSEE HAS FILED CROSS OBJECTION IN SUPPORT O F THE ORDER OF CIT(A) AND ASSAILING THE ORDER OF TPO. THE ORDER OF TPO IS NOT AS PER THE WELL FORMULATED TRANSFER PRICING SYS TEM. THE TPO HAS NOT DONE ANY TRANSFER PRICING STUDY. THE TP O HAS NOT UNDERTAKEN DETAILED COMPARISON OF THE ARMS LEN GTH PRICE OF INTERNATIONAL TRANSACTION BY APPLYING APPROPRIAT E MARK-UP TO THE EXPENSES INCURRED. THE TPO ACCEPTED THE PERCE NTAGE OF PROFIT MENTIONED IN SERVICE AGREEMENT AS THE ARMS LENGTH PRICE. 6. THE AR MADE AN ALTERNATE PLEA THAT EVEN THOUGH THE ARMS LENGTH PRICE IS DETERMINED AT THE VALUE MENTI ONED IN THE NOTICE, +/- 5% ADJUSTMENT ON THE SAME AS PROVIDED UNDER THE PROVISIONS OF SECTION 92C OF THE ACT WOULD RESULT I N AN ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 10 ADJUSTED PRICE OF ` 11,72,38,713/-. AS AGAINST THIS, THE VALUE OF INTERNATIONAL TRANSACTION OF THE COMPANY IS AT ` 11,78,20,228/- WHICH IS WITHIN THE RANGE. THE COU NSEL FOR THE ASSESSEE FURTHER CONTENDED THAT THE ASSESSEE FOLLOW ED TNMM OVER COST PLUS METHOD AS MOST APPROPRIATE ME THOD FOR THE REASON COST PLUS METHOD REQUIRES COMPARISON OF GROSS MARGINS EARNED BY THE COMPANY WITH THAT OF THE COMP ARABLE COMPANIES AND TO DETERMINE THE GROSS MARGINS OF COMPARABLE COMPANIES ON A RELIABLE MANNER IT IS DIF FICULTY AS THE ACCOUNTING POLICIES ADOPTED BY THE COMPARABLE COMPANIES ARE INCONSISTENT AND ENTIRE DETAILS ARE N OT AVAILABLE IN THE PUBLIC DOMAIN. 7. WE HAVE HEARD THE SUBMISSIONS MADE BY BOTH THE PARTIES AND HAVE ALSO PERUSED THE ORDERS OF THE AUT HORITIES BELOW. THE REVENUE HAS ASSAILED THE ORDER OF THE CI T(A) PRIMARILY ON THREE GROUNDS. 8. THE FIRST GROUND IS WITH RESPECT TO EXCLUSION OF TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER WHIL E COMPUTING DEDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSEE HAS CLAIMED AN AMOUNT OF ` 6,46,123/- TOWARDS ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 11 TELECOMMUNICATION CHARGES. THE ASSESSEE HAD EXCLUDE D THE SAID AMOUNT FROM EXPORT TURNOVER IN COMPUTATION OF DEDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSEE HAS CON CEDED BEFORE THE CIT(A) THAT IT IS NOT IN A POSITION TO F URNISH BREAK UP OF EXPENSES INCURRED FOR DOMESTIC AND EXPORTS. THE CIT(A) MADE ESTIMATION OF TELECOMMUNICATION CHARGES TO THE TUNE OF ` 5.00 LAKHS AS ATTRIBUTABLE TOWARDS EXPORT OF SOFTW ARE. IT IS AN ADMITTED FACT THAT THE ASSESSEE IS IN THE BUSINESS OF EXPORT OF DESIGN, DEVELOPMENT AND TESTING OF HARDWARE AND SOF TWARE AND IT WAS ALSO MAINTAINING THE SMART CARD AND BIO- METRIC PRODUCTS DEVELOPED BY THIRD PARTIES. THEREFORE, I T MUST HAVE INCURRED A SUBSTANTIAL AMOUNT OF EXPENDITURE TOWARD S TELECOMMUNICATION AND INTERNET CHARGES. THE CIT(A) HAS MADE FAIR ESTIMATION OF THE SAME. SINCE THE REVENU E HAS NOT ABLE TO PRODUCE ANY COGENT EVIDENCE TO CONTROVERT T HE FINDINGS OF THE CIT(A), WE DO NOT DEEM IT APPROPRIA TE TO INTERFERE WITH THE SAME. THE REVENUE HAS ALSO ASSA ILED THE ORDER OF THE CIT(A) WITH REGARD TO EXCLUSION OF TELECOMMUNICATION CHARGES FROM EXPORT TURNOVER AS W ELL AS TOTAL TURNOVER. WE FIND THAT THE SPECIAL BENCH OF T HE TRIBUNAL ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 12 IN THE CASE OF SAK SOFT LTD. (SUPRA) HAS HELD THAT WHILE APPLYING THE FORMULA PRESCRIBED UNDER SECTION 10B( 4) OF THE ACT, WHERE THE FREIGHT, TELECOMMUNICATION CHARGES O R INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, THE EXPENSES THAT ARE TO BE EXCLUDED FROM THE EXPORT TURNOVER, SHOULD ALSO BE E XCLUDED FROM THE TOTAL TURNOVER AS WELL. IN VIEW OF THE WE LL SETTLED LAW, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 9. THE SECOND GROUND OF APPEAL OF THE REVENUE RELAT ES TO DISALLOWANCE OF EMPLOYEES CONTRIBUTION TOWARDS PROV IDENT FUND BEYOND DUE DATE. IT IS AN ADMITTED FACT THAT T HE ASSESSEE HAS MADE CONTRIBUTION TOWARDS EMPLOYEES PROVIDENT F UND BEYOND THE DUE DATE PRESCRIBED UNDER THE PROVIDENT FUND ACT, BUT THE SAME HAS BEEN MADE BEFORE THE DUE DATE FOR FILING OF THE TAX RETURN. THE TRIBUNAL IN THE CASE OF ATLAS CYCLES (HARYANA) LTD.(SUPRA) HAS HELD THAT EMPLOYEES CO NTRIBUTION WHICH HAS BEEN REMITTED BELATEDLY BEYOND THE DUE DA TE PRESCRIBED IN THE PROVIDENT FUND ACT BUT BEFORE T HE DUE DATE FOR FILING OF TAX RETURN OF INCOME IS ALLOWABLE AS DEDUCTION. ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 13 RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL , THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 10. THE THIRD AND LAST GROUND OF APPEAL OF THE REVE NUE RELATES TO TRANSFER PRICING ADJUSTMENT. THE OBJECTI ON OF THE DR IS WITH REGARD TO THE METHOD ADOPTED BY THE ASSESSE E IN DETERMINING THE ARMS LENGTH PRICE. AS PER THE SERV ICE AGREEMENT IT WAS AGREED TO DETERMINE ARMS LENGTH P RICE ON THE BASIS OF COST PLUS MARK UP OF 17%, WHEREAS THE ASSESSEE HAD FOLLOWED TNM METHOD FOR DETERMINING THE ARMS LENGTH PRICE . A PERUSAL OF SECTION 92C SHOWS THAT ARMS L ENGTH PRICE TO ANY INTERNATIONAL TRANSACTION SHALL BE DETERMINE D BY ANY OF THE METHODS SPECIFIED THEREIN BEING MOST APPROPRIAT E METHOD HAVING REGARD TO : I) NATURE OF TRANSACTION; OR II) CLASS OF TRANSACTION; OR III) CLASS OF ASSOCIATED PERSONS; OR IV) FUNCTIONS PERFORMED BY SUCH PERSONS; OR V) SUCH OTHER RELEVANT FACTORS AS MAY BE PRESCRIBE D BY THE BOARD. ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 14 THE METHODS PRESCRIBED UNDER SECTION 92C(1) FOR DET ERMINING ALP ARE : 1. COMPARABLE UNCONTROLLED PRICE METHOD (CUP); 2. RESALE PRICE METHOD; 3. COST PLUS METHOD; 4. PROFIT SPLIT METHOD; & 5. TRANSACTIONAL NET MARGIN METHOD (TNMM) OR ANY OTHER METHOD PRESCRIBED BY THE BOARD. 11. THE MOST APPROPRIATE METHOD HAS TO BE APPLIED F OR DETERMINING ARMS LENGTH PRICE IN THE MANNER AS MAY BE PRESCRIBED IN RULE 10C OF THE INCOME TAX RULES. IN THE INSTANT CASE, THE ASSESSEE FOLLOWED TNMM OVER COST PLUS METHOD FOR THE REASON: COST PLUS METHOD REQUIRES COMPARISON OF GROSS MARGINS EARNED BY THE COMPANY WITH THAT OF THE COMPARABLE COMPANIES AND TO DETERMINE T HE GROSS MARGINS OF THE COMPARABLE COMPANIES IN A RELIABLE M ANNER IS DIFFICULT AS THE ACCOUNTING POLICIES ADOPTED BY THE COMPARABLE COMPANIES ARE NOT CONSISTENT AND THE DETAILS ARE NO T AVAILABLE IN THE PUBLIC DOMAIN. AN AGREEMENT BETWEEN THE PAR TIES CANNOT EXCLUDE THE OTHER APPROVED METHOD OF DETERMI NING THE ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 15 ARMS LENGTH PRICE AS PROVIDED UNDER THE LAW, FOR THE REASON MARGIN MENTIONED THEREIN ARE BETWEEN RELATED PARTIE S. THUS, ASSESSEE HAS SHOWN REASONABLE CAUSE FOR ADOPTING TN MM AS THE MOST APPROPRIATE METHOD. THE METHOD MENTIONE D IN THE AGREEMENT CANNOT BE FOLLOWED FOR COMPARISON BEI NG RELATED PARTY TRANSACTION. THE ASSESSEE IS AT LI BERTY TO ADOPT ANY OF THE APPROPRIATE METHODS SPECIFIED IN SECTION 92C OF THE ACT, AS LONG AS IT CAN SHOW IT TO BE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE. THE REFORE, CONTENTION OF THE DR THAT THE ASSESSEE HAS DEVIATED FROM THE METHOD SPECIFIED IN AGREEMENT I.E. COST PLUS METHOD TO TNMM HAS NO FORCE. THE DR HAS ALSO RAISED AN ISSUE THAT AS PER THE AGREEMENT BENCH MARKING WAS COST PLUS 17% MARK-UP WHEREAS WHILE DETERMINING ARMS LENGTH PRICE THE A SSESSEE HAS DETERMINED AT 15.5%. THE A.R. POINTED OUT THAT THE ASSESSEE HAS TAKEN DATA OF 87 COMPANIES AND THE AR ITHMETIC MEAN PROFIT LEVEL INDICATOR FOR THESE COMPANIES WOR KS OUT AT 13.1% AS AGAINST THE ASSESSEES MARGIN OF 15.5%. HO WEVER, TPO HAS ADOPTED COST MARK-UP AS THE CORRECT ONE WITHOUT ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 16 VERIFYING THE APPROPRIATENESS OF DETERMINATION OF ARMS LENGTH PRICE DETERMINATION UNDER TNM METHOD. 12. WE ARE OF THE CONSIDERED OPINION THAT THE TPO HAS NOT CONDUCTED THE PRICING STUDY AS REQUIRED UNDER THE STATUTE. THE TPO HAS NOT INDEPENDENTLY DETERMINED ARMS LENG TH PRICE BY TAKING CANDID TRANSACTIONS OF UNRELATED P ARTIES. THE TPO HAS ERRED IN SIMPLY ACCEPTING THE PERCENTAGE O F PROFIT INDICATED IN THE SERVICE AGREEMENT BETWEEN THE ASSE SSEE AND THE PE. THE TPO OUGHT TO HAVE CONDUCTED DETAILED ST UDY FOR DETERMINING ARMS LENGTH PRICE BETWEEN UNRELATED EN TERPRISES BY APPLYING THE MOST APPROPRIATE METHOD AS PROVIDED UNDER SECTION 92C OF THE ACT. 13. IN VIEW OF THE ABOVE, WE REMIT THIS ISSUE BACK TO THE TPO WITH A DIRECTION TO PASS A SPEAKING ORDER AFTER CONDUCTING DETAILED TRANSFER PRICING STUDY SELECT C OMPARABLES AND DETERMINE ARMS LENGTH PRICE AS PER THE PROVISI ONS OF LAW. THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.774/MDS/2011 & C.O NO.198/MDS/2012 17 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON MONDAY , THE 15 TH DAY OF APRIL, 2013 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 15 TH APRIL, 2013. SOMU COPY TO: (1) APPELLANT (4) CI T(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.