2011 (6) TMI 398 - AT - Income Tax

Determination of arm s length price - Operating expenditure - payment of lease rent - expenditure of the parent company has been shifted to the assessee. - held that - transfer pricing adjustment is required to be made in respect of the rent while working out the arm s length PLI. At the same time it is also held that suitable adjustment has to be made to such PLI in respect of idle capacity. - matter restored to the file of the AO. Rejection of comparable of six companies identified by TPO - held that - it is seen that none of the comparables selected by the TPO is shown to have the same business of voice based BPO as in the case of the assessee. - Decided against the revenue.

Issues Involved:
1. Treatment of Rs. 1,42,58,751/- as operating expenditure.
2. Rejection of six companies identified by the TPO as comparables.
3. Extraordinary expenditure of Rs. 2,13,99,841/- incurred by the assessee.
4. Rejection of five comparables by the TPO.
5. Rejection of Optimus Global Services Ltd. as a valid comparable.
6. Rejection of Surevin Internet Services Ltd. as a comparable.
7. Rejection of Shreejal Info Hubs Ltd. as a comparable.
8. Rejection of Optimus Outsourcing Co. Ltd. as a comparable.
9. Inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as comparables.
10. Setting off of brought forward losses and unabsorbed depreciation.
11. Setting off of interest income against brought forward loss or depreciation.
12. Taxation of excess liability written back as income from other sources.

Detailed Analysis:

1. Treatment of Rs. 1,42,58,751/- as Operating Expenditure:
The TPO suggested an upward revision by an amount of Rs. 3,31,61,663/- to align the value of international transactions with the arm's length price, resulting in a total income determination of Rs. 3,02,19,100/-. The assessee had adopted the transactional net margin method (TNMM) for determining the arm's length price, excluding Rs. 1.36 crore termed as extraordinary expenses. The TPO included this amount, considering it as the expenditure of TP USA, not the assessee, resulting in a PLI of (-) 0.92%. The CIT(A) concluded that the Rs. 1.42 crore was abnormal expenditure unrelated to normal operations, thus it should be ignored for PLI computation.

2. Rejection of Six Companies Identified by the TPO as Comparables:
The TPO added six new comparable cases, resulting in a mean PLI of 15.49%. The CIT(A) rejected these six comparables, noting they were engaged in different businesses and thus not comparable to the assessee's voice-based BPO services. The CIT(A) identified four valid comparables with a mean PLI of 4.29%, and concluded no adjustment was required for transfer pricing.

3. Extraordinary Expenditure of Rs. 2,13,99,841/- Incurred by the Assessee:
For the assessment year 2006-07, the assessee incurred extraordinary expenditure of Rs. 2,13,99,841/- by way of rent and maintenance expenses. The CIT(A) held this expenditure should have been borne by the parent company, leading to lower reported profits by the assessee. The matter was restored to the AO to rework the adjustment for transfer pricing, considering capacity sub-utilization.

4. Rejection of Five Comparables by the TPO:
The TPO rejected five comparables due to substantial related party transactions, exceeding 15% of the revenue, following the decision in Sony India (P.) Ltd. The CIT(A) upheld this rejection, noting the comparables had significant related party transactions, thus were not valid.

5. Rejection of Optimus Global Services Ltd. as a Valid Comparable:
The TPO rejected Optimus Global Services Ltd. due to persistent losses and eroded capital base. The CIT(A) upheld this rejection, noting that persistent losses and eroded capital base are abnormal and render the company incomparable.

6. Rejection of Surevin Internet Services Ltd. as a Comparable:
The TPO rejected Surevin Internet Services Ltd. due to its low turnover from call centre activities and accumulated losses. The CIT(A) upheld this rejection, noting a substantial difference in turnover from similar business, thus not comparable.

7. Rejection of Shreejal Info Hubs Ltd. as a Comparable:
The TPO rejected Shreejal Info Hubs Ltd. due to functional differences and different business territory. The CIT(A) upheld this rejection, noting the significant difference in business territories, thus not comparable.

8. Rejection of Optimus Outsourcing Co. Ltd. as a Comparable:
No arguments were made regarding this ground, and it appeared to be wrongly taken up. Thus, no decision was required on this ground.

9. Inclusion of Galaxy Commercial, Maple E Solutions, Triton Corporation, and Nucleus Netsoft and GIS (India) Ltd. as Comparables:
The CIT(A) rejected these companies as comparables due to diversified activities, questionable business reputation, and substantial related party transactions. The CIT(A) noted that segment-wise profitability was not available, and the business reputation of the owners was under serious indictment, making them unsafe for comparison.

10. Setting Off of Brought Forward Losses and Unabsorbed Depreciation:
The CIT(A) held that while unabsorbed depreciation is rightly considered by the AO, brought forward losses should not be deducted when computing profits and gains of business, partly allowing this ground.

11. Setting Off of Interest Income Against Brought Forward Loss or Depreciation:
The CIT(A) directed the AO to decide this ground again, noting that interest income can be set off against brought forward depreciation as it becomes the business loss of the current year, but not against brought forward business losses.

12. Taxation of Excess Liability Written Back as Income from Other Sources:
The CIT(A) held that the excess liability written back should be assessed as business income, allowing this ground.

Conclusion:
Both appeals were treated as partly allowed, with specific directions given for reworking adjustments and reconsidering certain grounds.

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