There was a controversy on whether the +/- 5% tolerance adjustment was a standard deduction or not. After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without considering the amendment and is per incuriam and not good law. The challenge to the constitutional validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act and not a constitutional authority

The argument that the foreign AE should be selected as the tested party and the profit earned by the foreign AE from outside comparables should be compared with the price charged by the assessee from the AE to determine whether they are at ALP is not acceptable because under the scheme of s. 92C, the profit actually realized by the Indian assessee from the transaction with its foreign AE has to be compared with that of the comparables. There is no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee and its foreign AE. The contention that the profit earned by the foreign AE should be substituted for the profit of the comparables patently unacceptable. The fact that this may be permissible under the US and UK Regulations is irrelevant

In certain Tribunal decisions, various reasons have been given for applying the turnover filter for comparison of margins such as economy of scale, greater bargaining power, more skilled employees and higher risk taking capabilities in cases of high turnover companies, which increase the margins with rise in turnover. However, in these decisions, no detailed examination has been made as to how these factors increase the profitability with rising turnover. The concept of economy of scale is relevant to manufacturing concerns, which have high fixed assets and, therefore, with the rise in volume, cost per unit of the product decreases, which is the reason of increase in margin as scale of operations goes up because with the same fixed cost there is more output when the turnover is high. The same is not true in case of service companies, which do not require high fixed assets. In these cases employees are the main assets, who in the case of the assessee are software engineers, who are recruited from project to project depending upon the requirement. The revenue in these cases is directly related to manpower utilized. With rise in volume cost goes up proportionately. Therefore, the concept of economy of scale cannot be applied to service oriented companies. On facts, it is shown by the department that in the case of the comparables selected by the assessee, there is no linear relationship between margin and turnover and that that the margin has come down with the rise in turnover in some cases. Such detailed study was not available before the various Benches of the Tribunal which have applied the turnover filter and consequently those decisions cannot be followed

S. 144C(8) empowers the DRP not only to confirm or reduce the variation proposed in the draft order to the benefit of the assessee but also to enhance it to the prejudice of the assessee. This power of enhancement which is impliedly embedded in the matter of issuing directions, due to the use of expression `as it thinks fit’ in s. 144C(5) is expressly set out in s. 144C(8). If the DRP reaches the conclusion that the TPO erred in determining the ALP correctly, warranting further adjustment, the assessee, objecting to the variation in the income due to the order of the TPO, may land in difficulty, and end up with the enhancement of variation. But, for the DRP to exercise its power there has to be some variation proposed in the draft order. The Explanation to s. 144C(8) inserted by the Finance Act, 2012 with retrospective effect from 01.04.2009 has widened the DRP’s power of enhancement to all the matters arising out of the assessment proceedings irrespective of whether they were raised or not by the assessee. With this amplification of the power, even the matters not agitated by the assessee before the DRP can also be considered for the purposes of enhancement. Accordingly, in principle, the DRP was entitled to embark upon the question of enhancement of the TP adjustments. However, on facts as the DRP did not give reasonable opportunity to the assessee, the matter has to be remanded to it for fresh consideration

A mere mistake in making of a claim in the return of income would not ipso facto reflect concealment or furnishing of inaccurate particulars of income in terms of s. 271(1)(c). The wrong claim of depreciation cannot be said to be made with an intention to evade taxes in as much as even after the disallowance of depreciation, the resultant income of the assessee remains a loss. The assessee had been incurring losses since the year 2003 due to the market forces. Considering the entirety of circumstances, the claim on account of depreciation was a mistake, and did not invite the provisions of s. 271(1)(c)

The assessee’s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of “international transaction” u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred)

The India-France DTAA does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and the DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess. U/s 90(2) if the provisions of the DTAA are more beneficial to the taxpayer, the DTAA prevails over the Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA for deduction of tax