Philips Software Centre (P) Ltd. v. Asstt. CIT

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The Tax Publishers2008 TaxPub(DT) 2317 (Bang-Trib) : (2009) 027 (II) ITCL 0574 : (2008) 119 TTJ 0721 : (2008) 026 SOT 0226 : (2008) 015 DTR 0505 Philips Software Centre (P) Ltd. v. Asstt. CIT Income Tax Act, 1961 --Transfer pricing--Arm's length price--Computation--In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. To support the results achieved by applying the CPM, the assessee had also selected the Transactional Net Margin Method (TNMM) in its TP study. However, while conducting his comparability analysis and passing the order, the TPO did not provide any reasons for rejecting the CPM, which was selected as the most appropriate method by the assessee. Further, the TPO selected the TNMM as the most appropriate method, without sharing, with the assessee any analysis, basis or reasons. Likewise, where a transfer pricing assessment is conducted by the TPO/AO under section 92CA or 92C(3). *Held:* The TPO/AO has not discharged the onus of proving that the methodology followed by the assessee is erroneous in any manner, before rejecting the same. TPO is not justified in considering another method as the most appropriate method, where there was no shortcomings in the method adopted by the assessee in the TP study. The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP study, and also in using the Prowess database. The TPO did not provide any reason for deviating from the TP study in respect of these matters. Section 92C read with rule 10C provide that the ALP of an international transaction shall be determined by any of the five prescribed methods, being the most appropriate method. In connection with the above, while conducting the TP study, the counsel had selected the CPM as the most appropriate method, after evaluating the criterion laid down in rule 10C(2). Further, the guidance issued by the ICAI, relating to issue of Form 3CEB by chartered accountants, expains the use of the most appropriate method. The guidance issued by the ICAI clearly specifies that selection of the most appropriate method should be based on a meticulous appraisal of facts and circumstances. In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. To support the results achieved by applying the CPM, the assessee had also selected the Transactional Net Margin Method (TNMM) in its TP study. However, while conducting his comparability analysis and passing the order, the TPO did not provide any reasons for rejecting the CPM, which was selected as the most appropriate method by the assessee. Further, the TPO selected the TNMM as the most appropriate method, without sharing, with the assessee any analysis, basis or reasons. Which led him to (a)select the TNMM as the most appropriate method; and (b)reject CPM, as selected by the assessee, as the most appropriate method. Sections 92D and 92E cast a responsibility on the assessee to prove that the requisite transfer pricing documentation, including the comparability analysis has been conducted and maintained by the assessee. Likewise, where a transfer pricing assessment is conducted by the TPO/AO under section 92CA or 92C(3), it is the duty of the TPO/AO to prove that such documentation maintained by the assessee is deficient or insufficient in any manner. Only if such deficiency or insufficiency is found in the documentation, the TPO/AO can conduct a scrutiny. [Paras 5.10] However, during the transfer pricing assessment proceedings, the TPO, without providing any reasons, followed a different methodology and selected a different method, completely disregarding the statutory provisions. The TPO/AO has not discharged the onus of proving that the methodology followed by the assessee is erroneous in any manner, before rejecting the same. TPO is not justified in considering another method as the most appropriate method, even though there is no shortcoming in the method adopted by the assessee in the TP study. [Para 5.10] A look at the show-cause notice referred to by the Departmental Representative clearly shows that the argument of the Departmental Representative is erroneous as in the said notice, no reasons were given for rejecting CPM as the most appropriate method. Further, neither were any reasons set out in the order of the TPO and nor has the Departmental Representative suggested that the reasons have been given elsewhere. [Para 5.11] In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate . [Para 5.12] Income Tax Act, 1961 Section 92C Income Tax Rules, 1962 Rule 10C Income Tax Act, 1961 --Transfer pricing--Arm's length price--Selection of comparable cases--The fact that the TPO conducted the comparability analysis after the 'specified date' clearly proves that such comparability did not use data which was contemparaneous and hence is not in compliance with provision of rules 10D(5) and provisions of rule 10B(4), the study conducted by the TPO was not in conformity with the said provisions of section 92C and was not, therefore, applicable. The Act and the Rules provide that while conducting the comparability analysis, the data to be used should be contemporaneous. In this regard, the requirement of law is two-fold : (a) Data to be used for analyzing the comparability of an uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into (rule 10B(4)3; and (b) Amongst other things, the data which is used for the comparability analysis should exist latest by the specified date (rule 10D(4)). It is important to note that rule 10B(4) casts an obligation on the taxpayer to conduct the comparability analysis using data for the relevant financial year. However, rule 10D(4) makes it mandatory for the taxpayer to ensure data that exists by the time specified under the Act, i.e., 31st October, of the relevant assessment year. Further, rule 10C(2)(c) also clarifies that availability of data is a significant factor in conducting a comparability analysis, whether it relates to selection of the most appropriate method or arriving at a set of comparables or computing the margins of such comparables. [Paras 5.5] The TPO erred in conducting a fresh study for the purpose of passing his order. The study conducted by the TPO is not in conformity with the provisions of rules 10B(4) and 10D(4). [Para 5.71] Income Tax Act, 1961 Section 92C Income Tax Act, 1961 Section 92D Income Tax Act, 1961 --Transfer pricing--Arm's length price--Selection of comparable cases vis-a-vis data base--In the TP study conducted by the assessee, the database used for conducting the comparability analysis was Capitaline 2000 ('Capitaline'). The said database is compiled by Capital Market PI Ltd. and is a comprehensive interactive database of around 7,000 Indian companies, covering all companies listed on major stock exchanges like BSE/NSE plus other big unlisted companies. The TP was, therefore, not justified in rejecting assessee's data base without recording any reason. In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. In the TP study conducted by the assessee, the database used for conducting the comparability analysis was Capitaline 2000 ('Capitaline'). The said database is compiled by Capital Market Publishers India Ltd. and is a comprehensive interactive database of around 7,000 Indian companies, covering all companies listed on major stock exchanges like BSE/NSE plus other big unlisted companies. However, for the purpose of concluding the transfer pricing assessment, the TPO used another database (i.e., Prowess). The TPO did not: (a) question the database used by the assessee; (b) question the data which emanated from such database; (c) specifically reject the database used by the assessee; and (d) provide any reason for using the new database. [Para 5.12] Income Tax Act, 1961 Section 92C Income Tax Act, 1961 --Transfer pricing--Arm's length price--Computation--Proviso to section 92C(2) provides that while arriving at the ALP, at the option of the assessee, a price which may vary from the arithmetical mean by 5 per cent, can be considered as the ALP. The only criterion for availing itself of the 5 per cent variation is that the same is available at the option of the assessee. *Held:* Based on the above, one can reasonably conclude that a 5 per cent variance is allowed as a standard deduction which should be allowed while making an adjustment to the ALP, as declared by the assessee. The TPO/CIT(A) has not applied the proviso to section 92C(2), i.e., they have not allowed a standard deduction of 5 per cent from the arithmetical mean and have thus ignored a specific and mandatory provision of law. The proviso to section 92C(2) provides that while arriving at the ALP, at the option of the assessee, a price which may vary from the arithmetical mean by 5 per cent, can be considered as the ALP. The language of proviso to section 92C(2) is clear and even without reference to extracts from 'Explanatory Memorandum to Finance Bill, 2002' and 'Notes on Clauses to Finance Bill, 2002', no different view can be formed. The only criterion for availing itself of the 5 per cent variation is that the same is available at the option of the assessee. Based on the above, one can reasonably conclude that a 5 per cent variance is allowed as a standard deduction which should be allowed while making an adjustment to the ALP, as declared by the assessee. The TPO/CIT(A) has not applied the proviso to section 92C(2), i.e., they have not allowed a standard deduction of 5 per cent from the arithmetical mean and have thus ignored a specific and mandatory provision of law. [Para 5.50] The proviso to section 92C(2) of the Act provides a standard deduction of 5 per cent to the taxpayers. The only condition for availing this benefit is that it is subject to the option of the taxpayer. [Para 5.71(xi)] Income Tax Act, 1961 Section 92C SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2008 TaxPub(DT) 2317 (Bang-Trib) : (2009) 027 (II) ITCL 0574 : (2008) 119 TTJ 0721 : (2008) 026 SOT 0226 : (2008) 015 DTR 0505

Philips Software Centre (P) Ltd. v. Asstt. CIT

Income Tax Act, 1961

--Transfer pricing--Arm's length price--Computation--In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. To support the results achieved by applying the CPM, the assessee had also selected the Transactional Net Margin Method (TNMM) in its TP study. However, while conducting his comparability analysis and passing the order, the TPO did not provide any reasons for rejecting the CPM, which was selected as the most appropriate method by the assessee. Further, the TPO selected the TNMM as the most appropriate method, without sharing, with the assessee any analysis, basis or reasons. Likewise, where a transfer pricing assessment is conducted by the TPO/AO under section 92CA or 92C(3). Held: The TPO/AO has not discharged the onus of proving that the methodology followed by the assessee is erroneous in any manner, before rejecting the same. TPO is not justified in considering another method as the most appropriate method, where there was no shortcomings in the method adopted by the assessee in the TP study. The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP study, and also in using the Prowess database. The TPO did not provide any reason for deviating from the TP study in respect of these matters.

Section 92C read with rule 10C provide that the ALP of an international transaction shall be determined by any of the five prescribed methods, being the most appropriate method. In connection with the above, while conducting the TP study, the counsel had selected the CPM as the most appropriate method, after evaluating the criterion laid down in rule 10C(2). Further, the guidance issued by the ICAI, relating to issue of Form 3CEB by chartered accountants, expains the use of the most appropriate method. The guidance issued by the ICAI clearly specifies that selection of the most appropriate method should be based on a meticulous appraisal of facts and circumstances. In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. To support the results achieved by applying the CPM, the assessee had also selected the Transactional Net Margin Method (TNMM) in its TP study. However, while conducting his comparability analysis and passing the order, the TPO did not provide any reasons for rejecting the CPM, which was selected as the most appropriate method by the assessee. Further, the TPO selected the TNMM as the most appropriate method, without sharing, with the assessee any analysis, basis or reasons. Which led him to (a)select the TNMM as the most appropriate method; and (b)reject CPM, as selected by the assessee, as the most appropriate method. Sections 92D and 92E cast a responsibility on the assessee to prove that the requisite transfer pricing documentation, including the comparability analysis has been conducted and maintained by the assessee. Likewise, where a transfer pricing assessment is conducted by the TPO/AO under section 92CA or 92C(3), it is the duty of the TPO/AO to prove that such documentation maintained by the assessee is deficient or insufficient in any manner. Only if such deficiency or insufficiency is found in the documentation, the TPO/AO can conduct a scrutiny. [Paras 5.10] However, during the transfer pricing assessment proceedings, the TPO, without providing any reasons, followed a different methodology and selected a different method, completely disregarding the statutory provisions. The TPO/AO has not discharged the onus of proving that the methodology followed by the assessee is erroneous in any manner, before rejecting the same. TPO is not justified in considering another method as the most appropriate method, even though there is no shortcoming in the method adopted by the assessee in the TP study. [Para 5.10] A look at the show-cause notice referred to by the Departmental Representative clearly shows that the argument of the Departmental Representative is erroneous as in the said notice, no reasons were given for rejecting CPM as the most appropriate method. Further, neither were any reasons set out in the order of the TPO and nor has the Departmental Representative suggested that the reasons have been given elsewhere. [Para 5.11] In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate . [Para 5.12]

Income Tax Act, 1961 Section 92C

Income Tax Rules, 1962 Rule 10C

Income Tax Act, 1961

--Transfer pricing--Arm's length price--Selection of comparable cases--The fact that the TPO conducted the comparability analysis after the 'specified date' clearly proves that such comparability did not use data which was contemparaneous and hence is not in compliance with provision of rules 10D(5) and provisions of rule 10B(4), the study conducted by the TPO was not in conformity with the said provisions of section 92C and was not, therefore, applicable.

The Act and the Rules provide that while conducting the comparability analysis, the data to be used should be contemporaneous. In this regard, the requirement of law is two-fold : (a) Data to be used for analyzing the comparability of an uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into (rule 10B(4)3; and (b) Amongst other things, the data which is used for the comparability analysis should exist latest by the specified date (rule 10D(4)). It is important to note that rule 10B(4) casts an obligation on the taxpayer to conduct the comparability analysis using data for the relevant financial year. However, rule 10D(4) makes it mandatory for the taxpayer to ensure data that exists by the time specified under the Act, i.e., 31st October, of the relevant assessment year. Further, rule 10C(2)(c) also clarifies that availability of data is a significant factor in conducting a comparability analysis, whether it relates to selection of the most appropriate method or arriving at a set of comparables or computing the margins of such comparables. [Paras 5.5] The TPO erred in conducting a fresh study for the purpose of passing his order. The study conducted by the TPO is not in conformity with the provisions of rules 10B(4) and 10D(4). [Para 5.71]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961 Section 92D

Income Tax Act, 1961

--Transfer pricing--Arm's length price--Selection of comparable cases vis-a-vis data base--In the TP study conducted by the assessee, the database used for conducting the comparability analysis was Capitaline 2000 ('Capitaline'). The said database is compiled by Capital Market PI Ltd. and is a comprehensive interactive database of around 7,000 Indian companies, covering all companies listed on major stock exchanges like BSE/NSE plus other big unlisted companies. The TP was, therefore, not justified in rejecting assessee's data base without recording any reason.

In the TP study, the assessee had carefully evaluated the five prescribed methods, and based on the facts, the assessee selected CPM as the most appropriate method. In the TP study conducted by the assessee, the database used for conducting the comparability analysis was Capitaline 2000 ('Capitaline'). The said database is compiled by Capital Market Publishers India Ltd. and is a comprehensive interactive database of around 7,000 Indian companies, covering all companies listed on major stock exchanges like BSE/NSE plus other big unlisted companies. However, for the purpose of concluding the transfer pricing assessment, the TPO used another database (i.e., Prowess). The TPO did not: (a) question the database used by the assessee; (b) question the data which emanated from such database; (c) specifically reject the database used by the assessee; and (d) provide any reason for using the new database. [Para 5.12]

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961

--Transfer pricing--Arm's length price--Computation--Proviso to section 92C(2) provides that while arriving at the ALP, at the option of the assessee, a price which may vary from the arithmetical mean by 5 per cent, can be considered as the ALP. The only criterion for availing itself of the 5 per cent variation is that the same is available at the option of the assessee. Held: Based on the above, one can reasonably conclude that a 5 per cent variance is allowed as a standard deduction which should be allowed while making an adjustment to the ALP, as declared by the assessee. The TPO/CIT(A) has not applied the proviso to section 92C(2), i.e., they have not allowed a standard deduction of 5 per cent from the arithmetical mean and have thus ignored a specific and mandatory provision of law.

The proviso to section 92C(2) provides that while arriving at the ALP, at the option of the assessee, a price which may vary from the arithmetical mean by 5 per cent, can be considered as the ALP. The language of proviso to section 92C(2) is clear and even without reference to extracts from 'Explanatory Memorandum to Finance Bill, 2002' and 'Notes on Clauses to Finance Bill, 2002', no different view can be formed. The only criterion for availing itself of the 5 per cent variation is that the same is available at the option of the assessee. Based on the above, one can reasonably conclude that a 5 per cent variance is allowed as a standard deduction which should be allowed while making an adjustment to the ALP, as declared by the assessee. The TPO/CIT(A) has not applied the proviso to section 92C(2), i.e., they have not allowed a standard deduction of 5 per cent from the arithmetical mean and have thus ignored a specific and mandatory provision of law. [Para 5.50] The proviso to section 92C(2) of the Act provides a standard deduction of 5 per cent to the taxpayers. The only condition for availing this benefit is that it is subject to the option of the taxpayer. [Para 5.71(xi)]

Income Tax Act, 1961 Section 92C