Appeal details
Counselvise Citation
135024514 RSA 2010
Assessee PAN
Bench
Appeal Number
Duration Of Justice
10 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
03-10-2011
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Assessment Year
2006-2007
Appeal Filed On
18-11-2010
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER I.T.A. NO. 1350/PN/2010 (ASSTT. YEAR : 2006-07) STARENT NETWORKS (INDIA) P.LTD. .. APPELLANT P-17, RAJIV GANDHI INFOTECH PARK, HINJEWADI, PUNE PAN AAACN5937G VS. DY. COMMISSIONER OF INCOME-TAX, .. RESPONDENT PUNE APPELLANT BY: S/SHRI R R V ORA & MAHESH G MANDLECHA RESPONDENT BY: SHRI HARESHWAR SHARM A ORDER PER G.S. PANNU, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE DY. COMMISSIONER OF INCOME-TAX, CIR.6 , PUNE DATED 28.9.2010 UNDER SECTION 143(3) R.W.S 144C OF THE IN COME-TAX ACT, 1961 (IN SHORT THE ACT), PERTAINING TO THE ASSES SMENT YEAR 2006- 07. 2. IN THIS APPEAL PERTAINING TO THE ASSESSMENT YEAR 200 6-07, SUBSTANTIVE DISPUTE RAISED BY THE ASSESSEE IS AGAINST THE ACTION OF THE LOWER AUTHORITIES IN DETERMINING THE ARMS LENGTH PRICE (IN SHORT ALP) O F THE APPELLANTS INTERNATIONAL TRANSACTION AT RS 18,78,32,677/- AS AGAIN ST RS 17,47,15,470/- 2 DECLARED BY THE ASSESSEE. ALTHOUGH THE APPELLANT COMPA NY HAS RAISED MULTIPLE GROUNDS ON THIS ISSUE, THE PERTINENT GRIEVANCE IS AGAINST THE DETERMINATION OF THE ALP AT A HIGHER FIGURE BY THE REVENUE AUTHORITIES TH AN THE VALUE DECLARED BY THE ASSESSEE. 3. IN BRIEF THE RELEVANT FACTUAL BACKDROP LEADING UP TO THE PRESENT DISPUTE CAN BE SUMMARIZED AS FOLLOWS. THE APPELLANT IS A COMPANY INCO RPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 AND IS A 100% OWNE D SUBSIDIARY OF M/S STARENT NETWORKS CORPORATION, USA (HEREINAFTER REFERR ED TO AS SNC). THE APPELLANT IS ENGAGED IN CARRYING OUT RESEARCH, DEVELOP MENT AND TESTING ACTIVITIES IN THE FIELD OF SOFTWARE DEVELOPMENT AND EXPORT THE REOF EXCLUSIVELY TO ITS PARENT HOLDING COMPANY, I.E. SNC. THE APPELLANT COMPANY HAS T HREE UNDERTAKINGS IN INDIA LOCATED AT PUNE AND BANGALORE, WHICH ARE STATED TO BE APPROVED UNDER THE SOFTWARE TECHNOLOGY PARK SCHEME OF THE GOVERNMENT OF IN DIA ENTITLED TO THE BENEFITS PROVIDED UNDER SECTION 10A OF THE ACT. 4. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE (AE), I.E. SNC ON ACCOUNT OF SOFTWARE DEVELOPMENT SERVICES FOR A STATED CONSIDERATIO N OF RS 17,47,15,470/-. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) TO D ETERMINE THE ALP WITH REFERENCE TO THE ABOVE TRANSACTION IN TERMS OF SECTION 92CA(1) OF THE ACT. IN THE PROCEEDINGS BEFORE THE TPO, IT WAS EXPLAINED THAT IN T HE TRANSFER PRICING STUDY REPORT, THE APPELLANT CONSIDERED THE COST PLUS METHOD ( I.E. CPM) AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION IN QUESTION SINCE THE PRICING WAS DETERMINED ON COST PLUS BASIS. THE ASSE SSEE EXPLAINED THAT THE PARENT COMPANY PROVIDED A 10% MARGIN TO THE APPELLANT ON THE TOTAL COSTS INCURRED BY IT. THUS, THE PRICE CHARGED BY THE ASSESSEE FROM ITS AE WAS ARRIVED AT BY APPLYING A 10% MARGIN ON THE TOTAL COS TS INCURRED. 5. DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEED INGS, THE TPO OPINED THAT THE METHOD ADOPTED BY THE APPELLANT FOR BENCHMARKING ITS 3 INTERNATIONAL TRANSACTION WAS NOT ACCEPTABLE. IT WAS OBSE RVED THAT THE FINAL COMPARISON WAS DONE ON THE BASIS OF NET MARGIN (PBIT/OPE RATING COST) OF THE COMPARABLE COMPANIES WITH THE GROSS MARGIN OF THE ASSESSEE C OMPANY. THE TPO WAS, THEREFORE, OF THE OPINION THAT IN SUCH SITUAT ION, THE TRANSACTIONAL NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD FOR BENCH MARKING THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE. I N SO FAR AS THIS ASPECT OF THE MATTER IS CONCERNED, THE LEARNED COUNSEL FOR THE AP PELLANT SUBMITTED IN RESPONSE TO A QUERY FROM THE BENCH, THAT THE APPLICATI ON OF THE TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNM METHO D) IS NOT BEING DISPUTED. IN FACT, THE IN THE COURSE OF TRANSFER PRICING ASSESSMENT PROC EEDINGS, THE APPELLANT ALSO TESTED ITS INTERNATIONAL TRANSACTIONS BY APPLYING T HE TNM METHOD, INASMUCH AS, THE ASSESSEE COMPARED ITS NET OPERATING PROFITS WITH THE NET OPERATING PROFITS OF THE COMPARABLE COMPANIES. FOR THIS PURPOSE, THE APPEL LANT CONDUCTED SEARCH FOR IDENTIFYING THE COMPARABLE COMPANIES ON THE BASIS OF THE PROWESS INFORMATION DATA BASE. AFTER USING THE FOLLOWING FI LTERS FOR IDENTIFYING THE COMPARABLE COMPANIES, A TOTAL OF 62 COMPANIES WERE CONSID ERED AS COMPARABLE BY THE APPELLANT: I) COMPANIES WHERE SALES WERE LESS THAN ONE CRORE AND MO RE THAN ONE HUNDRED CRORES; (II) COMPANIES FOR WHICH DATA NOT AVAILABLE; (III) ABNORMAL PLI (IE NEGATIVE PLI OR PLI GREATER THAN 50%); (IV) PRODUCT BASED ACTIVITY; (V) LINE OF BUSINESS ACTIVITIES/SERVICES NOT COMPARABLE TO T HE APPELLANT; AND, (VI) RELATED PARTY TRANSACTIONS MORE THAN 25%. UPON CONSIDERATION OF THE ABOVE FILTERS, THE NET OPERA TING PROFIT/OPERATING COST WAS USED AS THE RELEVANT PLI AND AVERAGE PLI WAS ASCERTAIN ED AT 8.72%. FOR THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD EARNED A MARGIN OF 11.62% AND SINCE THE MARGIN EARNED BY THE APPELLANT WAS HIGHER TH AN THE AVERAGE OF MARGIN 4 EARNED BY THE COMPARABLE COMPANIES, THE INSTANT INTER NATIONAL TRANSACTION WITH THE AE FOR THE PROVISION OF SOFTWARE DEVELOPMENT SERV ICES WAS CANVASSED BY THE ASSESSEE AS HAVING BEEN CONCLUDED AT AN ARMS LENGTH. 6. THE AFORESAID DETERMINATION OF ALP BY THE APPELLA NT WAS NOT FOUND ACCEPTABLE BY THE TPO. FIRSTLY, THE TPO REJECTED ONE O F THE FILTERS APPLIED BY THE APPELLANT, I.E. THE FILTER ON ACCOUNT OF ABNORMAL PL I (I.E. NEGATIVE PLI OR PLI GREATER THAN 50%) FOR THE REASON THAT THE FUNCTIONAL COMPARABILITY, ASSETS EMPLOYED AND RISKS UNDERTAKEN SHOULD ULTIMATELY ALONE M ATTER IN IDENTIFYING THE COMPARABLE COMPANIES. FURTHER, THE TPO CITED TWO MORE F ILTERS FOR REJECTION OF COMPARABLE COMPANIES, NAMELY, COMPANIES WITH NEGATIVE N ET WORTH; AND, COMPANIES HAVING RATIO OF PERSONNEL EXPENSES TO TOTAL EXPENSES LESS THAN 30% IN THIS WAY, OUT OF THE 62 COMPANIES SELECTED BY THE AP PELLANT AS COMPARABLES, THE TPO REJECTED 56 COMPANIES FOR VARIED REASONS, SUCH AS DISTINCTION IN BUSINESS ACTIVITIES FROM THAT OF THE APPELLANT, PRODUCT BASED ACTIVITY (TRADING), SUBSTANTIAL RELATED PARTY TRANSACTIONS, RATIO OF PERSONN EL EXPENSES TO TOTAL EXPENSES LESS THAN 30%, ETC. ADDITIONALLY, AFTER CONSIDERI NG THE ACCEPT REJECT MATRIX PROVIDED BY THE APPELLANT, THE TPO ADOPTED A N ADDITIONAL COMPARABLE COMPANY WHICH WAS OTHERWISE REJECTED BY THE APPELLANT IN ITS ANALYSIS, NAMELY, M/S COMPUCOM SOFTWARE LTD. IN THE FINAL ANALYSIS, THE TPO HAS ADOPTED THE FOLLOWING AS THE COMPARABLE COMPANIES:- S.NO NAME OF THE COMPANY MARGIN (OP/TC) (%) 1 GOLDSTONE TECHNOLOGIES LTD. 0.98% 2 NUC SOFT LTD 3.69% 3 OMINITECH INFOSOLUTIONS LTD(SEG) 84.94% 4 R SYSTEMS INTERNATIONAL LTD 21.86% 5 SIP TECHNOLOGIES & EXPORTS LTD 20.92% 6 COMPUCOM SOFTWARE LTD (SEG) 33.52% ARITHMETIC MEAN 27.65% AS A RESULT OF THE ABOVE EXERCISE, THE APPELLANTS MARGI N OF 11.62% WAS FOUND LOWER THAN THE AVERAGE MARGIN OF THE COMPARABLE COMP ANIES ADOPTED BY THE TPO. AS A RESULT, THE TPO PROPOSED AN UPWARD ADJUSTMEN T OF RS 2,50,91,747/- 5 TO THE APPELLANTS INCOME IN TERMS OF HIS ORDER PASSED UN DER SECTION 92CA(3) OF THE ACT DATED 30.10.2010. ACCORDINGLY, THE ASSESSING OFF ICER PROPOSED SIMILAR ADDITION IN THE DRAFT ORDER, WHICH WAS OBJECTED TO BY THE APPELLANT BEFORE THE DISPUTE RESOLUTION PANEL (DRP). IN ITS OBJECTION BEFO RE THE DRP, THE APPELLANT INTER ALIA, OBJECTED TO THE ADJUSTMENT PROPOSED BY T HE TPO TO THE INTERNATIONAL TRANSACTION OF PROVIDING OF SOFTWARE DEVELOPMENT SERVI CES. AFTER CONSIDERING THE VARIED SUBMISSIONS PUTFORTH BY THE APPELLANT AND TAKING INTO CONSIDERATION THE MATERIAL ON RECORD, THE DRP GAVE CERTAIN DIRECTIONS VID E ORDER DATED 30.8.2010. BRIEFLY PUT, THE DIRECTIONS OF THE DRP WERE TO THE FO LLOWING EFFECT - THAT THE TNM METHOD IS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE APPELLANTS INTERNATIONAL TRANSACTION; - THAT OUT OF THE SET OF COMPARABLES FINALLY ADOPTED B Y THE TPO, TWO COMPANIES, ONE HAVING THE HIGHEST PROFIT MARGIN AT 84 .94% (I.E. OMNITECH INFOSOLUTIONS LTD) AND THE OTHER HAVING THE LOWEST MARGIN AT 0.98% (I.E. GOLDSTONE TECHNOLOGIES LTD) SHOULD BE EXCLU DED TO ARRIVE AT THE PLI FOR BENCHMARKING THE SAID INTERNATIONAL TR ANSACTION OF THE APPELLANT; - THAT SINCE THE PLI OF THE REMAINING FOUR COMPANIES ON AGGREGATION BASIS CAME TO 20%, THE ASSESSING OFFICER WAS DIRECTED TO COMPU TE THE VALUE OF THE INTERNATIONAL TRANSACTION ADOPTING TNM M ETHOD AND PLI OF 20% ON THE COST; AND, - THAT AS REGARDS THE CONTENTION OF THE APPELLANT REGA RDING THE ALLOWABILITY OF BENEFIT OF +/-5% AS PER PROVISO TO SE CTION 92C OF THE ACT, THE DRP WAS OF THE VIEW THAT THE SAFE HARBOUR OF +/- 5% IS NOT AVAILABLE TO THE APPELLANT; AS A RESULT OF THE ABOVE DIRECTIONS, THE FINAL SET OF COM PARABLE COMPANIES ADOPTED ARE AS UNDER: S.NO NAME OF THE COMPANY MARGIN (OP/TC)(%) 1 NUC SOFT LTD 3.69% 2 R SYSTEMS INTERNATIONAL LTD 21.86% 3 SIP TECHNOLOGIES AND EXPORTS LTD 20.92% 4 COMPUCOM SOFTWARE LTD (SEG) 33.52% ARITHMETIC MEAN 20.00% IN TERMS OF THE AFORESAID DIRECTIONS, THE ASSESSING OFFICER FINALIZED THE ASSESSMENT UNDER SECTION 143(3) R.W.S. 144C OF THE ACT, VID E ORDER DATED 28.9.2010 AFTER MAKING AN ADDITION OF RS 1,31,17,207/ - ON ACCOUNT OF TRANSFER 6 PRICING ADJUSTMENT. AGGRIEVED BY SUCH AN ADDITION, THE APPELLANT IS IN APPEAL BEFORE THE TRIBUNAL. 7. IN THE ABOVE BACKGROUND, THE RIVAL PARTIES HAVE MA DE DETAILED SUBMISSIONS. THE APPELLANT COMPANY HAS ALSO FURNISHED AN EX HAUSTIVE PAPER BOOK CONTAINING, INTER ALIA , THE WRITTEN SUBMISSIONS MADE BEFORE THE RESPECTIVE AUTHORITIES, AS ALSO COPY OF THE TRANSFER PRICING STUDY REPORT CONDUCTED BY THE APPELLANT ETC. THE LEARNED CIT-DEPARTMENTAL REPRESENT ATIVE, APPEARING FOR THE REVENUE, HAS EXHAUSTIVELY REFERRED TO THE ORDERS OF T HE AUTHORITIES BELOW IN SUPPORT OF THE CASE OF THE REVENUE. THE RESPECTIVE SUBMI SSIONS HAVE BEEN HEARD AND THE RELEVANT RECORDS PERUSED. 8. BROADLY SPEAKING THE LEARNED COUNSEL FOR THE APPEL LANT HAS ASSAILED THE ADDITION ON THE FOLLOWING POINTS. FIRSTLY, IT IS CONTE NDED THAT THE DRP ERRED IN EXCLUDING M/S GOLDSTONE TECHNOLOGIES LTD. FROM THE LIST O F COMPARABLES ON THE GROUND THAT THE MARGIN OF THE SAID COMPARABLE COMPANY WAS ABNORMALLY LOW. THE AFORESAID ACTION IS STATED TO BE INAPPROPRIATE FOR NO OPPORTUNITY OF BEING HEARD WAS GIVEN TO THE ASSESSEE BEFORE EXCLUDING SUCH COMPAN Y FROM THE FINAL SET OF COMPARABLES. FURTHER IT IS POINTED OUT THAT THE PROFIT MARGIN OF 0.98% OF GOLDSTONE TECHNOLOGIES LTD. CANNOT BE CONSIDERED AS ABNO RMALLY LOW IN THE LIGHT OF ITS OWN MARGIN OF THE PRECEDING YEAR AND IN THIS CON NECTION, A REFERENCE HAS BEEN INVITED TO THE TABULATION PLACED AT PAGE 163 OF THE PAPER BOOK. IN TERMS THEREOF, IT IS POINTED OUT THAT THE MARGIN (I.E. NET OPERATING PROFIT/OPERATING COST OF THE SAID COMPANY FOR THE EARLIER YEAR OF MARCH 2005 I S 4.51% VIS--VIS 0.98% FOR THE YEAR UNDER CONSIDERATION, AND IN ANY CASE, THE SAID COMPANY HAS BEEN ACCEPTED AS FUNCTIONALLY COMPARABLE BY THE TPO IN THE SU BSEQUENT ASSESSMENT YEAR. IT IS CONTENDED THAT THE APPELLANT HAD ALREADY APPLIED A FILTER TO REMOVE ABNORMAL PLI (I.E. NEGATIVE PLI OR PLI GREATER THAN 50%) WHILE IDENTIFYING THE COMPARABLE COMPANIES AND AFTER THE APPLICATION OF SUCH F ILTER, THE GOLDSTONE TECHNOLOGIES LTD. CANNOT BE CONSIDERED AS A COMPANY H AVING ABNORMAL PLI OR A NEGATIVE PLI AND THEREFORE THE SAME CANNOT BE EXCLU DED ON ACCOUNT OF THE 7 REASON ADVANCED BY THE DRP ESPECIALLY WHEN THE SAID COMP ANY HAS BEEN ACCEPTED AS FUNCTIONALLY COMPARABLE BY THE TPO IN THE SUB SEQUENT YEAR. IT WAS ACCORDINGLY CONTENDED THAT GOLDSTONE TECHNOLOGIES LTD BE CONSIDERED AS A COMPARABLE FOR THE PURPOSES OF TESTING THE INTERNATIONA L TRANSACTION IN QUESTION. 9. SECONDLY, IT IS SUBMITTED THAT COMPUCOM SOFTWARE LTD . HAS BEEN WRONGLY CONSIDERED BY THE TPO AS A COMPARABLE COMPANY AND DESERV ES TO BE EXCLUDED BECAUSE OF SIGNIFICANT RELATED PARTY TRANSACTIONS. IN THI S REGARD, IT HAS BEEN POINTED OUT THAT WHILE ADOPTING THE SAID COMPANY AS A COMPARABLE, THE TPO DID NOT CONSIDER THAT IT HAS RELATED PARTY TRANSACTIONS WHICH COMPRISED MORE THAN 25% OF THE TOTAL REVENUE FOR THE FINANCIAL YEAR 2005 -06. IT HAS BEEN SUBMITTED THAT THE APPELLANT APPLIED A FILTER OF REJECTING COMP ANIES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25% AND OUR ATTENTION WAS DRAWN TO PAGES 244-245 OF THE PAPER BOOK, WHEREIN IS PLACED THE RELEVANT WORKINGS IN THIS REGARD. ON THIS BASIS, IT WAS CONTENDED THAT THE SAID COMPANY BE EXCLUDED FROM THE FINAL SET OF COMPARABLE COMPANIES TO ARRIVE AT THE ALP OF THE INTER NATIONAL TRANSACTION IN QUESTION. 10. IT IS FURTHER CONTENDED THAT THE AUTHORITIES BELOW HAVE ERRED IN NOT CONSIDERING ANY ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN W ORKING CAPITAL AND RISKS UNDERTAKEN BY THE APPELLANT VIS--VIS THE COMPARABLE COM PANIES. IT IS SUBMITTED THAT ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL IS WARRAN TED FOR THE DIFFERENCE IN THE LEVELS OF CREDIT EXTENDED IN THE FORM OF ACCOUNTS RE CEIVABLES AND CREDIT OBTAINED IN THE FORM OF ACCOUNTS PAYABLES IN THE BOOKS OF TESTED PARTY VIS-A-VIS THOSE OF THE COMPARABLE COMPANIES. EVEN ON ACCOUNT OF DI FFERENTIAL RISKS UNDERTAKEN, AN ADJUSTMENT IS WARRANTED AS THERE IS A DI RECT RELATIONSHIP BETWEEN RISK AND RETURN. IN THIS REGARD, IT IS VEHEMENTLY EMPHA SIZED THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER TO ITS PARENT COMPANY, (I.E. THE AE) AND THAT MAJOR RISKS ARE UNDERTAKEN BY THE PARENT COMPANY INASMUCH AS THE MA JORITY OF FUNCTIONS OF OVERALL SOFTWARE DEVELOPMENT ARE DONE BY THE AE AND ALL OF THE SIGNIFICANT RISKS ARE ASSUMED BY THE AE. IT IS SUBMITTED THAT THESE ASPECTS HAVE NOT BEEN 8 APPRECIATED BY THE LOWER AUTHORITIES AND NO ADJUSTMENT HAS BEEN ALLOWED ON ACCOUNT OF DIFFERENCE IN WORKING CAPITAL AND RISKS UNDERTAKE N BY THE APPELLANT VIS- -VIS COMPARABLE COMPANIES. IN SUPPORT OF THE AFORESAID PROPOSITIONS, RELIANCE HAS BEEN PLACED ON THE FOLLOWING DECISIONS: A. MENTOR GRAPHICS (NOIDA) P LTD V DCIT 112 TTJ 408 (D EL); B. EGAIN COMMUNICATIONS P LTD V ITO 118 TTJ 354 (PUNE) ; C. PHILIPS SOFTWARE CENTRE P LTD V ACIT 119 TTJ 721 (B ANG.); AND D. SONY INDIA (P) LTD V DCIT 118 TTJ 865 (DEL). 11. FURTHER IT IS CONTENDED THAT THE DRP ERRED ON FA CTS AND IN LAW IN MAKING THE TRANSFER PRICING ADJUSTMENT FROM THE ALP WITHOUT GIVING THE BENEFIT OF THE OPTION AVAILABLE TO THE APPELLANT UNDER THE ERSTWHIL E PROVISO TO SECTION 92C(2) OF THE ACT. AS PER THE DRP, THE ALP OF THE INTERNATIO NAL TRANSACTION UNDERTAKEN BY THE ASSESSEE FALLS BEYOND 5% MARGIN OF THE PRICE OF INTER NATIONAL TRANSACTION COMPUTED BY THE ASSESSEE, THUS THE BENEFIT OF +/-5% AS PER THE PROVISO TO SECTION 92C(2) IS NOT AVAILABLE TO THE ASSESSEE. IT IS P OINTED OUT BY THE LEARNED COUNSEL THAT THE ABOVE CONCLUSION OF THE DRP IS IN CONTRA ST TO THE FOLLOWING DECISIONS: A. SKODA AUTO INDIA (P) LTD V ACIT 122 TTJ 699 (PUNE) ; AND B. ELECTROBUG TECHNOLOGIES LTD V ACIT 37 SOT 270 (DEL HI) 12. IN THIS REGARD, THE APPELLANT HAS SUBMITTED A DETA ILED WRITTEN SUBMISSION WHICH IS ON THE FOLLOWING LINES: 4.3 AS PER THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT, AN ASSESSEE HAS THE OPTION OF CHARGING A PRICE TO ITS AE, WHICH MAY VAR Y FROM THE ALP BY +/-5%. THE APPELLANT FURTHER STATES THAT SECTION 92CA(3) OF TH E ACT PROVIDES THAT THE GTPO HAS TO DETERMINE THE ARMS LENGTH PRICE IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C. SECTION 92C(3) FURTHER STATES THAT THE ARMS LENGTH PRICE SHALL BE DETERMINED BY THE AO IN ACCORDANCE WITH SUB-SECTION (1) AND (2) OF SECTION 92C. THEREFORE, IT SHOULD BE APPRECIATED THAT IT IS MANDATORILY REQUIRED TO CALC ULATE THE ARMS LENGTH PRICE IN ACCORDANCE WITH SECTION 92C(1) AND 92C(2) OF THE AC T. THE EXPLANATORY MEMORANDUM TO FINANCE BILL 2002 AND NOTES ON CLAUSES - INCOME TAX (FINANCE BILL, 2002) ALSO CLARIFIES THAT IN CASE THE APPLICATION OF THE MOST APPROPRIAT E METHOD RESULTS IN TWO OR MORE PRICES, THE APPELLANT IS REQUIRE TO COMPUTE THE ARMS LENGT H PRICE BY DETERMINING AN ARITHMETIC MEAN OF SUCH PRICES OR A 5% VARIATION OF THE ARITHM ETIC MEAN THEREOF. THERE IS NO AMBIGUITY IN LAW IN RESPECT OF THE SAME. THUS, ANY ADJUSTMENT TO THE INCOME OF THE ASSESSEE SHOULD BE COMPUTED AFTER CONSIDERING A +/- 5% VARIATION FROM THE ARITHMETIC MEAN. 4.4 IN VIEW OF THE ABOVE, THE APPELLANT REQUESTS YO UR HONOUR TO ADOPT THE COMPUTATION MECHANISM FOLLOWED IN THE ABOVE CASES A ND ALLOW THE BENEFIT OF THE 5 PERCENT RANGE AS PROVIDED UNDER THE ERSTWHILE PROVI SO TO SECTION 92C(2) OF THE ACT. 4.5 FURTHER, PRIOR TO THE AMENDMENT MADE BY THE FIN ANCE (NO 2) ACT, 2009, THE PROVISO TO SECTION 92C(2) OF THE ACT PROVIDED THAT THE ALP WOULD BE TAKEN TO BE THE ARITHMETIC MEAN (HEREINAFTER REFERRED TO AS AM) O F THE PRICES OR AT THE OPTION OF THE APPELLANT, A PRICE WHICH MAY VARY FROM THE AM BY AN AMOUNT NOT EXCEEDING 5% OF SUCH AM. THUS, THE ALP WAS +/-5% FROM THE AM. HOWEVER, T HE AMENDMENT INTRODUCED BY THE 9 FINANCE (NO 2) ACT, 2009 PROVIDES THAT THE ALP SHAL L BE DETERMINED TO BE THE AM OF PRICES WHERE MORE THAN ONE PRICE IS DETERMINED BY T HE MOST APPROPRIATE METHOD. FURTHER, WHERE SUCH ALP IS WITHIN 5% OF THE TRANSFER PRICE, HEN THE TRANSFER PRICE SHOULD BE REGARDED AS THE ALP. THE SAID AMENDMENT TO SECTION 92C(2) OF THE ACT HAS COME INTO EFFECT FROM 1 OCTOBER 2009. 4.6 WITH RESPECT TO THE APPLICABILITY OF SUCH AMEND MENT FROM 1 OCTOBER 2009, THE APPELLANT SUBMITS THAT AS THE ALP IS TO BE COMPUTED AND DETERMINED FOR EACH INTERNATIONAL TRANSACTION BY THE ASSESSEE AT THE TI ME OF COMPLYING WITH THE TRANSFER PRICING REGULATIONS, THE AMENDMENT SHOULD APPLY ONLY FOR CO MPUTING ALP FOR INTERNATIONAL TRANSACTIONS ENTERED INTO ON OR AFTER 1 OCTOBER 200 9. FOLLOWING THE RULING OF THE SUPREME COURT IN THE CASE OF KARIMTHARUVI TEA ESTATE LIMITE D V STATE OF KERALA (60 ITR 262), THE AMENDMENT SHOULD NOT ORDINARILY APPLY TO ASSESSMENT YEAR 2007-08. 4.7 IT MAY BE NOTED THAT WHILE SUBMITTING THE RETUR N OF INCOME, INCOME WAS REQUIRED TO BE COMPUTED BASED ON ALP. A TAX-PAYER WOULD HAVE COMMITTED NO WRONG IF, IN THE PAST RETURNS, INCOME WAS DETERMINED BASED ON THE LA W THAT THEN EXISTED AND ALLOWED A VARIATION OF +/-5%. ANY CHANGE IN LAW WHICH HAS THE EFFECT OF CONTRIBUTING TO RETURNED AND ASSESSED INCOME AND HAVING CONSEQUENCES OF CONCEALM ENT PENALTY OR SCOPE FOR PROSECUTION CAN NEVER BE APPLIED RETROSPECTIVELY SO AS TO LEAD TO A PRESUMPTION OF WILLFULLY WRONG RETURN FURNISHED BY THE TAXPAYER. IN TERMS OF THE ABOVE, THE ASSESSEE SUBMITTED THAT THE A MENDMENT TO THE PROVISO MADE WITH EFFECT FROM 1.10.2009 WAS NOT RETROSPECTIVE AND CAME INTO EFFECT FROM THE ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. IN THIS REGARD, REFERENCE WAS MADE TO A DECISION OF THE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF ACIT V UE TRADE CORPORATION INDIA (ITA NO 4405/DEL/09 DATE D 24.10.2010), A COPY OF WHICH HAS BEEN PLACED BEFORE US. FOR THE ABOVE REASONS, IT IS CONTENDED THAT THE COMPUTATION MECHANISM AS PER THE ERSTWHILE PROVISO BE AP PLIED AND ASSESSEE BE ALLOWED THE BENEFIT OF 5% RANGE AS PROVIDED BY TH E ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. 13. APART FROM THE AFORESAID ARGUMENTS, THE LEARNED C OUNSEL HAS MADE DETAILED SUBMISSIONS THAT OUT OF THE COMPARABLE COMPANIES IDENTIFIED BY THE APPELLANT, THE REJECTION OF CERTAIN COMPARABLES BY THE TPO WAS NOT APPROPRIATE IN THE CASE OF THE FOLLOWING COMPANIES, NAMELY, I) VMF SOF TECH LTD.; II) RS SOFTWARE (I) LTD.; III) QUINTEGRA SOLUTIONS LTD.; IV ) VJIL CONSULTING LTD.; AND V) LGS GLOBAL LTD. 14. FURTHER, THE LEARNED COUNSEL POINTED OUT THAT T HE APPELLANT HAD EXPLAINED BEFORE THE LOWER AUTHORITIES THAT THE AE OF THE ASSESSE E WAS HAVING SIGNIFICANTLY LOW MARGINS, AND THE APPELLANT WAS BEING COMPENSATED ADEQUATELY IRRESPECTIVE OF THE FACT WHETHER THE AE WAS MAKING REASONABLE PROFIT S OR NOT. IT HAS BEEN POINTED OUT THAT ASSESSEE WAS BEING COMPENSATED WITH A CO NSTANT MARK-UP OF 10% OVER THE COSTS, DESPITE THE LOW PROFITABILITY OF T HE AE AND IN ANY CASE 10 SIGNIFICANT FUNCTIONS AND RISKS WERE BEING UNDERTAKEN BY T HE AE AS COMPARED TO THE APPELLANT COMPANY. IN THIS CONNECTION, REFERENCE WA S INVITED TO THE DETAILED FUNCTIONAL, ASSETS AND RISK ANALYSIS OF THE APPELLANT VIS- -VIS PARENT COMPANY AND SUMMARY FINANCIAL POSITION OF THE PARENT COMPANY CONTAIN ED IN THE WRITTEN SUBMISSIONS DATED 22.6.2009 ADDRESSED TO THE TPO, A COPY OF WHICH HAS BEEN PLACED IN THE PAPER BOOK AT PAGES 180 TO 212. BASED ON SUCH WORKINGS, IT IS CONTENDED THAT INSPITE OF ASSUMING MAJORITY OF THE FUN CTIONS, ASSETS AND RISKS IN COMPARISON TO THE APPELLANT, THE MARGINS OF THE AE EAR NED ON AN OVERALL BASIS IS SIGNIFICANTLY LOWER. IT IS CONTENDED THAT NO CREDENCE T O THE ABOVE ARGUMENT HAS BEEN GIVEN BY THE TPO. THE LEARNED COUNSEL EMPHASIZED THAT THE TRANSFER PRICING PROVISIONS IN THE ACT ARE LIABLE TO BE INVOKED IN A SITUATION WHERE THE PROFITS BELONGING TO INDIAS TAX JURISDICTIONS ARE INTEN DED TO BE PASSED ON TO ANY OTHER TAX JURISDICTION BY WAY OF AN INTERNATIONAL TRA NSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES AND IN THIS REGARD, REFERENCE WAS M ADE TO THE FOLLOWING DECISIONS: A. PHILIPS SOFTWARE CENTRE P LTD V ACIT 119 TTJ 721 ( BANG); B. ZYDUS ATLANTA HEALTHCARE P LTD V ITO ITA NO 3311 K& 3312/MUM/2008 (MUM); C. PANASONIC INDIA P LTD V ITO 135 TTJ 43 (DEL); AND, D. DCIT V INDO AMERICAN JEWELLERY ITA NO 6194/MUM/2 008 (MUM). DWELLING FURTHER, IT WAS SUBMITTED THAT BEFORE VENTU RING TO PROVE THAT ANY PROFIT OF THE APPELLANT COMPANY HAS BEEN SHIFTED OUTSIDE INDIA, I T WOULD NEED SUBSTANTIATION THAT PROFITS EXIST AT ALL WITH THE PAREN T COMPANY OUTSIDE LNDIA. IN THE INSTANT CASE, THE ASSESSEE ENJOYS THE BENEFIT OF EXEMPTIO N UNDER SECTION 10A OF THE ACT, THE PARENT COMPANY HAS EARNED A NET OPERATIN G MARGIN OF 2.43% FOR THE YEAR ENDED 31.12.2005, WHICH IS LOWER THAN THE MARGIN OF ASSESSEE COMPANY, WHICH WAS 11.62% DURING THE FINANCIAL YEAR 2005-06. TH US AS PER THE LEARNED COUNSEL FACTUALLY SPEAKING, SINCE THE THE PARENT COMPANY HAS LOWER PROFITS IN COMPARISON WITH THE APPELLANT COMPANY, IT IS INAPPROPR IATE TO CONCLUDE THAT ANY 11 PROFIT HAS BEEN SHIFTED OUTSIDE INDIA SO AS TO ATTRACT T HE TRANSFER PRICING REGULATIONS OF THE ACT. 15. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE, APPEARING FOR THE REVENUE, HAS PRIMARILY RELIED UPON THE ORDER S OF THE AUTHORITIES BELOW IN SUPPORT OF THE CASE OF THE REVENUE. THE LEARNED DEPAR TMENTAL REPRESENTATIVE POINTED OUT THAT THE FINAL SET OF COMPARABLES CONSIDERE D ON THE BASIS OF THE DIRECTIONS OF THE DRP WAS FAIR AND PROPER. IT IS POINTE D OUT THAT THE RISKS ASSUMED BY THE ASSESSEE COMPANY ARE QUITE HIGH WHICH WOULD SUGGEST HIGH RETURNS/MARGINS. IT WAS SUBMITTED THAT THE ASSESSEE WAS FULL Y DEPENDENT ON A SINGLE CUSTOMER, I.E. ITS PARENT COMPANY AND THIS FACTOR B Y ITSELF SUGGESTS A HIGH RISK SITUATION. IT WAS ALSO POINTED OUT THAT CERTAIN ASSETS HAVE BEEN TRANSFERRED BY THE PARENT COMPANY TO THE APPELLANT AT FAIR VALUE OF THE TRANSACTION WHICH SHOWED THAT THERE WAS NO INTENTION ON THE PART OF THE PAREN T COMPANY TO ASSUME THE RISKS ASSOCIATED WITH THE OPERATIONS OF THE APPELLANT COMPANY. IT IS ALSO POINTED OUT THAT IT WAS WRONG TO SUGGEST ON THE PART OF THE ASSESSEE T HAT MAJORITY OF THE RISKS ARE UNDERTAKEN BY THE PARENT COMPANY BECAUSE ULTIMATELY THE MARKET FORCES DETERMINE THE LEVELS OF BUSINESS CARRIED OUT, AND THE SAME WOULD NOT ONLY AFFECT THE PARENT COMPANY BUT IT WOULD ALSO IMPACT THE BUSINE SS OF THE INDIAN SUBSIDIARY AS WELL. 16. FURTHER, IT IS CONTENDED THAT LOW MARGINS EARNED BY THE PARENT COMPANY IS NOT A RELEVANT FACTOR FOR THE PURPOSE OF TRANSFER PR ICING ADJUSTMENTS, SINCE AS PER THE TRANSFER PRICING REGULATIONS, ASSOCIATED ENTERPRISE IS EXPECTED TO PAY ARMS LENGTH PRICE TO ITS INDIAN SUBSIDIARY COMPANY, IRRESPECTIV E OF ITS OWN PROFITABILITY LEVELS. 17. WITH REGARD TO EXCLUSION OF M/S GOLDSTONE TECHNOLOG IES LTD., IT IS CONTENDED THAT THE DRP HAS GIVEN THE FOLLOWING REASONI NG FOR ITS EXCLUSION, WHICH IS QUITE JUSTIFIED:- THE NEXT QUESTION THAT ARISES BEFORE US IS PERTAIN ING TO COMPARABLES CHOSEN BY THE LD TPO IN PARAGRAPH 87 OF THE TP ORDER ON THE BASIS OF WHICH PLI OF 27.65% HAS BEEN ARRIVED AT BY HIM TO BENCHMARK THE ASSESSEES INTER NATIONAL TRANSACTIONS. AFTER CAREFUL CONSIDERATION OF THE MATERIAL ON RECORD INCLUDING T HE SUBMISSION OF THE ASSESSEE, WE ARE 12 OF THE CONSIDERED VIEW THAT THE TWO COMPANIES, ONE HAVING THE HIGHEST PROFIT MARGIN AT 84.94%, NAMELY, OMNITECH INFOSOLUTIONS LTD. AND THE OTHER HAVING MARGIN OF 0.98% IN THE CASE OF GOLDSTONE TECHNOLOGIES LD. WHICH IS THE LOW EST, SHOULD BE EXCLUDED TO ARRIVE AT THE JUST AND FAIR PLI FOR THE PURPOSE OF BENCHMARKI NG THE INTERNATIONAL TRANSACTION OF THE ASSESSEE BECAUSE THE MARGIN IN THE TWO CASES ARE FO UND TO BE ABNORMAL IN THE LIGHT OF THEIR OWN MARGINS IN THE PRECEDING YEARS. 18. AS REGARDS THE CONTENTION OF THE APPELLANT THAT IT MAY BE ALLOWED THE BENEFIT OF +/-5% AS PER THE PROVISO TO SECTION 92C, A R EFERENCE WAS MADE TO THE FOLLOWING DISCUSSION IN THE ORDER OF THE DRP IN PARA 6. 3: 6.3 AS REGARDS THE CONTENTION OF THE ASSESSEE THAT IT MAY BE ALLOWED THE BENEFIT OF +/- 5% AS PER SECTION 92C, IT MAY BE MENTIONED THAT THE PROVISO TO SECTION 92C(2) OF THE IT ACT PROVIDES THAT WHERE MORE THAN ONE PRICE IS DETE RMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICE, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEA N. THE TRANSFER PRICING PROVISIONS WERE BROUGHT ON THE STATUTE BY THE FINANCE ACT, 200 1 W.E.F. 1.4.2002. IT IS WITH A VIEW TO AVOID HARDSHIP TO THE TAX PAYERS IN THE INITIAL YEA RS OF IMPLEMENTATION OF THESE PROVISIONS, GOVERNMENT OF INDIA, THROUGH A PRESS NOTE ISSUE BY THE MINISTRY OF FINANCE (DEPARTMENT OF REVENUE) ON 22.8.2001, EXPRESSED ITS INTENTION O F NOT MAKING ANY ADJUSTMENT IF THE PRICE ADOPTED BY THE ASSESSEE WAS UPTO 5% LESS OR U PTO 5% MORE THAN THE ARMS LENGTH PRICE DETERMINED BY THE AO. IMMEDIATEY THEREAFTER, THE CENTRAL BOARD OF DIRECT TAXES (CBDT) ISSUED THE CIRCULAR NO 12 DTD. 23.8.2001) SP ECIFYING THAT THE AO SHALL NOT MAKE ANY ADJUSTMENT TO THE PRICE SHOWN BY THE ASSESSEE IF SUCH PRICE WAS UP TO 5% LESS OR UPTO 5% MORE THAN THE ARMS LENGTH PRICE DETERMINED BY THE AO 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 TRANSACTION UNDERTAKEN BY THE ASSESSEE FALLS BEYOND THE 5% MARGIN OF THE PRICE OF INTERNATIONAL TRANSACTION CO MPUTED BY THE ASSESSEE. THEREFORE IN VIEW OF THE PROVISIONS OF THE LAW, DETAILS AND INTE NTIONS 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 HARBOR OF +5% -5% IS NOT AVAILABLE TO THE ASSE SSEE. 19. ON THE BASIS OF THE AFORESAID, IT HAS BEEN CONTENDED THAT SINCE THE IMPUGNED ASSESSMENT WAS MADE AFTER 1.10.2009, THE AMEND ED PROVISO TO SECTION 92C(2) OF THE ACT SHALL APPLY IN THIS CASE. IN THI S REGARD, A REFERENCE HAS BEEN MADE TO THE CBDT CIRCULAR NO. 5/2010 DATED 03.0 6.2010 READ WITH CORRIGENDUM DATED 30.9.2010 TO SUBMIT THAT THE AMEND ED PROVISO TO SECTION 92C(2) OF THE ACT IS APPLICABLE WITH EFFECT FROM 1 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN WHICH PROCE EDINGS ARE PENDING BEFORE THE TRANSFER PRICING OFFICER ON OR AFTER SUCH DATE. TH EREFORE, AS PER THE LEARNED CIT-DEPARTMENTAL REPRESENTATIVE, THE BENEFIT OF +/-5 % INTENDED BY THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT IS NOT AVAILABLE TO THE ASSESSEE. IN THE AFORESAID MANNER, THE LEARNED DEPARTMENTAL REPRESENTA TIVE HAS STRONGLY DEFENDED THE ASSESSMENT FRAMED BY THE ASSESSING OFFICER DET ERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AT RS 18,78,32,677/- AS AGAINST THE STATED VALUE OF RS 17,47,15,470/-. 13 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. I N THIS CASE, A PERTINENT ISSUE WHICH HAS BEEN VEHEMENTLY AGITATED BY T HE APPELLANT IS WITH REGARD TO ITS CLAIM OF SEEKING BENEFIT OF THE OPTION AV AILABLE UNDER THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. THE ERSTWHILE PROV ISO WHICH WAS INSERTED BY FINANCE ACT, 2002 WITH EFFECT FROM 1.4.2002 READ AS UN DER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARI THMETICAL 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 FIVE PERCENT OF SUCH ARITHMETICAL MEA N. AS PER THE SAID PROVISO, AN OPTION IS AVAILABLE TO THE ASSESSEE FOR ADJUSTMENT OF +/-5% VARIATION FOR THE PURPOSES OF COMPUTING ALP. AS PER THE PROVISO, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRI ATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEA N 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. TH E POINT MADE OUT BY THE ASSESSEE IS BASED ON THE LATTER PART OF THE PROVISO WHEREB Y AN OPTION IS GIVEN TO THE ASSESSEE TO TAKE AN ALP WHICH MAY VARY FROM THE ARIT HMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. FIRST LY, THE CLAIM OF THE REVENUE IS THAT SUCH BENEFIT IS NOT AVAILABLE TO THE P RESENT ASSESSEE, BECAUSE THE PRICE OF INTERNATIONAL TRANSACTION DISCLOSED BY THE ASSESSEE EXCEEDS THE MARGIN PROVIDED IN THE PROVISO. THIS ASPECT OF THE CONTR OVERSY, IN OUR VIEW, IS NO LONGER GERMANE IN VIEW OF THE PLETHORA OF DECISIONS OF OUR CO-ORDINATE BENCHES, NAMELY, SONY INDIA (P) LTD. (SUPRA); ELECTROBUG TECHNO LOGIES LTD. (SUPRA), AND DEVELOPMENT CONSULTANT P LTD V DCIT 115 TTJ 577 (KOL .) WHEREIN IT HAS BEEN OBSERVED THAT THE BENEFIT OF THE OPTION CONTAINED IN THE LATTER PART OF THE PROVISO TO SECTION 92C(2) IS AVAILABLE TO ALL ASSESSEES, IRRESPECTIV E OF THE FACT THAT PRICE OF THE INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEED S THE MARGIN PRESCRIBED IN THE PROVISO. 21. SO, HOWEVER, THE OTHER ARGUMENT SET UP BY THE RE VENUE AND WHICH HAS BEEN MORE POTENTLY ARGUED IS TO THE EFFECT THAT THE BENEFIT OF SUCH PROVISO IS NOT AVAILABLE TO THE ASSESSEE IN THE INSTANT CASE, BECAUSE THE SAID PROVISO HAS BEEN 14 AMENDED BY THE FINANCE (NO 2) ACT, 2009 WITH EFFECT FR OM 1.10.2009 WHICH READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARI THMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS AC TUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PRICE AT WH ICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH PRICE. THE CASE SET UP BY THE REVENUE IS THAT THE AMENDED PRO VISO SHALL GOVERN THE DETERMINATION OF ALP IN THE PRESENT CASE, INASMUCH AS T HE AMENDED PROVISIONS WERE ON STATUTE WHEN THE PROCEEDINGS WERE CARRIED ON B Y THE TRANSFER PRICING OFFICER (TPO). AS PER THE REVENUE, THE AMENDED PROVI SO WOULD HAVE A RETROSPECTIVE OPERATION AND IN ANY CASE, WOULD BE APPLI CABLE TO THE PROCEEDINGS WHICH ARE PENDING BEFORE THE TPO ON INSERTION OF THE AMENDED PROVISO, WHICH HAS BEEN INSERTED BY THE FINANCE (NO. 2) ACT, 2009 WIT H EFFECT FROM 1.10.2009 AND, IN THIS CASE, THE TPO HAS PASSED HIS ORDER ON 30.10 .2009. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO REFERRED TO THE CBDT CIRCULAR NO 5/2010 (SUPRA) READ WITH CORRIGENDUM DATED 30.9.2010 ISSUED B Y THE CBDT IN THIS REGARD. PER CONTRA, THE STAND OF THE ASSESSEE IS THAT THE AMENDED PROVISO WOULD BE APPLICABLE PROSPECTIVELY AND WOULD NOT APPLY IN RESP ECT OF THE STATED ASSESSMENT YEAR, WHICH IS PRIOR TO THE INSERTION OF THE A MENDED PROVISO WITH EFFECT FROM 1.10.2009. 22. WE HAVE CAREFULLY EXAMINED THE RIVAL STANDS ON THIS ASPECT. THE AMENDED PROVISO HAS BEEN BROUGHT ON THE STATUTE BY THE FINANCE (NO. 2) ACT, 2009 WITH EFFECT FROM 1.10.2009. THE EXPLANATORY NOT ES TO THE PROVISIONS OF FINANCE (NO 2) ACT, 2009 CONTAINED IN CIRCULAR NO 5 OF 2010 (SUPRA) PROVIDES THE OBJECTIVE BEHIND THE AMENDMENT OF THE PROVISO. THE L EGISLATURE NOTICED THE CONFLICTING INTERPRETATION OF THE ERSTWHILE PROVISO BY THE ASSESSEE AND THE INCOME-TAX DEPARTMENT. THE ASSESSEES VIEW WAS THAT THE A RITHMETICAL MEAN SHOULD BE ADJUSTED BY 5% TO ARRIVE AT ALP, WHEREAS THE DEPARTMENTAL VIEW WAS THAT NO SUCH ADJUSTMENT IS REQUIRED TO BE MADE IF THE V ARIATION BETWEEN THE 15 TRANSFER PRICE AND THE ARITHMETICAL MEAN IS MORE THAN 5% OF THE ARITHMETICAL MEAN. WITH A VIEW TO RESOLVING THIS CONTROVERSY, THE LE GISLATURE SOUGHT TO AMEND THE PROVISO TO SECTION 92C(2), WHICH HAS BEEN REPRODUCED BY US IN THE EARLIER PART OF THIS ORDER. IN THE SAID CIRCULAR, IT HAS ALSO BE EN ELABORATED THAT THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 .4.2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. IN ANY CASE, THE PROVISO CONTAINS A PRESCRIPTION TO DETERM INE THE ALP AND QUITE CLEARLY IT IS A SUBSTANTIVE PROVISION ENCOMPASSING THE EVEN TUAL DETERMINATION OF AN ASSESSEES TAX LIABILITY. THUS, IT CAN BE SAID THAT THE PROVISO IS NOT A PROCEDURAL PIECE OF LEGISLATION AND THEREFORE, UNLESS IT IS SO CLEARLY INTENDED, THE NEWLY AMENDED PROVISO CANNOT BE UNDERSTOOD TO BE RETRO SPECTIVE IN NATURE. IN FACT, IT IS A WELL-SETTLED PROPOSITION THAT THE STATUTOR Y PROVISIONS AS THEY STAND ON THE FIRST DAY OF APRIL OF THE ASSESSMENT YEAR MUST APPLY TO THE ASSESSMENT OF THE YEAR AND THE MODIFICATION OF THE PROVISIONS DURING THE PENDENCY OF ASSESSMENT WOULD NOT GENERALLY PREJUDICE THE RIGHTS OF THE ASSESSEE . FURTHERMORE, WE ARE FORTIFIED BY THE INTENTION OF THE LEGISLATURE AS FOUN D FROM CIRCULAR NO 5 OF 2010 (SUPRA) WHEREBY IN PARA 37.5, THE APPLICABILITY OF T HE ABOVE AMENDMENT HAS BEEN STATED TO BE WITH EFFECT FROM 1.4.2009 SO AS TO APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. IN THIS REGA RD, WE ALSO FIND THAT THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V UE TRADE CORPORATION INDIA (P) LTD. VIDE ITA NO 4405(DEL)/2009 DT 24.12.2010 HAS OBSERVED THAT THE PROVISO INSERTED BY THE FINANCE (NO 2) ACT, 2009 WOULD NOT APPLY TO AN ASSESSMENT YEAR PRIOR TO ITS INSERTION. IN THIS VIEW OF T HE MATTER, WE THEREFORE FIND NO JUSTIFICATION TO DENY THE BENEFIT OF +/-5% TO THE ASSESSEE IN TERMS OF THE ERSTWHILE PROVISO FOR THE PURPOSES OF COMPUTING THE ALP . 23. HOWEVER, BEFORE PARTING WE MAY ALSO REFER TO A C ORRIGENDUM DATED 30.9.2010 BY THE CBDT BY WAY OF WHICH PARA 37.5 OF T HE CIRCULAR NO 5/2010 (SUPRA) HAS BEEN SOUGHT TO BE MODIFIED. THE CORRIGEND UM READS AS UNDER: 16 CORRIGENDUM IN PARTIAL MODIFICATION OF CIRCULAR NO. 5/2010 DATE D 03.6.2010, (I) IN PARA 37.5 OF THE SAID CIRCULAR, FOR THE LINE S THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST APRIL, 2009 AND WILL ACCORDINGLY APPLY IN RESPECT O F ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. THE FOLLOWING LINES SHALL BE READ; THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELATI ON TO ALL CASES IN WHICH PROCEEDINGS RE PENDING BEFORE THE TRANSFER PR ICING OFFICER (TPO) ON OR AFTER SUCH DATE. (II) IN PARA 38.3, FOR THE DATE 1 ST OCTOBER, 2009, THE FOLLOWING DATE SHALL BE READ: 1 ST APRIL, 2009. IN TERMS THEREOF, IT IS CANVASSED THAT THE AMENDED PROV ISO HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1.10.2009 AND SHALL APPLY EVEN TO CASES WHERE PROCEEDINGS WERE PENDING BEFORE THE TPO ON OR AFTER SU CH DATE, IRRESPECTIVE OF THE ASSESSMENT YEAR INVOLVED AND, THEREFORE, IN THE IN STANT CASE THE BENEFIT OF THE ERSTWHILE PROVISO CANNOT BE EXTENDED TO THE ASSESSEE. WE HAVE CAREFULLY PONDERED OVER THE ASSERTION MADE BY THE APPELLANT TH AT THE CORRIGENDUM IS UNTENABLE IN THE EYES OF LAW. FIRSTLY, THE SAID CORRIGE NDUM DOES NOT BRING OUT ANY PREAMBLE SO AS TO THROW LIGHT ON THE CIRCUMSTANCES AND THE BACKGROUND IN WHICH THE SAME HAS BEEN ISSUED. SECONDLY, IT IS WELL UNDERSTOO D THAT THE EXPLANATORY NOTES TO THE PROVISIONS OF A FINANCE ACT PASSED BY THE PA RLIAMENT SEEKS TO EXPLAIN THE SUBSTANCE OF THE PROVISIONS OF THE ACT AS INTE NDED BY THE LEGISLATURE. IN FACT, THE HONBLE SUPREME COURT IN THE CASE OF K.P VARGHESE V ITO 131 ITR 597 (KER) EMPHASIZED THE SANCTITY OF THE STATEMENTS CONTA INED IN THE EXPLANATORY NOTES OF THE PROVISIONS AND STATED THAT THE INTERPRETATION PLACED IN SUCH DOCUMENTS IS BINDING INTERPRETATION OF LAW. THE CON TENTS OF THE CORRIGENDUM ARE QUITE INEXPLICABLE. NOTWITHSTANDING T HE AFORESAID AND WITHOUT GOING INTO THE VALIDITY OF THE CORRIGENDUM DATED 30 .9.2010 (SUPRA), WE ARE OF THE VIEW THAT THE SAME WOULD NOT OPERATE TO THE DETRIMEN T OF THE ASSESSEE SINCE AT THE RELEVANT POINT OF TIME THE CONTENTS OF THE CIRCU LAR NO 5/2010 (SUPRA) WERE IN OPERATION. IN OTHER WORDS, THE WITHDRAWAL OF THE INT ERPRETATION PLACED IN CIRCULAR 17 NO 5 /2010 (SUPRA) ON THE APPLICABILITY OF THE AMENDE D PROVISO IS SOUGHT TO BE DONE AWAY BY THE CORRIGENDUM DATED 30.9.2010 AND, T HEREFORE, SUCH WITHDRAWAL SHALL BE EFFECTIVE ONLY AFTER 30.9.2010, EVEN IF SUCH C ORRIGENDUM IS ACCEPTED AS VALID. WE MAY NOTE HERE THAT THE APPELLANT HAS ASSAILE D THE VALIDITY OF THE CORRIGENDUM ITSELF ON WHICH WE HAVE NOT MADE ANY DETE RMINATION. THEREFORE, THE CORRIGENDUM DATED 30.9.2010, IN OUR CONSIDERED OPINIO N, HAS NO BEARING SO AS TO DIS-ENTITLE THE ASSESSEE FROM ITS CLAIM OF THE BENEFIT OF +/-5% IN TERMS OF THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. IN COMING TO THE AFORESAID, WE HAVE BEEN GUIDED BY THE PARITY OF REASONING LAID DOW N IN THE JUDGMENTS OF THE HONBLE BOMBAY HIGH COURT IN THE CASES OF BASF (INDIA) LTD. V CIT 280 ITR 136 (BOM); SHAKTI RAJ FILMS DISTRIBUTORS V CIT 213 ITR 20 ( BOM); AND, UNIT TRUST OF INDIA & ANRS. V ITO 249 ITR 612 (BOM). THE HONBLE HIGH COURT HAS OPINED IN THE CASE OF BASF (INDIA) LTD. (SUPRA) THAT THE CIRCULARS WHICH ARE IN FORCE DURING THE RELEVANT PERIOD ARE TO BE APPLIED AND THE SUBSEQU ENT CIRCULARS EITHER WITHDRAWING OR MODIFYING THE EARLIER CIRCULARS HAVE NO APPLICATION. MOREOVER, THE CIRCULARS IN THE NATURE OF CONCESSION CAN BE WITHDRAWN PR OSPECTIVELY ONLY AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF STATE BA NK OF TRAVANCORE V CIT 50 CTR 102 (SC). CONSIDERING ALL THESE ASPECTS, WE THEREF ORE FIND NO JUSTIFICATION IN THE ACTION OF THE LOWER AUTHORITIES IN DISENTITLING TH E ASSESSEE FROM ITS CLAIM FOR THE BENEFIT OF +/-5% TO COMPUTE ALP IN TERMS OF THE E RSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. WE ORDER ACCORDINGLY. 24. APART FROM THE AFORESAID, THE APPELLANT HAS ASSAIL ED THE ADDITION ON OTHER ASPECTS ALSO. ONE OF THE ISSUE RAISED IS REGARDING THE INCLU SION OF COMPUCOM SOFTWARE LTD. AS A COMPARABLE BY THE TPO. SUCH INCLUSION IS ASSAILED ON THE GROUND THAT THE RELATED PARTY TRANSACTIONS OF THIS COM PANY EXCEEDED 25% OF THE TOTAL REVENUES FOR FINANCIAL YEAR 2005-06. AS PER THE WORKINGS PLACED AT PAGES 244-245 OF THE PAPER BOOK-II, IT IS REFLECTED THAT THE RELATED PARTY TRANSACTIONS OF THIS COMPANY ARE 28.78%, WHICH IS IN EXCESS OF 25%. IT HA S BEEN POINTED OUT 18 THAT THERE IS AN APPARENT CONTRADICTION IN THE APPROA CH OF THE TPO INASMUCH AS HE HAS REJECTED CERTAIN COMPANIES CONSIDERED COMPARABLE BY THE ASSESSEE, WHICH AS PER THE TPO HAD SUBSTANTIAL RELATED PARTY TRAN SACTIONS. CONSIDERING THE CASE SET-UP BY THE ASSESSEE, IN OUR VIEW, THE FILTER SET- UP BY THE ASSESSEE TO EXCLUDE COMPANIES HAVING RELATED PARTY TRANSACTIONS IN EXCESS OF 25% CANNOT BE CONSIDERED AS UNREASONABLE. MOREOVER, WE DO NOT FIND A NY REASON FOR THE ASSESSING OFFICER TO DO AWAY WITH THE FILTER OF RELATED PARTY TRANSACTIONS EXCEEDING 25% ADOPTED BY THE ASSESSEE, ON A SELECTIVE BA SIS. OSTENSIBLY, THE AFORESAID FILTER HAS BEEN ACCEPTED BY THE TPO IN PRINCI PLE, BUT HAS BEEN IGNORED WHILE REVIEWING THE CASE OF COMPUCOM SOFTWARE LTD. CLE ARLY, THE SAID FILTER HAS ESCAPED ITS APPLICATION AT THE HANDS OF THE TPO WHILE IN CLUDING COMPUCOM SOFTWARE LTD. AS A COMPARABLE. THEREFORE, IN THE I NSTANT CASE, WE DIRECT THE TPO TO EXCLUDE COMPUCOM SOFTWARE LTD. FROM THE FINAL SET OF COMPARABLES. THE ASSESSEE SUCCEEDS ON THIS ASPECT. 25. IT HAS BEEN STATED BEFORE US THAT IF COMPUCOM SOFT WARE LTD. IS EXCLUDED FROM THE SET OF COMPARABLE COMPANIES AND CONSIDERING THE +/-5% SAFE HARBOR PROVIDED UNDER SECTION 92C(2) OF THE ACT, WHOSE BENEFIT WE HAVE ALLOWED TO THE ASSESSEE IN PARA 24 ABOVE, THE MARGIN OF 11.62% OF THE APPELLANT WOULD BE AT ARMS LENGTH FROM THE INDIAN TRANSFER PRICING PERSPECTI VE. IN THIS VIEW OF THE MATTER, WE DO NOT ADJUDICATE ON THE OTHER ASPECTS RAISE D BY THE ASSESSEE, AS THE NECESSARY RELIEF HAS ALREADY BEEN ALLOWED TO THE ASSESSEE . THUS, ON THIS GROUND ASSESSEE SUCCEEDS. 26. THE ONLY OTHER GROUND RAISED IS WITH REGARD TO TH E DISALLOWANCE ON ACCOUNT OF A DELAY IN PAYMENT OF EMPLOYEES CONTRIBUTIO N TOWARDS PROVIDENT FUND AMOUNTING TO RS 71,694/-. IT HAS BEEN EXPLAINED BY TH E LEARNED COUNSEL THAT THE DELAY WAS JUST SIX DAYS IN TWO INSTANCES AND NINE DAYS IN ONE INSTANCE AS PER THE DETAILS CONTAINED AT PAGE 213 OF THE PAPER BOOK. IN AN Y CASE, THE AMOUNT HAD 19 BEEN DEPOSITED BEFORE THE DUE DATE OF FILING OF THE RETURN OF INCOME AND THEREFORE NO DISALLOWANCE IS CALLED FOR, IN VIEW OF THE FOLLOWIN G DECISIONS: (I) CIT V AIMIL LTD 321 ITR 508 (DEL); AND, (II) CIT V. ALOM EXTRUSIONS LTD. 319 ITR 306 (SC) THOUGH THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS C ONTESTED THE DISALLOWANCE, YET NO DECISION TO THE CONTRARY HAS BEEN BR OUGHT TO OUR NOTICE. THEREFORE, FOLLOWING THE AFORESAID PRECEDENTS, WE HERE BY SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE. 27. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 3 RD DAY OF OCTOBER, 2011. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PANN U) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 3RD OCTOBER, 2011 B COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE CIT (A) CONCERNED 4) CIT CONCERNED 5) DR, A BENCH, ITAT, PUNE. 6) GUARD FILE BY ORDER TRUE COPY ASST. REGISTRAR, I.T.A.T., PUNE 20 N THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER I.T.A. NO. 1350/PN/2010 (ASSTT. YEAR : 2006-07) STARENT NETWORKS (INDIA) P. LTD. .. APPELLANT P-17, RAJIV GANDHI INFOTECH PARK, HINJEWADI, PUNE VS. DY. COMMISSIONER OF INCOME-TAX, .. RESPONDENT PUNE PER G.S. PANNU, AM CORRIGENDUM IT IS OBSERVED THAT A TYPOGRAPHICAL ERROR HAS CREPT IN O UR ORDER DATED 24.10.2011 IN THE CAPTIONED APPEAL, INASMUCH AS IN PA RA 23 OF THE ORDER IT HAS BEEN WRONGLY STATED THAT, IN FACT, THE HONBLE SUPREME COURT IN THE CASE OF K.P VARGHESE V ITO 131 ITR 597 (KER). WE HEREBY DIRECT THAT THE FOLLOWING SENTENCE MAY BE SUBSTITUTED IN PLACE OF THE ABOVE: IN FACT, THE HONBLE SUPREME COURT IN THE CASE OF K.P VARGHESE V ITO 131 ITR 597 (SC) SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PANN U) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 3 RD NOVEMBER, 2011 B COPY TO:- 1) ASSESSEE 2) DEPARTMENT 3) THE CIT (A) CONCERNED 4) CIT CONCERNED 5) DR, A BENCH, ITAT, PUNE. 6) GUARD FILE BY ORDER TRUE COPY ASST. REGISTRAR, I.T.A.T., PUNE 21
