Transfer pricing is founded on the principles of economic substance and hence, it is fact specific – ITAT Pune

Bind view India P. Ltd. Vs. DCIT (ITAT Pune)- In light of Pune bench’s decision in the case of Starent Networks (I) P. Ltd. Pune Vs. DCIT, the assessee’s claim for +/- 5% in order to compute arm’s length price in terms of erstwhile proviso to section 92C(2) of the Act is accepted. Provisions of sub-Rule (4) of Rule 10B are quite explicit and provide for analysing the comparability of an uncontrolled transaction with the international transaction in question on the basis of the data relating to financial year in which the international transaction sought to be tested has been entered into.

In the present case, the international transaction sought to be tested has been carried out in financial year 2005-06 and, therefore, the data of the said financial year in relation to the uncontrolled transaction has been rightly considered by the TPO. So, however, we do not state as a matter of rule that the position canvassed by the assessee for using the data relating to two year’s prior to such financial year cannot be used at all. As mandated by the proviso to Rule 10B(4), where the data of more than two year’s prior to such financial year is to be considered, it is required to be demonstrated by the assessee that such data reveals facts which could have an influence on determination of the transfer price in relation to the transactions being compared. However, in this case, as assessee has failed to bring out proper justification for use of multiple data of prior two years, his claim of using multiple data of prior two years is rejected.

 INCOME TAX APPELLATE TRIBUNAL, PUNE

ITA No 1386/PN/10 (Asst. Year: 2006- 07)

Bind view India P. Ltd.

Vs.

Dy. Commissioner of Income-tax

Date of Pronouncement: 30.11.2011

ORDER

PER G.S. PANNU, AM

This appeal by the assessee is directed against the order of the Dy. Commissioner of Income-tax, Cir.1(1), Pune dated 27.09.2010 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 (in short “the Act”), pertaining to the assessment year 2006- 07.

2. The appellant company has raised the following Grounds of appeal:

“On the facts and in the circumstances of the case and in law, the Hon’ble DRP and consequentially the ld AO have:

1)  Erred in computing the arm’s length price of international transaction and confirming the adjustment of Rs 2,45,51,957;

2) erred in computing transfer pricing adjustment using the financial information of the comparable companies available at the time of assessment – although such information was not available at the time when the appellant complied with the Indian TP regulations, as per the Act;

3) erred in considering the operating margins earned by comparable companies based on the financial data pertaining to the year ended March 31, 2006 only and rejecting the financial data of comparable companies for prior two years or use of multiple year data;

4) erred by cherry picking new com parables with high profit margins. The ld AO also erred in including new com parables, without providing a sound/ logical search strategy;

5) erred in adding new com parables which differ in functions undertaken, assets employed and risk assumed as compared to appellant, also whose data was not available to the appellant at the time of preparing the TP documentation;

6) erred in rejecting com parables selected in TP study report, for FY 05-06 without sound and logical reasons;

7) erred in rejecting comparable selected in TP study report, on account of losses incurred by concerned com parables in a single year i.e. for FY 05- 06;

8)  erred in applying the Related Party (RPT”) criteria considering the value of RPT as a percentage of total sales and expenses and not considering the base to be sales alone;

9) erred in rejecting BIPL ’s criteria, of applying a filter, to select companies with RPT/sales <10% and unjustly adopting a criteria to accept companies with RPT/Total transactions <25%;

10)  erred in rejecting application of turnover filter for identification of comparable companies thereby accepting comparable companies of all sizes irrespective of their scale of operations;

11)  erred in ignoring the losses incurred by the parent company Bindview Development Corporation (“BDC”)

12)  erred in not making any adjustments for differences in functions undertaken, assets employed and risk assumed by of comparable companies vis-à-vis the appellant thereby comparing the operating margins of the comparable companies assuming higher business risks with the appellant’s captive, risk mitigated operations, without making any adjustment for differences in functional and risk profile;

13) erred in ignoring the quantification of adjustments for the differences in risks assumed by the comparables and the appellant, as provided by the appellant;

14)  erred in not applying the Proviso to section 92C(2) of the Act and has failed to grant the relief for the downward adjustment of 5 percent from the arithmetic mean, which is permitted to and which has also been opted or by the appellant;

15)  the directions of the Hon’ble DRP and thus the order of the ld AO is not a speaking order as the Hon’ble DRP and the ld AO have merely relied upon the action taken by the Transfer Pricing Officer and his predecessors without exercising their own judgment and skill;

16)  erred by ignoring the fact, that, there was no intention of BIPL to evade taxes, as BIPL, being a 100% Export Oriented Unit (‘EOU’), registered with the ‘Software Technology Park Scheme,’ enjoyed, an exemption from tax, on its profits, in India;

17) without prejudice to the above or any other grounds, if the transfer pricing adjustment is sustained then the ld AO has erred in levying interest under section 234B of the Act to the extent the addition is made based on the updated financial data for the comparable companies.”

3. Although the appellant has raised multiple Grounds of appeal, but all of them are in support of the challenge to an addition of Rs 2,45,51 ,957/- made by the Assessing Officer on account of adjustment in computing the arm’s length price of International transaction in terms of Chapter X of the Act. The learned Counsel for the assessee has made detailed submissions and in the course of the hearing has also referred to the relevant material placed in the Paper Books filed before us. The Departmental side has also supported the adjustment made by the AO by referring to the relevant discussion in the orders of the authorities below. The rival submissions have been heard and the relevant record perused.

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4. In order to appreciate the controversy and the rival stands, it would be appropriate to briefly note the background and the relevant facts. The appellant before us is a Company incorporated under the provisions of the Companies Act, 1956 and is inter-alia, engaged in the business of export of network security and administrative software solutions, broadly speaking software development activities. The appellant has its software development facility at Pune, which is a 100% Export Oriented Unit (EOU) approved under the Software Technology Park scheme (STPI) of the Government of India. The assessee is undertaking software development activities exclusively for its parent company, Bindview Development Corporation, US (hereinafter referred to as “AE”). During the year under consideration, it was noticed that assessee company had entered into the following international transactions with AE/related parties:S.No Description of transaction                                     Amount in Rs.

1. Provision of software development services          24,48,47,439/-
2. Repayment of interest free ECB loan                       1,19,94,250/-

                                                                    Total:                      25,68,41,689/-

As a result, the Assessing Officer referred the computation of Arm’s Length Price (hereinafter referred to as “ALP”) in relation to the said international transaction to the Transfer Pricing Officer (hereinafter referred to as “TPO) in terms of section 92CA(1) of the Act. The TPO passed an order under section 92CA(3) of the Act dated 29.10.2009 determining the ALP on account of the international transaction relating to the provision of software development services at Rs 26,93,99,396/- as against the reported consideration of Rs 24,48,47,439/-, thereby resulting in an upward adjustment to the ALP of Rs 2,45,51 ,957/-. While passing such order, the TPO allowed opportunity to the assessee to produce evidence on which the assessee relied in support of the computation of ALP in relation to the said International transaction. On receipt of the order of the TPO dated 29.10.2009, the Assessing Officer proceeded to compute the total income of the assessee in terms of 92C(4) of the Act having regard to the ALP of the stated International transaction as determined by the TPO. As a result, the Assessing Officer determined the total income of the assessee at Rs 7,04.46,740/- as against the returned income of Rs 4,58,94,786/-, the only addition being an amount of Rs 2,45,51,957/- representing adjustment made to ALP of the stated International transaction with AEs, in the assessment finalized under section 143(3) of the Act read with 144C(1) dated 27.9.2010. Pertinently, the assessment so finalized was after the receipt of the order of the Dispute Resolution Panel (hereinafter referred to “DRP”) dated 24.8.2010 wherein the objections of the assessee to the proposed adjustment were rejected in totality. Presently before us, the solitary dispute relates to the efficacy of the upward adjustment of Rs 2,45,51,957/- made in the assessment proceedings to the ALP of the international transaction of the provision of software development services carried out with its AE.

5. Before us, it has been explained on behalf of the appellant that broadly six objections were raised before the lower authorities challenging the impugned adjustment and the same have been rejected for insufficient/irrelevant reasons. Firstly, it has been pointed out that the appellant-company had carried out the benchmarking of its international transaction on the basis of Transactional Net Margin Method (hereinafter referred to as “TNMM method’) with the identified comparables on the basis of FAR analysis, i.e. Functions performed, risk assumed and assets utilized. The assessee had relied upon prowess and capitaline plus data base to identify comparable companies in the transfer pricing study (hereinafter referred to as “T P study”) and by applying appropriate filters, eleven companies were identified as comparables for benchmarking the international transaction, details of which has been noted by the TPO in para 4 of his order. In this connection, it is pointed out that the arithmetical mean of the fully loaded cost price (FLCP) of the comparables was 4.96% whereas the FLCP mark up of the assessee was 13.33% and therefore, the declared consideration of Rs 24,48,47,439/- for the international transaction with AE was consistent with ALP standard from the Indian Transfer Pricing perspective. It is pointed out that in carrying out such TP study the assessee used the average of prior two years’ data of comparable companies as on 31.1.2006. The TPO has wrongly used the data pertaining to the financial year 2005-06 as available at the time when the TPO examined the issue, although such information was not available at the time when the assessee carried out its TP study to comply with the regulations as per the Act. As per the appellant, the lower authorities have erred in considering the operating margins earned by the comparable companies based on the financial data pertaining to the year ending 31.3.2006 only and rejecting the financial data of comparable companies for prior two years or the use of multiple year’s data. The learned counsel for the assessee emphasized that the approach of the assessee was in line with the proviso to Rule 10B(4) of the Income-tax Rules, 1962 which permits consideration of data relating to a period not being more than two years prior to such financial year. In support, it has been submitted that the approach of the lower authorities is untenable firstly because the data for the relevant financial year was not available when the assessee carried out its TP study as on 31.1.2006 and, secondly, the usage of multiple years data would remove any aberration between two years, so as to render the TP study analysis more scientific. On this aspect, it has also been pointed out that the said practice has been consistently followed by the appellant every year and the same has been accepted by the Department in earlier years as well as in subsequent assessment years. It has been pointed out that the TPO erred in rejecting nine comparables out of 11 selected by the assessee and also in identifying five more comparables without giving any basis or the search process involved. In nutshell, the first substantive plea of the assessee is that the TPO erred in identifying additional comparables without specifying the complete search analysis for such exercise and also in view of the fact that the TPO relied on the data available in September, 2009 which was not contemporaneous to the period in which the assessee carried out the TP study analysis as on 31.1.2006 as mandated by the tax provisions. Elaborating the second objection, it has been explained that the TPO has not followed any systematic search strategy to pick up additional com parables but has merely picked up high profit making com parables which can be termed as an exercise of ‘cherry picking.’ It has been explained that adopting com parables on a random basis without any search strategy/process, is untenable and is to be seen as a faulty selection of com parables. In this connection, reliance was placed on the observations of the Tribunal on the following decisions:

i) Mentor Graphics (Noida) P Ltd. V DCIT 112 TTJ 408 (Del);

ii) Skoda Auto India (P) Ltd. V. ACIT 122 TTJ 699 (Pune); and,

iii) Philips Software Centre P Ltd. V. ACIT 119 TTJ 721 (Bang)

Apart from the aforesaid, the learned Counsel also referred to detailed written submissions on each of the comparables to establish as to how the same are not liable to be included for the purposes of benchmarking the international transaction in question. Thirdly, the plea of the assessee is that the TPO unjustly rejected 9 comparables out of the 11 comparables selected by the assessee. In this connection, it was pointed out that the assessee had selected the comparable companies based on a methodological search strategy and reference was invited to pages 79 to 80 of the Paper Book in this regard. Apart therefrom, reference was also invited to the detailed factual submissions placed in the Paper Book to justify that the comparables have been rejected by the TPO on a wrong footing. In the course of his submissions, the learned Counsel pointed out a basic fallacy in the approach of the TPO in selecting the comparables by pointing out that whereas the assessee is a cost protective entity vis-a-vis its realizations from its AEs, the comparable companies selected by the TPO carry uncontrolled entrepreneurial risks and, therefore, on this factor alone the comparables adopted by the TPO need to be ignored.

6. The next plea taken up by the assessee is that the TPO has ignored the fact that the parent company, i.e. BDC, was incurring losses and yet, it has been compensating the assessee at a mark up on total costs incurred by the assessee. In this regard, it is argued that that inspite of losses, the fact of parent company compensating its subsidiary (i.e. the assessee) on cost plus mark up shows that the international transaction with AE is inherently at arm’s length. It was also pointed out that assessee being a captive service provider is assured of business from its AE and is compensated at a mark up over costs incurred by it, which is sufficient to demonstrate that the assessee company is insulated from all business risks and therefore the quantum of mark up has to be examined in the light of assessee’s risk taking ability which is indeed low. This aspect, as per the learned Counsel, has been ignored by the lower authorities on irrelevant considerations.

7. The next plea raised is that while carrying out the benchmarking, the TPO has denied adjustments for all other risks as, according to him, the same are unwarranted and has merely allowed a meager adjustment for working capital risk. It is pointed out that the risk assumed by the uncontrolled comparable companies are significantly higher than in the case of a captive service provider like the assessee. It was pointed out that the assessee has an assured return revenue model with minimal risk factors and, therefore, an appropriate adjustment with regard to such factors is warranted. In support of the aforesaid proposition, reference has been made to the following decisions of the Tribunal:

i) Mentor Graphics (Noida) P Ltd. V DCIT 112 TTJ 408 (Del);

ii)  Philips Software Centre P Ltd. V. ACIT 119 TTJ 721 (Bang); and,

iii) Egain Communications P. Ltd. V. ITO 118 TTJ 354 (Pune).

8. The next plea raised is that the TPO erred in not applying the proviso to section 92C(2) of the Act and has failed to grant the relief for the downward adjustment of 5 percent from the arithmetic mean, which is permitted to and which has also been opted for by the appellant. It was submitted that the TPO has applied the amended proviso to section 92C(2) in the instant case. However, according to the assessee, the amendment in proviso to section 92C(2) is substantive amendment and not a procedural amendment and, therefore, the same should apply prospectively. Reliance has been placed on the judgment of the Hon’ble Supreme court in the case of Kehavan Madhava Menon v State of Bombay (AIR 1951 SC 128). According to the appellant, if the amendment is considered prospective in nature, the old law would apply and in such a case, the assessee should be able to claim benefit of +/-5%. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P) Ltd 114 ITD 448. Further reliance has been placed on the following decisions:

i) Karimtaruvi Tea Estate Ltd. V. State of Kerala 60 ITR 262 (SC);

ii) ACIT v. UE Trade Corporation India, ITA No 4405/Del/09 dated 24.10.201 0; and,

iv) UCO Bank v. CIT 237 ITR 889 (SC).

9. In the end, learned counsel for the assessee pointed out that section 92(1) of the Act requires that any income from international transaction shall be computed having regard to arm’s length price. It is pointed out that the words ‘having regard to’ in section 92(1) shows the intention of the legislature that the ALP is to be computed after taking into account all the circumstances prevailing at the time of entering the transaction and that the responsibility of the Assessing Officer is to satisfy himself about the adequacy and propriety of the ALP so determined by the assessee. It is pointed out that in the instant case the conduct and intention of the assessee while carrying out the international transaction with its AE has to be considered while determining the ALP. In this connection, a reference was made to the agreement with AE for provision of software development services, copy of which is placed at paged 126 of the Paper Book which provides that compensation payable to the assessee shall be commensurate to the functions performed, assets employed and risks assumed by the Indian company and the same shall be in accordance with the arm’s length principles. In the said agreement, it is further provided that AE and the assessee shall review the compensation to ensure that all payments are not less than the arm’s length price and any adjustment required shall be reflected in the account books. In this regard, the learned Counsel pointed out that the assessee has a practice to carry out the comparable analysis in January every year, i.e. prior to the closure of the financial year on 31^st of March to adjust the price with AE, if so warranted. It is pointed out that following the said practice for certain assessment years in past, necessary adjustments were made as it was found after analysis that its transactions with the AE was not at ALP. However, for the year under consideration since the operating margin of the transaction with AE was found to be within the range of +/-5% of the ALP, no adjustment was made in the books of account for the period ending 31.3.2006. It is, therefore ,pointed out that having regard to the conduct and intention of the assessee the income arising from the impugned international transactions be accepted at the stated consideration which has been computed having regard to the arm’s length price.

10. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the addition made by the Assessing Officer. With regard to the assessee’s contention that only the data available at the time of analysis when the international transaction had been entered into should be used, the learned Departmental Representative submitted that such argument is not acceptable in view of the prescription of rule 10B(4) of the Income-tax Rules. It was submitted that Rule 1 0B(4) provides use of the data relating to the financial year in which the international transaction has been entered into and does not say specifically that contemporaneous data or only such data which is available at the time of transaction or at the time of conducting of analysis by the assessee, is alone to be used. Even with regard to the assessee’s plea with reference to the OECD guidelines in this regard, it has been pointed out that the approach of the TPO in using the information which is currently in public domain at the time of carrying out the analysis, cannot be faulted. Moreover, it is also pointed out that if the assessee intended to use the data for the prior two years as per the proviso to Rule 10B(4), then the onus was on the assessee to establish that such data could have an influence on the determination of ALP in relation to the stated international transaction. It is submitted that the burden cast on the assessee as per the proviso to Rule 1 0B(4) has not been discharged by the assessee and, therefore, the determination of ALP done by the TPO by using the data for the corresponding financial year, i.e. 2005-06,in the present case cannot be faulted. Further with regard to the assessee’s plea that selection of five new comparables by the TPO is without any basis and is ‘cherry picking’, it is pointed out that even the assessee does not dispute the inclusion of three such comparables out of the five and this itself proves the relevance of such comparables for the purposes of benchmarking the impugned international transaction. The learned Departmental Representative pointed out that the companies which have been selected by the TPO have been found to be comparable to the tested party having regard to the functions performed, assets employed, and risks assumed (FAR analysis) and their details are available in public domain and, therefore, the same have been appropriately considered by the TPO. The learned Departmental Representative referred to the relevant discussion in the order of the TPO with regard to the reasons for rejection of certain comparables selected by the assessee and also the justification for the final set of comparables adopted by the TPO to arrive at the ALP. With regard to the assessee’s plea that the losses incurred by the parent company BDC, it is submitted that merely because BDC was incurring losses would not show that the compensation determined to be payable to the assessee company was at an arm’s length principle. The learned Departmental Represemntative contended that rather the loss incurred by BDC would show that mark up on costs incurred by the assessee, which is remunerated by the AE would indeed be influenced to be on a lower side. With regard to the adjustments for risk factors, the learned Departmental Representative submitted that in para 9 of the order, the TPO has observed that the plea of the assessee was in general terms without any working or definite outlining of the differences in the risk profile of the comparable companies and the tested party, therefore, according to the learned Departmental Representative the adjustment allowed by the TPO on account of difference in working capital requirements was adequate and reasonable on the facts of the instant case. In this manner, the learned Departmental Representative has justified the order of the TPO.

11. We have carefully considered the rival submissions. As noted earlier, the pith and substance of the dispute raised by the assessee is against the action of the Revenue in determining ALP of the appellant’s international transaction of provision of software development services to its AE at R 26,93,99,396/- as against Rs 24,48,47,439/- declared by the assessee. In this connection, the first area of dispute is with regard to the claim of the assessee seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act for adjustment of +/-5% variation for the purposes of computing the ALP. The Revenue, on the other hand, has contended that since the impugned assessment was made after 1.10.2009, the provisions of Proviso to section 92C(2) of the Act as amended with effect from 1.10.2009 shall apply. Similar dispute was a subject-matter of consideration by the Pune Bench of the Tribunal in the case of Starent Networks (I) P. Ltd. Pune v. Dy. CIT in ITA No.1350/PN/10 dated 3.10.2011. The rival stands on this controversy remain the same as has been considered by us in our earlier precedent dated 3.10.2011 (supra). The following discussion in our order dated 3.10.2011 is relevant:

“In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 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, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean.”

As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variation for the purposes of computing ALP. As per the Proviso, 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% of such arithmetical mean. The point made out by the assessee is based on the latter part of the Proviso whereby an option is given to the assessee to take an ALP which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. Firstly, the claim of the Revenue is that such benefit is not available to the present assessee, because the price of international transaction disclosed by the assessee exceeds the margin provided in the Proviso. This aspect of the controversy, in our view, is no longer germane in view of the plethora of decisions of our co-ordinate Benches, namely, Sony India (P) Ltd. (supra); Electrobug Technologies Ltd. (supra), and Development Consultant P Ltd v DCIT 115 TTJ 577 (Kol.) wherein it has been observed that the benefit of the option contained in the latter part of the Proviso to section 92C(2) is available to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso.

21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 which reads 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.”

The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009.

22. We have carefully examined the rival stands on this aspect. The amended Proviso has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The Legislature noticed the conflicting interpretation of the erstwhile proviso by the assessee and the income-tax Department. The assessee’s view was that the arithmetical mean should be adjusted by 5% to arrive at ALP, whereas the departmental view was that no such adjustment is required to be made if the variation between the transfer price and the arithmetical mean is more than 5% of the arithmetical mean. With a view to resolving this controversy, the Legislature sought to amend the proviso to section 92C(2), which has been reproduced by us in the earlier part of this order. In the said Circular, it has also been elaborated that 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. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee’s tax liability. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP.

23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under:

“                         CORRIGENDUM

In partial modification of Circular No. 5/2010 dated 03.6.2010,

(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 re pending before the Transfer Pricing Officer (TPO) on or after such date.”

(ii) In para 38.3, for the date “1^st October, 2009, the following date shall be read: “1^st April, 2009”.

In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.2009 and shall apply even to cases where proceedings were pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. We have carefully pondered over the assertion made by the appellant that the Corrigendum is untenable in the eyes of law. Firstly, the said corrigendum does not bring out any preamble so as to throw light on the circumstances and the background in which the same has been issued. Secondly, it is well understood that the Explanatory Notes to the provisions of a Finance Act passed by the Parliament seeks to explain the substance of the provisions of the Act as intended by the Legislature. In fact, the Hon’ble Supreme Court in the case of K.P Varghese v ITO 131 ITR 597 (SC) emphasized the sanctity of the statements contained in the Explanatory Notes of the provisions and stated that the interpretation placed in such documents is binding interpretation of law. The contents of the Corrigendum are quite inexplicable. Notwithstanding the aforesaid and without going into the validity of the Corrigendum dated 30.9.2010 (supra), we are of the view that the same would not operate to the detriment of the assessee since at the relevant point of time the contents of the Circular No 5/2010 (supra) were in operation. In other words, the withdrawal of the interpretation placed in circular No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis­entitle the assessee from its claim of the benefit of ~/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon’ble Bombay High Court in the cases of BASF (India) Ltd. v CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v CIT 213 ITR 20 (Bom); and, Unit Trust of India & Anrs. v ITO 249 ITR 612 (Bom). The Hon’ble High Court has opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon’ble Supreme Court in the case of State Bank of Travancore v CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of ~/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly.”

On the basis of the aforesaid discussion, we find ample force in the plea of the assessee for claiming the benefit of +/-5% in order to compute ALP in terms of erstwhile Proviso to section 92C(2) of the Act. We order accordingly and, therefore, on this aspect the assessee succeeds.

12. Another aspect which has been vehemently argued by the assessee is with regard to the action of the TPO in computing the transfer pricing adjustment using the financial information of the comparable companies available at the time of assessment. Further, it is canvassed that the TPO erred in considering the operating margin earned by the comparable companies based on the financial data pertaining to the year ending 31.3.2006 only and disregarding the action of the assessee of having carried out the transfer pricing study on the basis of financial data of the comparable companies for the prior two years. The plea of the assessee is that a taxpayer undertakes transfer pricing analysis at the time of filing of the return and is, therefore, expected to use the contemporaneous data as available to him at that point of time and, in this regard, reference has been made to the provisions of Rule 10B(4) of the Rules. It is explained that at this stage, the assessee would be in a position to use the data of the earlier years of the comparable companies and it is so provided for in terms of the Proviso to Rule 1 0D(4) of the Rules. It was, therefore, contended that even at the time of assessment proceedings having regard to the proviso to Rule 10B(4), the TPO is bound to use such contemporaneous data alone to benchmark the international transaction. In this case, the assessee used average of prior two years data of the comparable companies available as on 31.1.2006 in order to benchmark its international transaction. The TPO, on the other hand, has used data of the comparable companies relating to the financial year 2005-06 corresponding to the assessment year under consideration and has not used the weighted average of prior two years data of comparable company as canvassed by the assessee.

13. We have carefully examined the rival stands on this aspect. Section 92C of the Act prescribes the determination of the ALP in relation to an international transaction on the basis of most appropriate method prescribed therein. Rule 1 0B lays down the manner in which the ALP in relation to an international transaction is to be determined for the purposes of section 92C(2) of the Act. Sub-rule (4) of Rule 10B prescribes that data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. On the strength of the aforesaid provision, Revenue has sought to justify the action of the TPO of having used the data of the financial year 2005-06 of the comparable companies in order to benchmark the international transaction of the assessee, which has been carried out during the instant year. The assessee, on the other hand, seeks support from the following Proviso to Rule 10B(4) which reads as under:

“10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into:

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”

In term of the above, it is contended that the assessee was justified in using the weighted average of prior two years data of the comparable companies, which was available when the assessee carried out its transfer pricing study to test the ALP of its international transaction in January, 2006. It is also further canvassed, on the basis of sub-rule (4) of Rule 1 0D that such an action was justified as the data should be contemporaneous and should exist latest by the specified date referred to in section 92F(iv) of the Act which in the other words is the due date for filing of the return as per section 139(1) of the Act. In our considered opinion, the provisions of sub-Rule (4) of Rule 1 0B are quite explicit and provide for analysing the comparability of an uncontrolled transaction with the international transaction in question on the basis of the data relating to financial year in which the international transaction sought to be tested has been entered into. In the present case, the international transaction sought to be tested has been carried out in financial year 2005-06 and, therefore, the data of the said financial year in relation to the uncontrolled transaction has been rightly considered by the TPO. So, however, we do not state as a matter of rule that the position canvassed by the assessee for using the data relating to two year’s prior to such financial year cannot be used at all. As mandated by the proviso to Rule 10B(4), where the data of more than two year’s prior to such financial year is to be considered, it is required to be demonstrated that such data reveals facts which could have an influence on determination of the transfer price in relation to the transactions being compared. We have carefully examined the stand of the assessee before the lower authorities as well as before us and find that no credible or cogent reasoning has been brought out to justify the use of multiple data of prior two years and the manner in which it would influence the determination of transfer pricing in relation to the impugned international transaction. Therefore, having regard to the facts and circumstances of the present case, we are unable to accept such objection of the assessee against the action of TPO having used the data of the financial year 2005-06 of the comparable companies in order to benchmark the impugned international transaction. Thus, on this aspect, the assessee has to fail.

14. Apart from the aforesaid, the appellant has assailed the addition on other aspects also. One of the aspect relates to the selection of comparables by the TPO. On this, the first issue raised is regarding the inclusion of Compucon Software Ltd. as a comparable by the TPO. The assessee objected to the inclusion of this company on the plea that it has a high percentage of Related Party Transactions (RPT) and, therefore, the same was liable to be excluded. In support, the assessee has also referred to a summary of search strategy at pages 79 to 80 of the Paper Book to point out that it had set up a filter in terms of which companies having RPT in excess of 10% were excluded. The TPO, however, has considered exclusion of a company on the basis of RPT beyond a threshold of 25% as against 10% considered by the assessee and, according to him in this case the RPT was less than 25%. In this connection, the assessee has drawn our attention to pages 180 to 182 of the Paper Book to show the workings of RPT in this case based on the data for the financial year 2005-06. On that basis, it is contended that the RPT exceeds even the threshold of 25% set up by the TPO and, therefore, on that basis also, the same is not includible. We have carefully examined this aspect and find potent reasons in the stand of the assessee. Firstly, we are satisfied that as per the workings placed at pages 180 to 182 of the Paper Book. RPT of this company exceeds 25% and, therefore, even on the basis of the threshold adopted by TPO the said company merits exclusion from the list of comparable companies. Secondly, there also can be a debate as to the justification of adopting threshold limit for exclusion on the basis of RPTs i.e. whether 10% or 25%. Without going further on this aspect, we are of the view that even adopting the threshold of RPT at 25%, the said company is liable to be excluded. We order accordingly and the assessee succeeds on this aspect.

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15. Another issue raised is regarding the inclusion of ICSA (India) Ltd. as a comparable by the TPO. The inclusion of the said comparable is assailed by the assessee on the ground that the turnover of the said company exceeds Rs 50 crores and further that the Research and Development expenses of this company is in excess of 3% of sales. The detailed factual analysis on this aspect is placed at pages 183 to 184 of the Paper Book. The TPO has included the said company on the ground that it is in the business of software and embedded system development activity and such type of service is what is provided by the assessee company also. In this case, the summary of search strategy reveals that assessee has excluded comparables wherein the sales are less than Rs One crore and also where the sale are in excess of Rs 50 crores. The filters so set-up by the assessee are sought to be justified n the ground that the turnover of the assessee is Rs 24.48 crores from software development services. We have examined the case set-up by the assessee and find that no reasons have been advanced by the TPO to do away with the filter adopted by the assessee on the basis of the turnover of the comparables. Without rejecting the merits of the filters so adopted, the TPO is not justified, on a selective basis, to ignore such filter and adopt a comparable company such as ICSA (India) Ltd. for the purposes of comparing international transaction in question which falls outside the search matrix. Even with regard to the filter applied by the assessee on the basis of the level of R & D expenses the situation remains the same. Therefore, once the TPO has accepted such filters in principle, clearly its application is unjustly ignored by him while including ICSA (India) Ltd. as a comparable company. We, therefore, direct the TPO to exclude ICSA (India) Ltd. from the final set of comparables.

16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of com parables, and thus on this aspect, assessee succeeds.

17. At the time of hearing, it was articulated on behalf of the assessee that if the aforesaid three companies are excluded from the set of com parables and considering the +/-5% safe- harbor provided under section 92C(2) of the Act whose benefit we have already allowed to the assessee in para 11 above, the margin of 13.33% of the assessee would be at arms length from the Indian transfer pricing perspective. We, therefore, do not dwell on other aspects raised by the assessee as the necessary relief enures to the assessee qua the impugned addition.

In the result, the appeal of the assessee is allowed, as above.

Decision pronounced in the open Court on the 30^th Day of November, 2011