ITAT, BANGALORE: ONLY DATA OF RELEVANT FINANCIAL YEAR SHALL BE CONSIDERED FOR ASCERTAINING ALP IN AN INTERNATIONAL TRANSACTION

DCIT Circle-11 (4), Bangalore vs. Softbrands India (P.) Ltd [2017] 88 taxmann.com 263(Bangalore-Trib) ITAT, Bangalore upheld the order of the CIT(Appeals) by stating that “in terms of Rule 10B(4) (of Income Tax Rules, 1962) data to be used for comparability purpose of an uncontrolled transaction with international transactions shall be data of relevant financial year in which international transaction has been entered into. Otherwise, circumstances should justify the use of previous year data while determining the Arm’s Length Price (ALP)”. Facts of the Case
  • Softbrands India Pvt Ltd (assessee) is a company engaged in the business of software development, software consultancy and Information Technology Enabled Services (ITES). It is wholly owned subsidiary of Soft brands International Inc., USA which provides product and services to its group companies.
  • During the relevant Previous Year (PY) 2008-09, the assessee rendered software development services to its holding company and received consideration for rendering software development services.
  • Assessing Officer (AO) determined the ALP based on the TP adjustment made by him in the case of the assessee in the previous Assessment Year (AY) 2008-09 i.e. PY 2007-08. In the AY 2008-09 (i.e. PY 2007-08), the TPO considered several comparable companies and determined the Arithmetic Mean (AM) of the profit margin of certain comparable companies at 23.65%. Following the said AM, the AO determined the ALP and the addition made to the total income for the PY 2008-09 as follows:
Particulars Amount (in Rs.)
Arm’s Length Mean Margin on cost 23.65%
Less : Working Capital Adj. (as given by the assessee) 0.22%
Adjusted mean margin of the comparables 23.43%
Operating Cost Rs. 10,87,17,752
Arm’s Length Price (ALP) (at an Arm’s Length Margin of 123.43 % of Operating Cost) Rs. 13,41,90,321
Price Received Rs. 11,24,86,812
Shortfall being adjustment u/s.92C Rs. 2,54,72,569
  AO made addition of above shortfall of Rs. 2,54,72,569 as Transfer Pricing Adjustment u/s.92C of the Income Tax Act, 1961 (“Act”).
  • On appeal by the assessee, the CIT (Appeals) deleted the addition made by the AO and was in the view that the action of the AO in adopting the data of AY 2008-09 in AY 2009-10 was erroneous. The CIT (Appeals) therefore held that the addition made by the AO cannot be sustained.
  • Aggrieved by the order of the CIT (Appeals), Revenue filed an appeal before ITAT, Bangalore.
HELD
  • ITAT considered the rival submissions and is in the view that in terms of Rule 10B(4) of IT Rules, 1961 the data to be used for comparability purpose of an uncontrolled transaction with international transactions shall be the data of the relevant to the Financial Year in which the international transaction has been entered into and Multiple data cannot be used as a matter of right.
  • In the present case, there are no circumstances justifying the use of the previous year data. In those circumstances, ITAT opined that the CIT (Appeals) rightly rejected the method and the basis of making addition by the AO.
  • ITAT also found that the addition made by the AO for the AY 2008-09 was subject matter of appeal before the Hon’ble ITAT in IT(TP)A No.1550/Bang/2012 and the Tribunal gave certain directions in the aforesaid order. As a consequence of the directions given by the Tribunal, the AM of a comparable company would be 13.06% and therefore the price charged by the assessee would be within + or – 5% of the average AM of the comparable company.
  • By applying the second proviso to Section 92C (2) of the Act, the price charged by the assessee has to be considered as one at arm’s length. Even on this basis, the addition made by the AO cannot be sustained. Accordingly, ITAT confirmed the order of the CIT (Appeals) and dismissed the appeal by the revenue.
In the result, the appeal of revenue is dismissed.