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07-06-2019, Approva Systems, Tribunal Pune

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1 week 4 days ago - 1 week 4 days ago #9690 by amit
Section -
Order Date - 07-06-2019
Favouring - Allowed for statistical purposes
Court - Tribunal Pune
Appellant - Approva Systems Private Limited
Respondent - DCIT
Justice - R.S. SYAL VP & PARTHA SARATHI CHAUDHURY JM
Citation - 619Taxpundit106
Appeal No. - ITA No.2444/PUN/2016
Asstt. Year - 2012-13

Order

PER : R.S.SYAL, VP

This appeal by the assessee is directed against the order passed by the CIT(A)-13, Pune on 28-07-2016 in relation to the Assessment Year 2012-13.

2. Succinctly, the factual matrix of the case is that the assessee is a wholly owned subsidiary of Approva, US. It provides Software Development Services and Quality Assurance (Testing) Services to its Associated Enterprises (AEs) on exclusive basis as a captive unit. The assessee filed its return declaring total income of Rs.2.26 crore. The income-tax return was accompanied by the Audit Report in Form No.3CEB detailing its international transaction of providing software services. The assessee received revenue of Rs.14.45 crore from rendering software development services. The Transactional Net Marginal Method (TNMM) was applied as the most appropriate method for benchmarking the international transaction with Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC). Such profit rate of the assessee was 14.72%. Certain comparables were chosen with average PLI of 15.03%. This is how, the assessee showed that its international transaction was at ALP. The Assessing Officer (AO) took up the benchmarking analysis at his own. He rejected certain companies from the assessee’s list of comparables and introduced certain fresh companies. In this manner, he shortlisted 4 companies with their average operating profit margin at 22.18%. By applying this profit rate as arm’s length margin to the assessee’s international transaction, the AO made transfer pricing addition amounting to Rs.1,26,92,794/-. In the first appeal, the ld. CIT(A) made certain adjustments to the average profit margin of comparables. On the basis of the findings given by the ld. CIT(A), the AO passed a consequential order computing average profit margin of comparables at 19.48%. By applying such a profit rate as arm’s length margin, the AO has computed transfer pricing addition of Rs.88,48,944/-. The assessee is aggrieved by sustenance of such an addition.

3. We have heard both the sides and gone through the relevant material on record. The first issue taken up by the ld. AR is against the inclusion of Vama Industries Ltd. in the final set of comparables. In fact, the assessee chose this company as comparable. However, during the course of proceedings before the AO, it was contended that the same should be excluded. This contention did not find favour with the AO. The ld. CIT(A) upheld the inclusion of this company in the final set of comparables. The ld. AR submitted that this company should be excluded from the list of comparables on several reasons including different functional profile. The ld. DR raised a preliminary objection for non-exclusion of this company putting forth that it was a comparable chosen by the assessee itself and hence it cannot be allowed to resile from its own stand.

4. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should be prohibited from taking a stand contrary to the one which was taken at the stage of the T.P. study or during the course of proceedings before the AO/TPO. It goes without saying that the object of assessment is to determine the income in respect of which the assessee is rightly chargeable to tax. As the income not originally offered for taxation, if otherwise chargeable, is required to be included in the total income, in the same breath, any income wrongly included in the total income, which is otherwise not chargeable, should be excluded. There can be no estoppel against the provisions of the Act. Extending this proposition further to the context of the transfer pricing if an assessee fails to report an otherwise comparable case, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP documentation and then later on claims that it should be excluded, then, there should be nothing to forbid it from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands in

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