Appeal details
Counselvise Citation
[2011] 134 COUNSELVISE.COM (IT) 4061 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 month(s) 17 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
06-05-2011
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
C
Next Hearing Date
21-04-2011
Assessment Year
2005-2006
Appeal Filed On
19-01-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `C: NEW DELHI BEFORE SHRI C.L.SETHI, JUDICIAL MEMBER AND SHRI K.D. RANJAN, ACCOUNTANT MEMBER. I.T. A. NO.116/DEL/2011 ASSESSMENT YEAR: 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX, M/S. GLOBAL VAN TEDGE (P) LTD., CIRCLE 12(1), NEW DELHI. VS. 77-B, IFFCO ROAD, SECTOR-18, GURGAON. PAN: AABCR8435J I.T.A.NO.323/DEL/2011 ASSESSMENT YEAR : 2005-06 M/S. GLOBAL VANTEDGE PVT. LTD., DY. COMMISSIONER OF I.TAX, A-16/9, VASANT VIHAR, VS. CIRCLE 12(1), NEW DELHI . NEW DELHI. PAN:AABCR8435J (APPELLANTS) (RESPONDENTS) DEPARTMENT BY : SHRI SANJAY PURI, CIT-DR. ASSESSEE BY : S/SH. VIK AS SRIVASTAVA, MAYANK AGGARWAL & ATUL NINAWAT. O R D E R PER C.L. SETHI, JUDICIAL MEMBER: THESE ARE CROSS APPEALS, FILED BY THE ASSESSEE AS W ELL BY THE REVENUE, AGAINST THE ORDER DATED 29.10.2010 PASSED BY THE CO MMISSIONER OF INCOME- TAX (APPEALS), PERTAINING TO THE ASSESSMENT YEAR 20 05-06. 2 ITA NO.323/DEL/2011: 2. WE SHALL FIRST TAKE THE APPEAL FILED BY THE ASSE SSEE. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE REVOLV E AROUND THE FOLLOWING ISSUES:- (1) WHETHER INTEREST-FREE FIXED DEPOSITS WITH BANK FOR BANK GUARANTEES, INTEREST IN FIXED DEPOSIT KEPT AS LIEN IN FAVOUR OF IBM FOR THE PURPOSE OF OBTAINING COMPUTERS ON LEASE AND OTHER INTEREST EARNED DURING THE COURSE OF BUSINESS ARE ELIGIBLE FOR DEDUCTION UNDER SEC.10A OF THE ACT? (2) WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN EXCL UDING MISCELLANEOUS INCOME WHILE COMPUTING THE DEDUCTION UNDER SEC. 10A OF THE ACT. 3. IN THE COURSE OF HEARING OF THIS APPEAL, THE LEA RNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT IDENTICAL ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL VIDE ORDER DATED 17.12.200 9 PASSED BY THE ITAT, DELHI BENCH `C PERTAINING TO THE ASSESSMENT YEARS 2003-04 AND 2004-05 IN ITA NOS.2763 & 2764/DEL/2009 ALONG WITH ITA NOS. 14 32 & 2321/DEL/2009. THE LEARNED DR HAS ALSO SUBMITTED S O. 4. WE HAVE GONE THROUGH THE AFORESAID TRIBUNALS OR DER AND FIND THAT THIS ISSUE WAS DECIDED AGAINST THE ASSESSEE IN THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT (2009) 317 ITR 218 (SC). THE LEARNED CIT(A) IN THE CURRENT ASSESSMENT YEAR HAS DECIDED THIS ISSUE IN THE LIGHT OF THE ORDER OF TRIBUNAL FOR THE EARLIER YEAR WHERE THE 3 RELIANCE ON THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF LIBERTY INDIA VS. CIT (SUPRA) WAS PLACED. 5. RESPECTFULLY FOLLOWING THE TRIBUNALS ORDER IN T HE EARLIER YEARS ORDER, WE DECIDE THIS ISSUE AGAINST THE ASSESSEE BY UPHOLD ING THE ORDER OF THE LEARNED CIT(A). THUS, THE GROUNDS RAISED BY THE AS SESSEE ARE REJECTED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE STANDS DISMISSED. ITA NO.116/DEL/2011: 7. NOW WE SHALL COME TO THE APPEAL FILED BY THE REV ENUE. 8. THE EFFECTIVE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.12,37,05,850/- MADE ON ACCOUNT OF DIFFERENCE OF ARMS LENGTH PRICE. 2, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LD. CIT(A) HAS ERRED IN NOT AFFORDING ANY OPPORTUNI TY TO THE TPO BEFORE PROCEEDING TO COMPUTE THE MARGIN OF THE COMPARABLES AND THE ASSESSEE. 9. THE ASSESSEE COMPANY IS PRIMARILY ENGAGED IN PRO VIDING RECEIVABLE MANAGEMENT SERVICES TO ITS OFFSHORE CLIENTS. DURIN G THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD UNDERTAKEN INTERNAT IONAL TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES. THE AO REFERRED THE MATTER UNDER SEC. 92CA TO THE TRANSFER PRICING OFFICER FOR DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WITH THE ASSOCIATE 4 ENTERPRISES. THE TPO PASSED HIS ORDER UNDER SEC. 9 2CA(3) DATED 26.09.2008 WHEREIN HE HAD MADE AN ADJUSTMENT OF RS.12,37,05,85 0/- TO PRICE DECLARED BY THE ASSESSEE. IN THE LIGHT OF THE TPOS ORDER, THE AO MADE AN ADDITION OF RS.12,37,05,850/- TO THE INCOME OF THE ASSESSEE, BE ING DIFFERENCE BETWEEN THE ARMS LENGTH PRICE DETERMINED BY THE TPO AND TH E PRICE SHOWN BY THE ASSESSEE IN RESPECT OF THE INTERNATIONAL TRANSACTIO NS ENTERED INTO WITH ASSOCIATE ENTERPRISES. 10. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPE AL BEFORE THE LEARNED CIT(A). 11. IN THE TRANSFER PRICING OFFICERS REPORT THE AS SESSEE HAS CHARACTERIZED ITS ASSOCIATE ENTERPRISE BROADLY HAS A MARKET SUPPO RT SERVICE PROVIDER BEING ENGAGED IN RENDERING A COLLECTION SERVICE AND TELEM ARKETING SERVICE. THE ASSESSEE PROVIDED SERVICES TO THE CLIENTS AND ITS A SSOCIATE ENTERPRISES, NAMELY GLOBAL VANTEDGE INC. RAISES THE INVOICE ON THE CLIE NTS AND COLLECT THE REMUNERATION FOR THE SAME. THE MONEY WAS PASSED ON TO THE ASSESSEE AFTER DEDUCTION OF THE ASSOCIATE ENTERPRISES SHARE OF IT S CONTRIBUTION. IN THIS BACKDROP IT WAS MENTIONED BY THE ASSESSEE THAT THE OVERSEAS AE NEGOTIATES WITH CLIENTS IN USA TO PROVIDE THEM BACK OFFICE PRO CESSING SERVICE, AND THEREAFTER, IT ENTERS INTO BACK TO BACK AGREEMENTS WITH THE ASSESSEE FOR EXECUTION OF THE SAID SERVICES. THUS, THE OVERSEAS ENTITY PROVIDES MARKET 5 SUPPORT SERVICES AND THE ASSESSEE PROVIDES BACK OFF ICE SUPPORT SERVICE. IN THE TRANSFER PRICING REPORT SUBMITTED BY THE ASSESS EE, THE ASSESSEE STATED THAT SINCE THE CORRECT TESTED PARTY I.E. AE OF THE ASSES SEE, EARNED LESS THAN ITS COMPARABLES, THE INTERNATIONAL TRANSACTIONS UNDERTA KEN BY THE ASSESSEE WITH ITS AE WERE AT ARM LENGTH. 12. AFTER ANALYZING THE INTERNATIONAL TRANSACTIONS, BUSINESS PROFILE AND RELATIONSHIP BETWEEN THE ASSESSEE AND GVI IN DETAIL S, THE TPO DID NOT ACCEPT GVI AS THE TESTED PARTY FOR THE APPLICATION OF TNMM . THE TPO AFTER HAVING CONSIDERED THE ASSESSEES METHOD AND COMPARA BLES SELECTED BY HIM SELECTED OP/TC AS A PLI FOR THE BENCH MARKING OF TH E INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE. THE TPO THEN COMPUTED THE ARMS LENGTH PRICE AT PARA 8 ON PAGE 23 OF HIS ORDER AS U NDER:- TC OF ASSESSEE = RS.58,85,00,000 ARMS LENGTH REVENUE = RS.122.21% *58,85,0 0,000 RS.71,92,05,850 BOOK VALUE OF REVENUE= RS.59,55,00,000 DIFFERENCE OF ARMS LENGTH REVENUE AND BOOK VALUE OF INTERNATIONAL TRANSACTIONS= RS.12,37,05,850 ARMS LENGTH VALUE OF INTERNATIONAL TRANSACTIONS RS.57,41,44,735+RS.12,37 ,05,850 RS.69,78,50,585/- THE TPO FURTHER HELD THAT SINCE THE PERCENTAGE OF A DJUSTMENT OF ARMS LENGTH VALUE WAS 17.7% BEING MORE THAN 5%, PROVISO TO SEC. 92C(2) PROVIDING 6 BENEFIT OF 5% WAS NOT ATTRACTED. THE TPO, THEREFOR E, SUGGESTED AN ADJUSTMENT OF RS.12,37,05,850/-. 13. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPE AL BEFORE THE LEARNED CIT(A). 14. THE LEARNED CIT(A) FRAMED FOLLOWING ISSUES FOR ADJUDICATION IN RELATION TO TRANSFER PRICING:- 1. WHETHER AO/TPO HAVE ERRED WHILE DETERMINING THE ALP BY TAKING APPELLANT AS THE TESTED PARTY AS OPPOSED TO THE ANALYSIS CARRIED OUT BY THE APPELLANT IN WHICH RCS WAS ACCEPTED AS THE TESTED PARTY? 2. WHETHER AO/TPO HAVE ERRED IN REJECTING THE ALP DETERMINED BY THE APPELLANT? 3. IN CASE THE ALP DETERMINED BY EITHER THE APPELLANT OR THE AO IS FOUND TO BE IMPROPER, WHAT WILL BE THE APPROP RIATE ALP? 4. CAN THE ALP OF THE INTERNATIONAL TRANSACTION BETWEE N THE APPELLANT AND ITS ASSOCIATED ENTERPRISE EXCEED THE TOTAL AMOUNT OF REVENUE EARNED FROM CLIENTS BY THE APPELL ANT AND RCS TOGETHER? 15. THE FIRST ISSUE WAS DECIDED BY THE CIT(A) AGAIN ST THE ASSESSEE IN THE LIGHT OF THE LEARNED CIT(A)S ORDER PASSED IN ASSES SMENT YEARS 2003-04 AND 2004-05 WHICH WAS AFFIRMED BY THE TRIBUNAL. THE CI T(A) OBSERVED THAT THERE BEING NO CHANGE IN THE FACTS IN THE CURRENT Y EAR VIS--VIS EARLIER YEARS, HE DID NOT INTERFERE WITH THE FINDING FOR THE EARLI ER YEARS. 16. REGARDING ISSUE NO.2, THE LEARNED CIT(A) HAS OB SERVED AS UNDER:- 7 17. THE MAIN ARGUMENT OF THE APPELLANT IS THAT THE APPELLANT IS BETTER EQUIPPED TO CARRY OUT THE TRANSFER PRICIN G ANALYSIS AS IT HAS A BETTER UNDERSTANDING OF THE INTRICACIES OF THE BUSINESS AND CAN CARRY ON THE ANALYSIS ON THE BASIS OF `FAR ANALYSIS IN AMORE COMPREHENSIVE MANNER. THEREFORE, THE ALP DET ERMINED BY THE APPELLANT SHOULD HAVE BEEN ACCEPTED. 18. I HAVE CONSIDERED THE CONTENTIONS OF THE APPELL ANT AND I AM OF THE VIEW THAT THE CONTENTIONS OF THE APPELLAN T ARE UNACCEPTABLE. THE CASE THAT THE APPELLANT IS TRYIN G TO MAKE IS THAT IN EVERY CASE, THE ALP DETERMINED BY THE TAXPA YER SHOULD BE ACCEPTED. THIS CANNOT BE ACCEPTED SINCE IF THE ASSESSEE IS GIVEN THE POWER TO DETERMINE THE ALP WHICH CANNOT B E CHALLENGED BY THE TAX OFFICERS, THEN THE TRANSFER P RICING REGULATIONS INTRODUCED INTO THE TAX LEGISLATION SHA LL BECOME INFRUCTUOUS. THE TAXPAYER SHOULD BE THE ONE DETERM INING THE SAME, HOWEVER, IT SHOULD BE SUBJECT TO SCRUTINY BY THE TAX ADMINISTRATION SO THAT ANY PROFIT SHIFTING METHODOL OGY BEING ADOPTED BY THE ASSESSEE CAN BE REJECTED. HOWEVER, WITH THIS POWER, ALSO COMES THE RESPONSIBILITY OF BEING JUDIC IOUS AND THUS, THE AO/TPO HAVE TO EXERCISE THEIR AUTHORITY I N ACCORDANCE THE TRANSFER PRICING REGULATIONS. 19. I AM THOUGH IN AGREEMENT WITH THE CONTENTION OF THE APPELLANT THAT `FAR ANALYSIS FORMS THE BASIC FOUND ATION ON WHICH THE ALP IS DETERMINED AND ITS IMPORTANCE JUST CAN NOT BE OVEREMPHASIZED. 20. THE APPELLANT HAS BEEN PROVIDED FULL OPPORTUNIT Y DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE ME, TO P RESENT THE FACTS OF THE CASE, INCLUDING FAR ANALYSIS AND ON CO NSIDERATION OF SAME THE ALP HAS BEEN DETERMINED IN SUBSEQUENT P ARAS. HAVING OBSERVED SO, THE LEARNED CIT(A) DECIDED THIS ISSUE AGAINST THE ASSESSEE FOR STATISTICAL PURPOSES. 17. REGARDING ISSUE NO.3 WHETHER ALP OF INTERNATION AL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE CAN EXCEED A TOTAL AMOUNT OF REVENUE 8 EARNED FROM CLIENTS BY THE ASSESSEE AND ITS ASSOCIA TE ENTERPRISES TOGETHER, THE LEARNED CIT(A) HAS HELD AND OBSERVED AS UNDER:- 23. THE CRUX OF THE CONTENTION RAISED BY THE APPEL LANT IS THAT IN A REVENUE SHARING ARRANGEMENT BETWEEN THE ENTITI ES, WHAT MAY BE QUESTIONED IS THE PROPORTION OF SHARING BETW EEN THE ENTITIES AND NOT THE ABSOLUTE AMOUNT OF REVENUE ITS ELF WHICH IS SUBJECT OF SHARING BECAUSE THAT IS BEYOND THE CONTR OL OF EITHER THE APPELLANT OR ITS ASSOCIATED ENTERPRISE(S). I W OULD AGREE WITH SUCH A VIEW BECAUSE THE PREVAILING TRANSFER PRICING REGULATIONS ONLY REQUIRE US TO ANALYSE THE TRANSACT IONS BETWEEN ASSOCIATED ENTERPRISES AND NOT THE TRANSACTIONS WIT H THIRD PARTIES SINCE EXTRANEOUS FACTORS CANNOT BE CONTROLL ED. MOREOVER, IF AN ENTITY IS UNABLE TO EARN ADEQUATE P ROFITS ON ACCOUNT OF LEGITIMATE BUSINESS EXIGENCIES AND NOT D UE TO MANIPULATION OF TRANSACTIONS UNDERTAKEN BY THE ASSO CIATED ENTERPRISES, SUCH ENTITY CANNOT BE PENALIZED. 24. THUS THE CONTENTION OF APPELLANT IS FOUND TO BE ACCEPTABLE, ESPECIALLY WITH REFERENCE TO THE OBJECT AND SCHEME OF TRANSFER PRICING REGULATION WHICH GOVERN THE INT ERNATIONAL TRANSACTION UNDERTAKEN BY AN ASSESSEE WITH ITS ASSO CIATED ENTERPRISE AND NOT WHEN TRANSACTIONS TAKE PLACE BET WEEN ASSESSEE AND INDEPENDENT CLIENTS. 25. IT IS ALSO VERY PERTINENT TO NOTE THAT THE SAME ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT FOR THE ASS ESSMENT YEAR 2003-04 BY THE CIT(A) AND ITAT. IN FACT IN THE AY 2003-04 THE CIT(A) HELD THAT IF ALP IS DETERMINED TO BE MAXIMUM I.E. 100% OF THE REVENUE EARNED BY GVI FROM THIRD PARTY INDEP ENDENT CLIENTS IT WOULD MEAN THAT GVI PERFORMS THE MARKET ING ACTIVITIES WITHOUT ANY CONSIDERATION WHICH AGAIN IS AN ABSURD PROPOSITION SINCE IN A COMMERCIAL WORLD NO PERSON O F ORDINARY PRUDENCE WOULD PERFORM ANY ACTIVITY WITHOUT ANY REW ARD. BASED ON THE FUNCTIONAL PROFILE OF THE TWO ENTITIES (APPELLANT AND GVI) CIT(A) HELD THAT A SHARE OF 1.40% OF THE R EVENUE IS ADEQUATE TO COMPENSATE GVI FOR ITS ACTIVITIES AND T HEREFORE IT WAS DECIDED THAT THE ALP DETERMINED FOR THE INTERNA TIONAL 9 TRANSACTIONS OF THE APPELLANT CANNOT EXCEED 98.60% OF THE REVENUE EARNED BY THE GVI FROM INDEPENDENT CLIENTS. 26. AS IN THE CURRENT YEAR THERE IS NO SIGNIFICANT CHANGE IN FACTS IT IS DECIDED THAT THE 1.40% OF THE REVENUE T O BE RETAINED BY GVI IS ADEQUATE TO COMPENSATE IT FOR ITS MARKETI NG ACTIVITIES AND THE APPELLANT IS ENTITLED TO 98.6% OF THE AMOUN T EARNED BY GVI FROM INDEPENDENT CLIENTS. THUS IN THE CURRENT YEAR THE ALP HAS TO BE RESTRICTED TO RS.60,32,18,954 (RS.611 ,783,929 X 98.6%). 18. WHILE DECIDING THE AFORESAID ISSUE NO.3, THE LE ARNED CIT(A) HAS HELD THAT THE SAME ISSUE WAS DECIDED IN FAVOUR OF THE AS SESSEE IN THE ASSESSMENT YEAR 2003-04 BY THE CIT(A) WHICH WAS CONFIRMED BY T HE TRIBUNAL AND SINCE THERE WAS NO CONSEQUENT CHANGE IN FACTS OF THE CURR ENT YEAR, THE CIT(A) HELD THAT 1.40% OF THE REVENUE TO BE RETAINED BY THE ASS OCIATE ENTERPRISES IS ADEQUATE TO COMPENSATE IT FOR ITS MARKETING ACTIVIT IES AND THE ASSESSEE IS ENTITLED TO 98.6% OF THE AMOUNT EARNED BY ASSOCIATE D ENTERPRISES FROM INDEPENDENT CLIENTS. THE LEARNED CIT(A) THEREFORE, RESTRICTED THE ALP TO RS.60,32,18,954/- BEING 98.6% OF THE TOTAL REVENUE OF RS.61,17,83,929/-. 19. ON ISSUE NO.4, THE LEARNED CIT(A)S ORDER IS AS UNDER:- 28. I HAVE CAREFULLY GONE THROUGH THE VARIOUS CONT ENTIONS AND SUBMISSION MADE BY THE APPELLANT. THOUGH THERE IS MERIT IN THE APPELLANTS ARGUMENT THAT THERE IS NO TAX BE NEFIT BEING OBTAINED BY THE APPELLANT THOUGH SHIFTING OF PROFIT S, IT CANNOT BE THE ONLY BASIS TO ACCEPT APPELLANTS CONTENTIONS IN THIS REGARD. IT IS WELL UNDERSTOOD THAT ONE ASSOCIATED ENTERPRIS E CAN TRY TO USE ITS INFLUENCE TO DETERMINE THE TRANSACTION IN A MANNER PREJUDICIAL TO THE INTERESTS OF THE OTHER ASSOCIATE D ENTERPRISE BECAUSE OF SEVERAL REASONS. 10 29. THE ISSUE RELATING TO USE OF CURRENT YEAR DATA IS WELL SETTLED NOW IN VIEW OF THE DECISION OF BANGALORE TR IBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. A ND REAFFIRMED IN THE CASE OF MENTOR GRAPHIC PVT. LTD. EVEN IN THE RECENT ORDER DATED 10.02.2009 IN THE CASE OF HONEYW ELL AUTOMATION INDIA LTD. VS. DCIT THE ITAT PUNE BENCH (2009- TIOL-104-ITAT-PUNE) HAS ALSO REAFFIRMED THIS ISSUE. THUS, IT IS HELD THAT THE TPO IS CORRECT IN USING SINGLE YEA R DATA WHILE DETERMINING ARMS LENGTH PRICE IN THE CASE OF THE A PPELLANT. 30. AS REGARDS CONTENTION OF THE APPELLANT THAT TRA NSACTION OF THE APPELLANT WITH INDEPENDENT CLIENTS, SHOULD NOT BE BENCHMARKED UNDER TNMM I AGREE THAT WHEN TNMM IS US ED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE, THE TNMM, AS THE NAME ITSELF SUGGESTS, EVALU ATES PROFITABILITY OF TRANSACTIONS RATHER THAN PROFITABI LITY OF AN ENTERPRISE. TRANSACTION OF DIFFERENT NATURE CANNOT BE AGGREGATED FOR THE PURPOSE OF COMPARISON UNDER TNMM . THE SAME ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF THE A PPELLANT IN EARLIER YEARS (AY 2003-04 AND 200-05) HENCE IN THE CURRENT YEAR AS WELL I HOLD THAT WHILE APPLYING THE TNMM TO DETERMINE ALP, THE REVENUE EARNED BY THE APPELLANT FROM SERVI CING THE INDEPENDENT CLIENTS, WITHOUT ANY INVOLVEMENT OF RCS SHOULD NOT BE BENCHMARKED. THE PROPORTIONATE COSTS (3.28%) AT TRIBUTABLE TO SUCH REVENUE SHOULD BE IGNORED WHILE COMPUTING A LP OF THE INTERNATIONAL TRANSACTIONS. 31. AS REGARD THE OBJECTION RAISED BY THE APPELLAN T AGAINST THE SELECTION OF COMPARABLES PERFORMING DISSIMILAR FUNC TIONS, I HAVE PERUSED THE PROFILE OF COMPARABLES AND DISAGRE E WITH THE APPELLANT. BESIDES THE TWO COMPARABLES AGAINST WHO M OBJECTION HAS BEEN RAISED BY THE APPELLANT WERE CON SIDERED COMPARABLES BY THE CIT(A) IN THE EARLIER YEARS I.E. 2003-04 AND 2004-05. THUS, OBJECTIONS OF THE APPELLANT ON THIS COUNT IS REJECTED. 32. WITH REGARD TO THE WORKING CAPITAL ADJUSTMENT, I HAVE CAREFULLY EXAMINED THE CONTENTIONS RAISED BY THE AP PELLANT AND I AM OF THE VIEW THAT A SUITABLE ADJUSTMENT IS NECE SSARY TO 11 ADJUST THE PROFITABILITY OF THE COMPARABLE BEFORE B ENCHMARKING THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APP ELLANT. THE SUITABLE WORKING CAPITAL ADJUSTMENT WAS ALSO MADE B Y THE TPO WHILE DETERMINING ALP IN THE CASE OF THE APPELLANT FOR THE A.Y. 2003-04. THE CONTENTION OF THE APPELLANT REGARDIN G ALLOWANCE OF WORKING CAPITAL ADJUSTMENT HAS ALSO BEEN ACCEPTE D BY THE CIT(A) IN AY 2004-05 AND HAS BEEN UPHELD BY ITAT, T HUS, IN THE CURRENT YEAR AS WELL THE CLAIM OF THE APPELLANT NEEDS TO BE ACCEPTED AND A SUITABLE ADJUSTMENT IS CALLED FOR. THE DETAILED COMPUTATION OF WORKING CAPITAL ADJUSTMENT TO BE MAD E TO THE FOUR COMPARABLES IS GIVEN AT ANNEXURE 1. WHILE DECIDING ISSUE NO.4, THE LEARNED CIT(A) HAS R ELIED UPON HIS ORDER PASSED IN ASSESSMENT YEARS 2003-04 AND 2004-05 WHIC H WAS UPHELD BY THE INCOME-TAX APPELLATE TRIBUNAL. 20. AFTER DECIDING THE AFORESAID 4 ISSUES IN THE MA NNER AS INDICATED ABOVE, THE LEARNED CIT(A) RECOMPUTED THE ALP AS UNDER:- RE-COMPUTATION OF ALP 33. TO SUMMARIZE, THE ALP DETERMINED BY THE AO/ TP O NEEDS TO BE RECOMPUTED IN VIEW OF MATTERS ADJUDICATED ABOVE. T HEREFORE, THE ALP IS RECOMPUTED AFTER MAKING THE FOLLOWING ADJUST MENTS: 1. THE FOUR COMPARABLES CHOSEN BY THE TPO FOR DET ERMINING THE ALP ARE FOUND APPROPRIATE. 2. A SUITABLE WORKING CAPITAL ADJUSTMENT HAS BEEN MADE TO ADJUST THE OPERATING MARGIN OF THE ABOVEMENTIONED REMAININ G 4 COMPARABLES. THE FINAL OPERATING MARGIN OF THE COM PARABLES, AFTER GIVING EFFECT TO THE SAID WORKING CAPITAL ADJUSTMEN T COMES TO 24.13%. THE DETAILED COMPUTATION OF THE OPERATING IS GIVEN AT ANNEXURE 1. THE COMPUTATION OF ALP ON THE BASIS OF AFORESAID AV ERAGE OPERATING MARGIN OF COMPARABLES IS GIVEN HEREUNDER: 12 PARTICULARS AMOUNT TOTAL OPERATING COST OF THE APPELLANT 58,85,15,696 LESS: OPERATING COST INCURRED IN RELATION TO SERVICE TO THIRD PARTIES (3.28%) 1,93,03,315 NET OPERATING COST IN RELATION TO THE INTERNATIONAL TRANSACTION WITH GVI(A) 56,92,12,381 ARMS LENGTH MARGIN THAT SHOULD HAVE BEEN EARNED BY THE APPELLANT I.E. 24.13% OF THE OPERATING COST (B)= (A)* 2.13% 13,73,50,98 ARMS LENGTH VALUE OF THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT (C)=(A) + (B) 70,65,63,329 THUS, THE ALP DETERMINED ON THE BASIS OF ABOVE WORK ING COMES TO RS. 70,65,63,329/- WHICH EXCEEDS THE TOTAL REVENUE EARNED BY THE GROUP AS A WHOLE. IN VIEW OF THE ADJUDICATION MADE FOR ISSUE 3 HEREINBEFORE, THE ALP CANNOT EXCEED RS. 60, 32,18,954 (RS. 611,783,929 X 98.6%), THEREFORE, THE ALP IS DE TERMINED TO BE RS. 60,32,18,954/-. HENCE, ADDITIONS TO THE INC OME OF THE APPELLANT IS CONFIRMED AT RS. 29,074,219 (I.E. RS. 603,218,954 I.E. THE MAXIMUM ALP LESS RS. 574,144,735 I.E. THE ACTUAL VALUE OF THE INTERNATIONAL TRANSACTION WITH THE ASSOCIATE D ENTERPRISE I.E. GV INC). 21. FROM THE AFORESAID RECOMPUTATION OF ALP DONE BY THE LEARNED CIT(A), IT IS SEEN THAT ALP WAS DETERMINED AT RS.70 ,65,63,329/-, WHICH EXCEEDED THE TOTAL REVENUE EARNED BY THE GROUP AS A WHOLE. THEREFORE, IN THE LIGHT OF HIS DECISION ON ISSUE NO.3, THE LEARNED CI T(A) HELD THAT THE ALP CANNOT EXCEED RS.60,32,18,954/- (RS.61,17,83,929/98 .6%). HE, THEREFORE, 13 DETERMINED THE ALP AT RS.60,32,18,954/-. HE, THERE FORE, CONFIRMED THE ADDITION TO THE EXTENT OF RS.2,90,74,219/- BEING TH E DIFFERENCE OF RS.60,32,18,954/- (MAXIMUM ALP) LESS RS.57,41,44,73 5/- BEING THE ACTUAL VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO WI TH ASSOCIATED ENTERPRISES BY THE ASSESSEE. THE LEARNED CIT(A) PROCEEDED FURTHER TO DECIDE THE ISSUE AS TO WHETHER THE ADJUSTMENT OF + 5% UNDER PROVISO TO SECTION 92C(2) IS AVAILABLE TO THE ASSESSEE. ON THIS ISSUE HIS DECISION IS AS UNDER:- 34. THE ONLY OBJECTION OF THE TPO IN RELATION TO A VAILABILITY OF THE BENEFIT OF THE PROVISO TO SEC. 92C(2) WAS THAT THE DIFFERENCE BETWEEN THE ALP DETERMINED AND VALUE OF INTERNATIONAL TRANS ACTION IS MORE THAN 5% OF THE ALP SO DETERMINED. AS IN VIEW OF AL P DETERMINED HEREINBEFORE THE DIFFERENCE (RS. 29,074,219) BETWEE N THE ALP DETERMINED (603,218,954) AND VALUE OF TRANSACTION D ECLARED (RS. 574,144,735) DOES NOT EXCEEDS 5% OF THE ALP (30,160 ,948). THEREFORE, ADJUSTMENT OF 5% IS ALLOWABLE TO THE APP ELLANT UNDER PROVISO TO SEC. 92C(2) OF THE ACT AND IT IS HELD TH AT THE APPELLANT IS TRANSACTING WITH ITS ASSOCIATED ENTERPRISE AT ARMS LENGTH PRICE AND THE ADDITIONS MADE BY THE AO/TPO ARE DELETED. THUS, THIS GROUND IS ADJUDICATED IN FAVOUR OF THE APPELLANT. 22. FROM THE AFORESAID FINDING OF THE LEARNED CIT(A ), IT IS CLEAR THAT THE LEARNED CIT(A) HAS GIVEN A BENEFIT OF + 5% TO THE ASSESSEE INASMUCH AS THE DIFFERENCE OF RS.2,90,74,219/- BETWEEN THE ALP DETE RMINED BY HIM AT RS.60,32,18,954/- AND THE VALUE OF TRANSACTIONS DEC LARED BY THE ASSESSEE AT RS.57,41,44,735/- DID NOT EXCEED 5% OF THE ALP DETE RMINED BY HIM. 23. NOW, THE DEPARTMENT IS IN APPEAL BEFORE US. 14 24. IN THE COURSE OF HEARING OF THIS APPEAL, THE LE ARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE VARIOUS ISSUES DECIDE D BY THE LEARNED CIT(A) IN RELATION TO TRANSFER PRICING MATTER HAD COME FOR CO NSIDERATION IN EARLIER 2 ASSESSMENT YEARS 2003-04 AND 2004-05, AND THE LEARN ED CIT(A) HAS DECIDED THIS ISSUE IN THE LIGHT OF HIS DECISION FOR THE EAR LIER YEARS, WHICH HAS BEEN UPHELD BY THE TRIBUNAL VIDE ORDER DATED 17 TH DECEMBER, 2009 PASSED IN ITA NOS. 2763 AND 2764/DEL/2009 AND 1432 & 2321/DEL/009 PERTAINING TO THE ASSESSMENT YEARS 2003-04 AND 2004-05, A COPY OF WHI CH HAS BEEN PLACED AT PAGES 80 TO 111 OF THE PAPER BOOK DATED MARCH 18, 2 011 FILED BY THE ASSESSEE. 25. THE LEARNED DR ON THE OTHER HAND, SUBMITTED THA T THOUGH THE ISSUES ARE COVERED BY THE DECISION OF TRIBUNAL PASSED IN E ARLIER YEARS WHERE THE ORDER OF THE LEARNED CIT(A) WAS UPHELD, THE VARIOUS POINTS WERE NOT RAISED AND CONSIDERED AT THAT STAGE. THE LEARNED DR CONTE NDED THAT OBSERVATION OF THE LEARNED CIT(A) AS ACCEPTED BY THE TRIBUNAL WOUL D GO AGAINST THE BASIC PRINCIPLES OF TRANSFER PRICING WHICH UNDER SEC. 92 MANDATES,..ANY INCOME ARISING FROM INTERNATIONAL TRANSACTIONS, SHALL BE C OMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. HE POINTED OUT THE FOLLOW ING POINTS AGAINST THE FINDING OF THE LEARNED CIT(A) IN EARLIER YEARS, WHI CH WAS ACCEPTED BY THE 15 TRIBUNAL, TO THE EFFECT THAT ALP CANNOT BE MORE THA N THE TOTAL REVENUE EARNED BY THE A.E:- THE OBSERVATION OF THE CIT(A) ACCEPTED BY HONBLE I TAT GOES AGAINST THE BACK PRINCIPLES OF TP, WHICH U/S 92 MAN DATES.ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THE LAW DOES NOT REQUIRE THAT IN THE QUEST FOR ALP IT IS NECESSARY TO LOOK INTO LOSSES OR PROFITS OF THE PARTY WITH WHOM THE ASSESSEE HAS TRANSACTED. EVEN IN A DOMESTIC SITUATION, THERE IS NEVER AN ATTEMPT TO SEE HOW WHETHER THE PARTY WITH WHOM THE ASSESSEE TR ANSACTED INCURRED LOSS OR PROFIT. FOR EXAMPLE, AN ENTERPRISE CAN HAV E PROFITABLE DEALINGS WITH ANOTHER ENTERPRISE THAT INCURS LOSSES USING GO ODS OR SERVICES SUPPLIED BY THE FORMER. THE QUESTION IS WHETHER AN INDEPENDENT ENTERPRISE WOULD HAVE BOTHERED ABOUT EARNINGS OF THE ENTERPRISE AT THE OT HER END OF THE TRANSACTION? IN TP WHAT IS REQUIRED TO BE ASCERTAINED IS HOW AN ARMS LENGTH OR AN INDEPENDENT OR UNCONTROLLED ENTITY WOULD HAVE RE SPONDED TO A BUSINESS SITUATION AND WHETHER THE ASSESSEE RESPOND ED IN A SIMILAR MANNER IN A CONTROLLED SITUATION. ANY INDEPENDENT INDIAN ENTERPRISE ENTERING INTO A TRANSACTION WITH A FOREIGN ENTERPRISE FOR PROVIDING SIMILAR SERVICES WOULD HAVE NEGOTIATED FOR HIGHEST AMOUNT OF PROFIT FOR ITSELF AND WOULD NOT HAVE BOTHERED ABOUT THE PROFIT/LOSS OF THE FOREIGN ENTER PRISE. 16 AT WHAT PRICE THE SERVICES WERE ULTIMATELY SOLD TO THE THIRD PARTY IS ON NO CONSEQUENCE WHILE DETERMINING ALP FOR THE ENT ERPRISE UNDER EXAMINATION. THE ONLY QUESTION THAT NEEDS TO BE ANSWERED IS, WH ETHER THE ASSESSEE ACTED AT AN ARMS LENGTH WHILE DEALING WIT H THE A.E. THEREFORE, THE PROPOSITION OF THE CIT(A) AND ACCEP TED BY THE HONBLE TRIBUNAL THAT THE PROPORTION OF SHARING BE TWEEN THE ENTITIES AND NOT THE ABSOLUTE AMOUNT OF REVENUE IS THE SUBJ ECT MATTER OF TRANSFER PRICING, WITH UTMOST RESPECT, IS AN INCORR ECT PROPOSITION. IT IS THE ABSOLUTE AMOUNT OF REVENUE EARNED BY THE ASSESS EE THAT IS THE SUBJECT MATTER OF TRANSFER PRICING PROVISIONS AND W HAT NEEDS TO BE EXAMINED IS WHETHER THAT WAS EARNED AT AN ARMS LEN GTH. THE REVENUE FROM THE THIRD PARTY MIGHT BE BEYOND C ONTROL OF THE AE BUT THE REVENUE FROM THE AE WAS NOT. AND, THE LA W ALSO REQUIRED THAT THE SAID REVENUE SHOULD HAVE BEEN AT AN ARMS LENGTH. THEREFORE, IF THE OBSERVATION OF THE ITAT/CIT(A), THAT THE ALP CANNOT BE MORE THAN THE TOTAL REVENUE EARNED BY THE AE, IS DISREGARDED THE ORDER OF THE CIT(A) IS IN REVENUE S FAVOUR AND IS RELIED UPON. 26. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE TH ROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH T HE TRIBUNALS ORDER PASSED IN ASSESSMENT YEARS 2003-04 AND 2004-05. 27. THE DECISION OF THE LEARNED CIT(A) ON THE ISSUE THAT ALP OF THE INTERNATIONAL TRANSACTIONS EARNED BY THE ASSESSEE S HOULD BE RESTRICTED TO 17 98.6% OF THE TOTAL REVENUE EARNED BY THE ASSESSEE A ND ITS ASSOCIATE ENTERPRISES IN ASSESSMENT YEAR 2003-04 AND 2004-05 HAS BEEN REPRODUCED BY THE TRIBUNAL AT PARA 13 OF ITS ORDER. THE LEARN ED CIT(A)S FINDINGS ON OTHER ISSUES WERE REPRODUCED IN PARA 14, 15, 16 & 1 7 OF THE ORDER. AFTER REPRODUCING CIT(A)S FINDINGS, THE TRIBUNAL UPHELD THE ORDER OF THE LEARNED CIT(A) VIDE PARA 19 OF THE ORDER. THE DECISION TAK EN BY THE TRIBUNAL IN ASSESSMENT YEAR 2003-04 WAS ALSO APPLIED IN THE ASS ESSMENT YEAR 2004-05 VIDE CONSOLIDATED ORDER DATED 17 TH DECEMBER, 2009. 28. WITH REGARD TO THE BENEFIT OF 5% ADJUSTMENT UND ER PROVISO TO SEC. 92C(2) OF THE ACT, NO BENEFIT WAS GRANTED BY THE LE ARNED CIT(A) IN ASSESSMENT YEARS 2003-04 AND 2004-05 INASMUCH AS DI FFERENCE BETWEEN THE ALP DETERMINED BY THE LEARNED CIT(A) AND THE PRICE DECLARED BY THE ASSESSEE WAS MORE THAN 5%. THEREFORE, THIS ISSUE W AS DECIDED AGAINST THE ASSESSEE IN EARLIER YEAR. HOWEVER, IN THE ASSESSME NT YEAR UNDER CONSIDERATION, THE BENEFIT OF ADJUSTMENT OF 5% HAS BEEN ALLOWED TO THE ASSESSEE BECAUSE OF THE REASON THAT DIFFERENCE BETW EEN THE ALP DETERMINED BY THE LEARNED CIT(A) AND THE PRICE OF INTERNATIONA L TRANSACTIONS DECLARED BY THE ASSESSEE WAS WITHIN THE RANGE OF 5%. SINCE THE ALP DETERMINED BY THE CIT(A) IS WITHIN 5% RANGE OF THE PRICE DECLARED BY THE ASSESSEE, THE BENEFIT 18 OF 5% ADJUSTMENT UNDER PROVISO TO SEC. 92C(2) HAS B EEN RIGHTLY GIVEN BY THE LEARNED CIT(A) IN THE CURRENT YEAR UNDER CONSIDERAT ION. 29. SINCE THE VARIOUS ISSUES RELATING TO THE DETERM INATION OF ALP ARE COVERED BY THE DECISION OF TRIBUNAL IN EARLIER YEAR S, AGAINST WHICH IT IS STATED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT BOTH T HE ASSESSEE AND DEPARTMENT IS IN APPEAL BEFORE THE HONBLE HIGH COURT, WE ARE INCLINE TO FOLLOW THE DECISION OF COORDINATE BENCH AND DECIDE ALL THESE I SSUES ACCORDINGLY. THEREFORE, THE VARIOUS POINTS RAISED BY THE LEARNED DR THAT THE VIEW OF THE LEARNED CIT(A), WHICH HAS BEEN ACCEPTED BY THE TRIB UNAL IN EARLIER YEARS, IS AN INCORRECT PROPOSITION, CANNOT BE ACCEPTED AT THI S STAGE. 30. RESPECTFULLY FOLLOWING THE TRIBUNALS ORDER PAS SED IN EARLIER ASSESSMENT YEARS 2003-04 AND 2004-05 UPHOLDING THE FINDINGS GIVEN BY THE LEARNED CIT(A) IN THOSE YEARS, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISSUE OF DETERMINATION OF ALP IN THE CURRENT YEAR U NDER CONSIDERATION. THUS, THE GROUNDS RAISED BY THE REVENUE ARE REJECTED. 31. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE AS WELL BY THE DEPARTMENT ARE DISMISSED. 32. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 6 TH MAY, 2011. SD/- SD/- (K.D. RANJAN) (C.L. SETHI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 6 TH MAY, 2011. 19 ITA NOS.116 & 323/DEL/2011 COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.
