Tally Solutions (P.) Ltd. v. Deputy Commissioner of Income tax

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The Tax Publishers2012 TaxPub(DT) 1179 (Bang-Trib) : (2012) 144 TTJ 0157 : (2011) 048 SOT 0110 : (2011) 064 DTR 0289 : (2012) 013 ITR (Trib) 0245 INCOME TAX ACT, 1961 --Refund--Interest under section 234DChargeability--The levy of interest udner section 234D is a legal ground which is chargeable for the assessment year 2006-07, following the finding of the Hon'ble Delhi E Special bench in the case of ITO v. Ekta Promoters (P) Ltd. (2008) 113 ITD 719 (Del) : 2008 TaxPub(DT) 2148 (Del-Trib). Income Tax Act, 1961 Section 234D INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPFormation of an considered opinion'--It was the contention of the assessee that the reference of its case to the TPO by the assessing officer was not in accordance with the law since, according to the assessee, as per the ruling of Hon'ble Delhi High Court in the case of Sony India (P.) Ltd. v. CBDT (2007) 288 ITR 52 : 2007 TaxPub(DT) 0661 (Del-HC), a prima facie satisfaction is only applicable when the taxpayer is given a second innings to explain his case before the assessing officer after the TPO reference is received.Held: The decision to make a reference does not in any manner visit the assessee with any civil consequence. The decision is to be taken by the assessing officer having regard to the question whether it will be proper for the assessing officer himself to determine the arms length price or it will be expedient to have it determined by the Transfer Pricing Officer. There is the safeguard of seeking prior approval of the CIT. Whether computation of the arms length price is made by one officer or by the other does not in any manner affect the assessee. Even though the assessing officer may in view of the latest amendment be bound by the computation by the Transfer Pricing Officer, the assessee has opportunity to challenge the same at higher levels as per hierarchy laid down in the Statute. There is nothing in section 92CA to suggest that the assessing officer should hear the assessee or record reasons before making a reference to the TPO nor is there anything in the section to suggest that the assessing officer should ask the assessee whether he should himself proceed to determine the arms length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessment. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Boards Instruction No. 3 of 2003 dated 20-5-2003 the CBDT decided that wherever the aggregate value of international transactions exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the assessing officer to refer all the cases wherever the aggregate value of international transactions is more than Rs. 5 crores. These instructions are binding on all the assessing officers. In these cases, there is no need for the assessing officer to make a prima facie opinion, except that he/she needs to examine the 3CEB report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions, based on 3CEB report filed by the taxpayer before the assessing officer, exceeded Rs. 5 crores, he referred the case to the TPO. Therefore, there is no infirmity in referring the matter to TPO without forming 'a considered opinion'. Income Tax Act, 1961 Section 92C Income Tax Act, 1961 Section 92CA INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Computation on non-authorized metod--The other legal grievance of the assessee being that the TPO has followed Excess Earning Method and not Comparable Uncontrolled Price Method (CUP) as there was no comparables available with reference to the IPR sold by the Assessee. It was submitted that the TPO wrongly relied on an exposure draft of the International Valuation Standard, which is a non-statutory body, and moreover, the draft is dated 2009, after the date of sale of Tally by the assessee in 2006. It is further submitted that the TPO determined the ALP following the Excess Earning Method and made adjustment to the sale value of the IPR. However, as per section 92C of the Act, the ALP in relation to an international transaction has to be determined only with reference to the prescribed method. Held: It is to be pointed out in this case the sale of IPR is not a routine transaction involving regular purchase and sale. The assessee itself admits that there is no comparable and the assessee has arrived at the sale consideration at Rs. 38.50 crores based on its own valuation. The TPO has used an established method (Excess Earning Method) and this kind of valuation is upheld by the U.S Courts. In fact, this method supplements the valuation which in effect done by CUP method, with a final valuation determined being the comparable. The Bangalore Bench of the Tribunal in the case of Intel Asia Electronics Inc. v. had upheld that the valuation method can be adopted to arrive at CUP price. The DRP initially rejected the TPOs conclusion in arriving at the adjustment of Rs. 466.47 crores. On being directed by the DRP on the basis of the assessees strong objection, the TPO came up with a revised valuation report which suggests that the adjustment to be made at Rs. 222.13 crores. As the DRP was unable to bring the warring groups (as the learned TPO as well as the AR have disagreed to narrow down their differences to the revised valuation report of the TPO) to fore, it came up with a via media, according to which, the assessee was asked to submit its own valuation of the IPR. The assessee had arrived at the value on first method at Rs. 40.42 crores and by a second method at Rs. 64.05 crores with a fervent submission to adopt Rs.52.23 crores being average of the first and second methods which was, however, not found favour with the revenue. Strangely, the DRP upheld the revised valuation report of the learned TPO by terming the valuation reports furnished by the assessee as extremely perfunctory with no illustration as to how the report of the assessee had become as such. The adjustment to be made on the basis of the revised working of the TPO was opted at Rs. 222.13 crores as against Rs.466.47 crores adopted in the draft assessment order. To demonstrate further the genuineness in the transaction, the assessee, during the course of hearing, came up with alternative computation as detailed in its submission cited supra . According to various method adopted, the arms length price was less than what was the price received as admitted by the assessee at Rs. 38.50 crores. It is true that it is difficult to value business more particularly to value a closely-held concern because each company has its own unique characteristics. Often, consideration has to be given to the future profits the company will be able to earn. The valuation may be influenced by the reason for it. For example, a different approach may be appropriate for divorce litigation compared to the price to pay for a targeted company compared to valuation for estate tax purposes. Thus, valuation depends on the purpose at hand. The valuation process is an art and not a science, since everyones perception is slightly different. In litigation matters, the valuation method selected should be logically consistent, reasonable, cost-effective and simply explained. [Para 10.1] The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted cash flow (DCF) analysis which is known to economists for the times immemorial. Thus, the TPO used a reasonable well accepted method of valuation of intangibles including software products and accepted by courts in the countries like in USA, where the TP regime is well developed. [Para 10.2] The excess earning method adopted by the TPO to arrive at the ALP is correct, the assessees contention that the ALP should be computed based on actual sales and not projection adopted by TPO is rejection. [Para 10.2] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1179 (Bang-Trib) : (2012) 144 TTJ 0157 : (2011) 048 SOT 0110 : (2011) 064 DTR 0289 : (2012) 013 ITR (Trib) 0245

INCOME TAX ACT, 1961

--Refund--Interest under section 234DChargeability--The levy of interest udner section 234D is a legal ground which is chargeable for the assessment year 2006-07, following the finding of the Hon'ble Delhi E Special bench in the case of ITO v. Ekta Promoters (P) Ltd. (2008) 113 ITD 719 (Del) : 2008 TaxPub(DT) 2148 (Del-Trib).

Income Tax Act, 1961 Section 234D

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPFormation of an considered opinion'--It was the contention of the assessee that the reference of its case to the TPO by the assessing officer was not in accordance with the law since, according to the assessee, as per the ruling of Hon'ble Delhi High Court in the case of Sony India (P.) Ltd. v. CBDT (2007) 288 ITR 52 : 2007 TaxPub(DT) 0661 (Del-HC), a prima facie satisfaction is only applicable when the taxpayer is given a second innings to explain his case before the assessing officer after the TPO reference is received.Held: The decision to make a reference does not in any manner visit the assessee with any civil consequence. The decision is to be taken by the assessing officer having regard to the question whether it will be proper for the assessing officer himself to determine the arms length price or it will be expedient to have it determined by the Transfer Pricing Officer. There is the safeguard of seeking prior approval of the CIT. Whether computation of the arms length price is made by one officer or by the other does not in any manner affect the assessee. Even though the assessing officer may in view of the latest amendment be bound by the computation by the Transfer Pricing Officer, the assessee has opportunity to challenge the same at higher levels as per hierarchy laid down in the Statute. There is nothing in section 92CA to suggest that the assessing officer should hear the assessee or record reasons before making a reference to the TPO nor is there anything in the section to suggest that the assessing officer should ask the assessee whether he should himself proceed to determine the arms length price or should involve the TPO for this purpose. The reference is a step in the collection of material which might be useful for making assessment. No violation of any civil rights of the assessee is involved here. Mere reference does not tantamount to any adverse assessment or use of adverse material. Moreover, by virtue of Boards Instruction No. 3 of 2003 dated 20-5-2003 the CBDT decided that wherever the aggregate value of international transactions exceeds Rs. 5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. Thus, it is mandatory for the assessing officer to refer all the cases wherever the aggregate value of international transactions is more than Rs. 5 crores. These instructions are binding on all the assessing officers. In these cases, there is no need for the assessing officer to make a prima facie opinion, except that he/she needs to examine the 3CEB report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions, based on 3CEB report filed by the taxpayer before the assessing officer, exceeded Rs. 5 crores, he referred the case to the TPO. Therefore, there is no infirmity in referring the matter to TPO without forming 'a considered opinion'.

Income Tax Act, 1961 Section 92C

Income Tax Act, 1961 Section 92CA

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Computation on non-authorized metod--The other legal grievance of the assessee being that the TPO has followed Excess Earning Method and not Comparable Uncontrolled Price Method (CUP) as there was no comparables available with reference to the IPR sold by the Assessee. It was submitted that the TPO wrongly relied on an exposure draft of the International Valuation Standard, which is a non-statutory body, and moreover, the draft is dated 2009, after the date of sale of Tally by the assessee in 2006. It is further submitted that the TPO determined the ALP following the Excess Earning Method and made adjustment to the sale value of the IPR. However, as per section 92C of the Act, the ALP in relation to an international transaction has to be determined only with reference to the prescribed method. Held: It is to be pointed out in this case the sale of IPR is not a routine transaction involving regular purchase and sale. The assessee itself admits that there is no comparable and the assessee has arrived at the sale consideration at Rs. 38.50 crores based on its own valuation. The TPO has used an established method (Excess Earning Method) and this kind of valuation is upheld by the U.S Courts. In fact, this method supplements the valuation which in effect done by CUP method, with a final valuation determined being the comparable. The Bangalore Bench of the Tribunal in the case of Intel Asia Electronics Inc. v. had upheld that the valuation method can be adopted to arrive at CUP price.

The DRP initially rejected the TPOs conclusion in arriving at the adjustment of Rs. 466.47 crores. On being directed by the DRP on the basis of the assessees strong objection, the TPO came up with a revised valuation report which suggests that the adjustment to be made at Rs. 222.13 crores. As the DRP was unable to bring the warring groups (as the learned TPO as well as the AR have disagreed to narrow down their differences to the revised valuation report of the TPO) to fore, it came up with a via media, according to which, the assessee was asked to submit its own valuation of the IPR. The assessee had arrived at the value on first method at Rs. 40.42 crores and by a second method at Rs. 64.05 crores with a fervent submission to adopt Rs.52.23 crores being average of the first and second methods which was, however, not found favour with the revenue. Strangely, the DRP upheld the revised valuation report of the learned TPO by terming the valuation reports furnished by the assessee as extremely perfunctory with no illustration as to how the report of the assessee had become as such. The adjustment to be made on the basis of the revised working of the TPO was opted at Rs. 222.13 crores as against Rs.466.47 crores adopted in the draft assessment order. To demonstrate further the genuineness in the transaction, the assessee, during the course of hearing, came up with alternative computation as detailed in its submission cited supra . According to various method adopted, the arms length price was less than what was the price received as admitted by the assessee at Rs. 38.50 crores. It is true that it is difficult to value business more particularly to value a closely-held concern because each company has its own unique characteristics. Often, consideration has to be given to the future profits the company will be able to earn. The valuation may be influenced by the reason for it. For example, a different approach may be appropriate for divorce litigation compared to the price to pay for a targeted company compared to valuation for estate tax purposes. Thus, valuation depends on the purpose at hand. The valuation process is an art and not a science, since everyones perception is slightly different. In litigation matters, the valuation method selected should be logically consistent, reasonable, cost-effective and simply explained. [Para 10.1] The excess earning method is the method that is adopted by the TPO. We see no infirmity in adoption of this method for the simple reason that the relevant data is available with reasonable accuracy, closing in on real valuation of a software product. This valuation is upheld by the US courts while arriving at the sale value of a software product. Further, the valuation under the method mainly revolves around discounted cash flow (DCF) analysis which is known to economists for the times immemorial. Thus, the TPO used a reasonable well accepted method of valuation of intangibles including software products and accepted by courts in the countries like in USA, where the TP regime is well developed. [Para 10.2] The excess earning method adopted by the TPO to arrive at the ALP is correct, the assessees contention that the ALP should be computed based on actual sales and not projection adopted by TPO is rejection. [Para 10.2]