Transfer pricing

If the difference in the ALP price determined by the TPO in international transaction and the revenue received by the assessee does not exceed the safe harbour of -/+ 5 per cent as per proviso (2) of s 92C (pre-amended) no addition can be made to the income of the assessee on account of transfer pricing adjustment — as held by DelTrib in iPolicy Network (P) Ltd v ITO — In favour of: The Assessee ; ITA No. 5504 (Delhi) of 2010 : Assessment Year: 2006–2007

Retrospective or prospective applicability of a provision cannot be decided simply on the basis of the view taken by CBDT ignoring the plain statutory language.

Amended proviso to sub-s 2 of s 92C is prospectively applicable.

iPolicy Network (P) Ltd. v ITO

ITAT, Delhi

IT Appeal No. 5504 (Delhi) of 2010

Assessment Year 2006-07

I.P. Bansal, JM and Shamim Yahya, AM

Decided on: 17 June 2011

Counsel appeared:

Ajay Vohra, Neeraj K. Jain, Abhishek Agarwal and Pallav Raghuvanshi for the appellant

Narender K. Chand for the respondent

Order

I.P. Bansal, JM

1. This is an appeal filed by the assessee under the provisions of section 253(1)(d) of the Incometax

Act, 1961, against the order passed by the Assessing Officer dated 13-10-2010 under section

143(3) read with section 144C of the Income-tax Act, 1961 (the Act).

2. The main ground raised is that the Assessing Officer has erred on facts and in law in proposing

to complete the assessment under section 144C/143(3) of the Income-tax Act at an income of

Rs.75,09,415.

3. The assessee company is 99.96 per cent subsidiary company of Policy Networks Inc., USA

(Policy Inc.) and is an offshore development center developing and exporting the application

software to be integrated in the security products marked by Policy Inc. It entered into

international transaction with its associate enterprises for an aggregate sum of Rs.14,33,33,713.

Reference was made to Transfer Pricing Officer to determine the arm's length price of such

transaction under section 92CA(1) of the Act. The TPO vide its order dated 8-10-2009 has

computed the arm's length price OP/TC at Rs.15,08,43,128 and a difference of Rs.75,09,415 is

arrived at which has been added to the income of the assessee on account of transfer pricing

adjustment. The assessee for determining the arm's length price has adopted TNMM method.

According to search and screening process based on a review of business description 101

companies were selected as reasonable functional comparables and average of OP/TC on

comparable companies, mean margin was arrived at (-) 0.33 per cent. OP/TC of the assessee

company was 10.06 per cent and, accordingly, in the TP study, the assessee disclosed the

international transaction being at arm's length price.

4. The TPO in its order had applied various additional filters and has rejected all the comparables

except three parties mentioned below and has arrived at OP/TC percentage of 15.64 per cent:-

Sl. No. Name of the company OP/TC%

1. SoftPro Systems 18.03

2. Fortune Informatics Limited 8.05

3. Sankhya Infotech 20.84

Average 15.64

5. Accordingly, addition was made of Rs.75,09,415 being the difference in the revenue shown by

the assessee and the arm's length price determined by the TPO.

6. The assessee, apart from challenging the determination of arm's length price on the basis of

rejection of various comparables by contending that those companies have wrongly been rejected

by the TPO, also has assailed the addition on the ground that upon application of proviso, as it

stood before amendment, the addition was not called for as the added amount falls within the safe

harbour of ±5 per cent. A calculation in this regard has been furnished by the assessee vide

following table to show that the addition was not called for as the difference did not exceed 5 per

cent:-

Particulars As per the

assessee

As per the

TPO

Total cost of the assessee 130,442,000 130,442,000

Arm's length price margin of 15.64% (A) 150,843,128 150,843,128

5% of the ALP as determined (B) 7,542,156

ALP of the international transactions as per the proviso to

section 92C(2) [(A)-(B)]

143,300,972

Revenue Shown 143,333,713 143,333,713

Difference (32741) 7,509,415

7. Referring to these facts, upon short issue, it was the case of ld. AR that even if one does not go

into other aspects of this appeal i.e., challenging the arm's length price determined by the TPO

regarding the rejection of various other comparables, etc., the appeal should be decided in favour

of assessee as the difference in the arm's length price determined by the TPO and the revenue

received by the assessee does not exceed the safe harbour of -/+ 5 per cent as per proviso to subsection

(2) of section 92C of the Act.

8. It was submitted by ld. AR that the benefit of proviso is available to the assessee according to

the following decisions:-

(i) Development Consultants (P.) Ltd. v. Dy. CIT [2008] 115 TTJ 577/23 SOT 455 (Kol.)

(ii) Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.)

(iii) Dy. CIT v. Sony India (P.) Ltd. [2008] 114 ITD 448 (Delhi)

(iv) Skoda Auto India (P.) Ltd. v. Asstt. CIT [2009] 122 TTJ 699/30 SOT 319 (Pune)

(v) Electrobug Technologies Ltd. v. Asstt. CIT [2010] 37 SOT 270 (Delhi)

(vi) SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 (Bang.)

(vii) Adobe Systems India (P.) Ltd. v. Addl. CIT [2011] 44 SOT 49 (Delhi) (URO)

9. He further submitted that recently Delhi ITAT in the case of Haworth (India) (P.) Ltd. in

Income-tax Appeal No. 5341/Delhi/2010 vide its order dated 29-4-2011 has held that the benefit

of safe harbour of ±5 per cent is available to the assessee in a case where the arm's length price

has been worked out by the TPO on the basis of more than one comparables. He, therefore,

contended that on the short ground, the aforementioned addition should be deleted.

10. On the other hand, the first and foremost contention raised by ld. DR was that the safe

harbour of ±5 per cent should be computed on the revenue shown to have been received by the

assessee in respect of international transaction. He contended that if it is so done, then, the

assessee's case will not fall under that safe harbour. Therefore, he contended that the benefit as

claimed by the assessee is not available to it. He submitted that post amendment the proviso to

sub-section (2) of section 92C as inserted by the Finance (No. 2) Act of 2009 read as under:-

"Provided that where more than one price is determined by the most appropriate method,

the arm's length price shall be taken to be the arithmetical mean of such prices."

Provided further that if the variation between the arm's length price so determined and

price at which the international transaction has actually been undertaken does not exceed

five per cent of the latter, the price at which the international transaction has actually

been undertaken shall be deemed to be the arm's length price."

11. He submitted that so as it relates to applicability of the aforementioned amended proviso, the

applicability of the provision has been explained in CBDT Circular No. F.142/13/2010-SO (TPL)

dated 30-9-2010 (Corrigendum) as follows:-

"This amendment will take effect from 1st October, 2009 and shall accordingly apply in

relation to all cases in which proceedings are pending before the Transfer Pricing Officer

(TPO) on or after such date."

12. He, therefore, contended that the amended proviso should be construed retrospectively and, in

this regard, ld. DR relied upon the following decisions:-

(i) K. Govindan and Sons v. CIT [2001] 247 ITR 192 (SC)

(ii) Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677/114 Taxman 94 (SC)

(iii) CIT v. Soft Beverages (P.) Ltd. [2005] 272 ITR 270 (Mad.).

13. Thus, it was pleaded by ld. DR that the amendment being clarificatory in nature should be

construed retrospectively. He also referred to the earlier decision of the Tribunal in the case of

Dy. CIT v. Global Vantedge (P.) Ltd. v. Dy. CIT [2010] 37 SOT 1 (Delhi) to contend that

wherever difference exceeds 5 per cent, the benefit of the poviso cannot be given to the assessee.

14.. In the rejoinder ld. AR submitted that 5 per cent safe harbour has to be computed on the

arithmetical mean adopted by the TPO for computing arm's length price, hence, ld. DR is wrong

in contending that assessee's case does not fall within the safe harbour of ±5 per cent. It was

further submitted by ld. AR that the proviso is a substantive provision imposing liability on the

assessee, hence, it cannot be construed retrospectively and, for this purpose, ld. AR has placed

reliance upon the Special Bench decision of Delhi ITAT in the case of ITO v. Ekta Promoters (P.)

Ltd. [2008] 113 ITD 719 and specifically to paras 56 to 58 thereof. He also relied upon the

Special Bench decision in the case of Kuber Tobacco Products (P.) Ltd. v. Dy. CIT [2009] 117

ITD 273 (Delhi).

15. We have carefully considered the rival submissions in the light of the material placed before

us. To resolve the controversy raised by both the parties in the present appeal, it will be necessary

to first examine the pre and post amendment change in the proviso to sub-section (2) of section

92C. For that purpose, it will be necessary to reproduce the proviso pre-amended and post

amended. The preamended proviso read as under:-

"The most appropriate method referred in sub-section (1) shall be applied for the

determination of arm's length price in the manner as may be prescribed.

Provided that where more than one price is determined by the most appropriate method,

the arm's length price shall be taken to be the arithmetical 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 5 per cent of such arithmetical mean."

16. The post amended proviso which has been inserted by the Finance (No. 2) Act, 2009 read as

under:-

"Provided that where more than one price is determined by the most appropriate method,

the arm's length price shall be taken to be the arithmetical mean of such prices."

Provided further that if the variation between the arm's length price so determined and

price at which the international transaction has actually been undertaken does not exceed

five per cent of the latter, the price at which the international transaction has actually

been undertaken shall be deemed to be the arm's length price."

17. Before going into the details, it will be relevant to mention that the Finance Act, 2001 had

substituted the existing section 92 of the Income-tax Act by new sections 92 and 92A to 92F.

Thus, new provisions laid down the norms to assess the income arising from an international

transaction between associate enterprises having regard to the arm's length price. vide Circular

No. 12 dated 23-8-2001, keeping in view the new type of legislation, in the initial years and its

implementation certain concessions were granted which read as follows:-

"However, this is a new legislation. In the initial years of its implementation, there may

be room for different interpretations leading to uncertainties with regard to determination

of arm's length price of an international transaction. While it would be necessary to

protect our tax base, there is a need to ensure that the taxpayers are not put to avoidable

hardship in the implementation of these regulations.

In this background the Board have decided the following:

(i) The Assessing Officer shall not make any adjustment to the arm's length price

determined by the taxpayer, if such price is up to 5 per cent less or up to 5 per cent more

than the price determined by the Assessing Officer. In such cases the price declared by

the taxpayer may be accepted.

(ii) The provisions of sections 92 and 92A to 92F come into force with effect from 1st

April, 2002, and are accordingly applicable to the assessment year 2002-05 and

subsequent years. The law requires the associated enterprises to maintain such documents

and information relating to international transactions as may be prescribed. However, the

necessary rules could be framed by the Board only after the Finance Bill received the

assent of the President and have just been notified. Therefore, where an assessee has

failed to maintain the prescribed information or documents in respect of transactions

entered into during the period 1-4-2001 to 31-8-2001 the provisions of section 92C(3)

should not be invoked for such failure. Penalty proceedings under section 271AA or

271G should also not be initiated for such defaults.

(iii) It should be made clear to the concerned Assessing Officers that where an

international transaction has been put to a scrutiny, the Assessing Officer can have

recourse to sub-section (3) of section 92C only under the circumstances enumerated in

clauses (a) to (d) of that sub-section and in the event of material information or

documents in his possession on the basis of which an opinion can be farmed that any such

circumstance exists. In all other cases, the value of the international transaction should be

accepted without further scrutiny."

18. Later on, the relaxation with regard to safe harbour of ±5 per cent was brought into the statute

by the Finance Act, 2002 with effect from 1-4-2002 which has been reproduced above and which

is a proviso pre-amendment.

19. The post amendment proviso has substituted the earlier proviso with effect from 1-10-2009.

The explanatory notes to provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010

dated 3-6-2010 as per para 37.5 describe the applicability of the amendment in the proviso as

under:-

"37.5 Applicability.-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."

20. However, according to the corrigendum dated 30-9-2010 issued by the Government of India,

M/o Finance, Deptt. of Revenue, Central Board of Direct Taxes [F.No. 142/13/2010-SO (TPL)],

it was described as under:-

"F.No. 142/13/2010-SO (TPL)

Government of India

Ministry of Finance

Department of Revenue

Central Board of Direct Taxes

New Delhi, the 30th September, 2010

CORRIGENDUM

No. (F. No. 142/13/2010-SO(TPL). In partial modification of Circular No. 5/2010 dated

3-6-2010,

(i) in para 37.5 of the said Circular, for the lines "the above amendment has been made

applicable with effect from 1st April, 2009 and will accordingly apply in respect of

assessment year 2009-10 and subsequent years."

The following lines shall be read;

"The above amendment has been made applicable with effect from 1st October 2009 and

shall accordingly apply in relation to all cases in which proceedings are pending before

the Transfer Pricing Officer (TPO) on or after such date."

(ii) in para 38.3, for the date "1st October, 2009", the following date shall be read: "1st

April, 2009."

21. On the basis of the aforementioned development and corrigendum, it is the case of ld. DR that

the date of order passed by the TPO is 8-10-2009 and the amended proviso had come into

existence on 19th day of August, 2009 when Finance (No. 2) Act, 2009 had received the assent of

the President, therefore, according to the corrigendum the amended proviso will be applicable in

relation to the cases in which the proceedings were pending before the Transfer Pricing Officer

(TPO) on or after such date. Thus, it was submitted by ld. DR that only amended proviso is

applicable in the case of the assessee and the assessee's case should be decided in view of post

amended proviso. This argument has been taken by ld. DR for the reason that if the amended

proviso is taken into consideration, then, safe harbour of ±5 per cent will be reckoned from the

price received/paid by an assessee to/from its associate enterprise whereas if the case of the

assessee will fall under the pre-amended proviso, then, safe harbour will be reckoned from the

arm's length price determined by the TPO in a case where more than one price is determined by

him by the most appropriate method. The case of the assessee fall within the marginal limit and,

therefore, it is important to resolve this controversy first.

22. The statute (Finance (No. 2) Act, 2009) while bringing substituted proviso stated its

applicability with effect from 1-10-2009 whereas when explanatory notes to the provisions of the

Finance (No. 2) Act, 2009 was issued vide Circular No. 5/2010 dated 3-6-2010 it was incorrectly

stated that the above amendment has been made applicable with effect from 1-4-2009 whereas the

statute describe that it has been brought with effect from 1-10-2009, secondly, it explained that

accordingly the amended proviso will be applicable in respect of 2009-10 and subsequent years,

but, later on the Board has changed its stand and it describe that it shall apply in relation to all

cases in which proceedings are pending before the TPO on or after such date. Therefore, till

corrigendum is issued on 30-9-2010, the position explained by the Board with regard to the

amended proviso was that it shall be applicable in respect of assessment years 2009-10 and

subsequent years and it was not the explanation of the CBDT that it shall apply to all cases in

which proceedings are pending before the TPO on or after such date. The corrigendum dated 30-

9-2010 has only brought such position.

23. It is difficult to accept the argument of ld. DR that retrospective or prospective applicability of

a provision should be decided in a way which has been explained by CBDT. The retrospective

applicability of a provision is to be seen purely in the light of the statutory provisions and the

parameters laid down by the principles of interpretation. It cannot be decided simply on the basis

of the view taken by CBDT ignoring the plain statutory language. The view expressed by the

CBDT in the explanatory notes may in some circumstances work as a guidance, but they are not

final words. The statute itself provide that amended proviso will be applicable with effect from 1-

10-2009 and this position has not been changed and has been accepted in the corrigendum itself

that this amendment has been made applicable with effect from 1-10-2009 in place of 1-4-2009

mentioned in the earlier Circular. Now, it is a question that whether by way of corrigendum can it

be said that the amended proviso will be applicable in relation to all cases in which the

proceedings are pending before TPO on or after such date. This corrigendum has been issued on

30-9-2010. If it has to be decided only by the CBDT, then, it can be said that on the date when

TPO passed his order, this corrigendum did not exist. Therefore, we find no force in the argument

of ld. DR that the case of the assessee should be considered in the light of the post amended

proviso, because of the reason that in the aforementioned corrigendum, it has been stated so.

24. Otherwise also as per well settled law, the first and foremost rule of construction of

interpretation is that in the absence of anything in the enactment to show that it is to have

retrospective operation and when amendment relates to a procedural provision resulting into

creating a new disability or application and which imposes new duty in respect of transactions

already completed, then, the said procedural provision also cannot be applied retrospectively.

Similar is the position where the statute not only changes the procedure, but also creates new

rights and liabilities, the same shall be construed to be prospective in operation unless otherwise

provided for either expressly or by necessary implication. This has so been held by the Special

Bench in the case of Kuber Tobacco Products (P.) Ltd. (supra).

25. In the case of ITO v. Ekta Promotors (P.) Ltd. (supra), it is held that in the fiscal legislation, if

a provision is brought for imposing any liability, the normal presumption will be that it has no

retrospective operation and it is a cardinal principle of tax law that law to be applied is the law

which is in force in the assessment year unless otherwise provided expressly or by necessary

implication.

26. If the unamended proviso is compared with the amended proviso, then, it is clearly noticed

that there is a substantial change in the relief given to the assessee. By the unamended proviso, an

option was given to the assessee to have its price of international transaction in variation of (±) 5

per cent of arithmetical mean through which the arm's length price is determined by the TPO by

adopting most appropriate method in a case where more than one price is determined by the said

appropriate method. By the amended proviso, firstly it has been provided that in a case where

more than one price is determined by the most appropriate method, the arm's length price will be

the price as determined by adopting arithmetical mean of such prices. It is further provided that if

the variation between arm's length price so determined and price at which international

transaction has actually been undertaken and it does not exceed 5 per cent of the latter, then, the

price at which the international transaction has actually been undertaken shall be deemed to be

the arm's length price. Thus, a deeming provision has been created to adopt an arm's length price

if the price actually undertaken by the assessee does not exceed 5 per cent of the amount at which

international transaction has actually been undertaken. Thus, 5 per cent difference has to be

reckoned from the price at which international transaction has actually been undertaken instead of

reckoning from price which is determined by the TPO, which was the position under unamended

proviso. Thus, there is a basic difference in both the provisos i.e., pre-amended and post

amended.

27. A bare reading of the pre amended proviso will clearly reveal that in a case where more than

one price is determined by the most appropriate method, the arm's length price shall be taken to

be the arithmetical mean of such prices, or at the option of the assessee, a price which may vary

from the arithmetical mean for an amount not exceeding 5 per cent of such arithmetical mean.

The arithmetical mean in the present case is 15.64 per cent and by adopting the same, the arm's

length price has been determined at Rs.15,08,43,128. The arithmetical mean in the present case

has been computed on the basis of three comparables, therefore, it is a case where more than one

price is determined by the most appropriate method which is TNMM. If it is so, then, 5 per cent

of a price which is determined by calculating the arithmetical mean is to be taken as the relevant

difference for computing the benefit of safe harbour of ±5 per cent. In other words, the safe

harbour has to be computed with reference to arm's length price determined by the TPO. The 5

per cent difference of arm's length price determined by the TPO comes to Rs.75,42,156 and if the

same is included in the revenue shown to be received by the assessee, the total will come to

Rs.15,08,75,869, which is in excess of arm's length price determined by the TPO. Therefore, the

difference in the arm's length price determined by the TPO and charged by the assessee is less

than 5 per cent. Therefore, applying the unamended proviso the addition on that very ground has

to be deleted and is accordingly deleted.

28. As we have deleted the addition by giving the benefit of the proviso, we do not consider it just

and proper to go into the other aspects on which also the assessee has assailed the addition as

adjudication of other issues will be of academic in nature.

29. In the result, the appeal filed by the assessee is allowed in the manner aforesaid.