P. Madhavi Devi, Judicial Member
1. This appeal is filed by the assessee against the order of the CIT(A)-IV, Bangalore, dated 29/03/2012 for the assessment year 2004-05. The assessee is aggrieved by the order of the CIT(A) in confirming the transfer pricing adjustment made by the assessee.
2. Brief facts of the case are that the assessee-company which is engaged in the business of development and export of software, had filed its return of income declaring 'nil' income. During the assessment proceedings u/s 143(3) of the Income- tax Act, 1961 [hereinafter referred to as 'the Act' for short] the Assessing Officer (AO) observed that the assessee had entered into international transaction with its Associated Enterprise(AE) to carry out business like software development and IT enabled services. Therefore, the AO, after obtaining the approval of the CIT referred the matter to the Addl. Director of Income-tax (Transfer Pricing), Bangalore to examine the transactions between the assessee-company and its Affiliates and to suggest any adjustment in respect of arms length price (ALP) u/s 92CA of the Act. The Transfer Pricing Officer (TPO), vide order dated 22/12/2006 determined the ALP at Rs.11,22,54,575/- as against Rs.9,64,05,510/- determined by the assessee and made the adjustment of the difference of Rs.1,49,91,300/-.
3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) who confirmed the order of the AO and the assessee is in second appeal before us.
4. The learned counsel for the assessee has drawn our attention to the fact that the assessee was carrying on the activities of software development and also has a Bio Division. He submitted that the assessee had carried out TP study using CUP method which was rejected by the TPO, who adopted the TNMM as the most appropriate method. It was submitted that by letter dated 11/07/2006, the assessee had submitted that it had earned a net profit of Rs.1,03,31,319/- from international transaction which works out to a net margin of 11.34% on cost and further that it had suffered loss in Bio Division, where it has transacted only with unrelated customers during the year. The TPO, however, was not convinced by the assessee's contention and observed that no material was made available in support of assessee's claim. He further held that since no segmental profit and loss account accounts for software and Bio division was filed and there is no basis for working out the loss of Bio division and profit at 11.34% in software division, the segmental data filed by the assessee cannot be accepted. Thereafter, search for suitable comparables in the database prowess was made and after applying the related party transaction filter, TPO adopted certain companies as comparables and arrived at the net average margin at 18.44% and made suitable adjustment to the ALP. The learned counsel for the assessee submitted that the assessee had clearly stated before the TPO that the assessee had not entered into any transactions with its AE in Bio-Division and therefore the entity level margin of the assessee should not have been considered by the TPO. He submitted that the said ground was taken before the CIT(A) as well and the CIT(A) had called for a remand report from the TPO but the TPO did not comment on the specific objection raised by the assessee and the CIT(A) has merely confirmed the order of the AO. The learned counsel for the assessee laid stress on the point that while determining the ALP of the international transactions each transaction has to be considered separately and when the segmental details of the software development are available, TPO ought to have considered them separately. Thus, according to him, the transfer pricing adjustment made by the TPO is unsustainable.
The learned Departmental Representative, on the other hand, supported the orders of the authorities below and submitted that since the assessee failed to furnish the relevant details before the TPO, the same could not be examined by the TPO and the TPO was constrained to take the entity level margin for determining the ALP. He submitted that since the assessee has filed details before the CIT(A) and the CIT(A) had called for a remand report, that it was only after considering the contents of the remand report the CIT(A) has confirmed the order of the AO. Thus according to him, there was no need for interference with the order of the CIT(A).
5. Having regard to the rival contentions and the material on record, we find that before going into the acceptability of the comparables adopted by the TPO, the basic point to be considered is whether while adopting the TNMM method, the entity level margin is to be adopted or only the margin of software development activity is to be considered separately from the margins of the Bio-Division which has sustained loss. It is not in dispute, as is evident from the record, that Bio division had incurred a loss and also that there were no transactions with related parties in bio division. As regards international transactions with unrelated parties, ALP of such transactions need no determination. Admittedly there are international transactions with AE of the assessee in the software development division only. According to the assessee, net margin of software development is 11% which is within + or -5% of the net margin of the comparable companies and therefore, it has to be accepted. We are of the opinion that only international transactions with Associated enterprises have to be considered for ALP adjustment. When Bio division does not have any international transactions with AEs, profit or loss from said division should not affect ALP of the international transaction in another division. Since neither the AO nor the CIT(A) have really examined the assessee's contention that there was no international transactions with AE
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9;s in the Bio division but have just combined the results of both software development as well as bio division for determining the ALP of the international transaction, we deem it fit and proper to set aside the order of the AO/TPO and remand the matter back to the AO with a direction to refer the matter to the TPO for re-consideration of the issue in the light of our observations above. The AO/TPO shall examine the assessee's contention and after verifying the details, shall recompute the ALP of the international transaction u/s 92CA of the Act. 6. In the result, the assessee's appeal is treated as allowed for statistical purposes.