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2013 (1) TMI 45 - AT - Income TaxInternational transactions entered with A.Es (USA) - assessee an Indian Company providing call centre services exclusively to A.E.- case referred to TPO - upward Transfer Pricing adjustment - Applicability of Multiple Year Data - Held that - The use of the word shall in the main provision of the Rule makes it abundantly clear that the use of data of the current financial year (i.e. of the financial year in which the international transaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as as per Indian T.P. Regulations - thus the TPO rightly rejected the use of earlier year's data by the assessee, as the assessee failed to establish before the TPO, CIT (Appeals) or the Tribunal how such earlier year's data had an influence on the prices of the current financial years. Use of data by the TPO after the cut off date - Held that - Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the specified date referred to in section 92F(4) which has the same meaning as 'due date' in Explanation 2 to section 139(1). In the assessee's case, this would be '30th day of September' as it is a company. It is clear, that the Act has not provided for any cutoff date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP - no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation. Safe Harbour - sought the benefit of /- 5% - Held that - The new section 92C(2A) mandates that if the arithmetical mean price falls beyond / - 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus the / - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes accordingly the 5% benefit is not allowable in the assessee's case. Rejection of T.P. Study - Held that - The use of current year data is mandated by the relevant IT Rules, 1962 and by not adhering thereto, the assessee has rendered into T.P. Study unreliable. In this view of the matter, the opinion that the TPO was right in rejecting the T.P. Study submitted by the assessee. Related Party Transactions - Held that - Respectfully following the decision in the case of Sony India (P) Ltd. v. Dy. CIT 2008 (9) TMI 420 - ITAT DELHI-H AO/TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04. Economies of Scale - Held that - As decided in Genisys Integrating Systems (India) (P.) Ltd. 2011 (8) TMI 952 - ITAT BANGALORE only companies within the turnover range of ₹ 1 Crore to ₹ 200 Crores should be taken into consideration for the T.P. Study. The cited case squarely applies to the assessee's case as the turnover of the assessee being approximately ₹ 66 Crores falls within the range of ₹ 1 Crore to ₹ 200 Crores. Direct the AO/TPO to consider only those companies having a turnover of ₹ 1 Crore to ₹ 200 Crores as comparables. Comparable Companies Owning Intangiables - Held that - It is a well accepted principle that only those companies which are on similar standards need to be considered for comparability. Therefore, companies which possess their own unique software intangibles cannot be compared with the assessee, as the former would derive significant advantage from unique software compared with the assessee, which is performing call centre services for it's A.E. in the USA. Parent Company Losses - Held that - As per a plain reading of the language of the provisions of section 92 it is clear that the income arising from an international transaction shall be computed having regard to the arms length price. Similar transactions carried on between unrelated parties were to be seen to come to a conclusion whether the profits earned by the assessee is justified. Thus, the arguments that the profits earned by the assessee is justified because the parent company is under losses is against the principle of arms length price. To sum up, the assessee's arguments that it has not shifted profits outside India based on the loss incurred by the parent company is not acceptable. the assessee mainly states that the T.P. regulations being anti avoidance legislation, the TPO has to prove that tax avoidances had in fact taken place before making any T.P. adjustment - Held that - As decided in case of Aztec Software Technology Services Ltd v. Asstt. CIT 2007 (7) TMI 329 - ITAT BANGALORE that it is not necessary to prove that profits are shifted out of India for making a transfer pricing adjustment. Thus it is not necessary for the TPO to demonstrate tax avoidance and diversion of tax/income before invoking the provisions of section 92C and 92CA of the Act. Individual Companies for Comparability - Vishal Information Technologies Ltd. (VIT) - Held that - An in the case of this comparable the Mumbai Tribunal in the case of Asstt. CIT v. Maersk Global Service Center (India) (P.) Ltd. 2011 (11) TMI 465 - ITAT MUMBAI has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself exclusion of Vishal Information Technologies Ltd. from the list of comparables warranted. Wipro BPO Ltd. - Held that - the turnover/Revenue of Wipro BPO Ltd. in the period relevant to Assessment Year 2004-05 is ₹ 322 Crores. Further, this company having the influence of Wipro brand may be seen as having its unique intangibles. Tricom India Ltd. Fortune Infotech Ltd. - Held that - Has registered an abnormal growth of 33% increase in PAT in the relevant period due to the fact that it has developed its unique software to provide BPO services to its customers. Spanco Telesystems Solutions Ltd. - Held that - this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company and therefore see no reason why this company should not be considered as a comparable - grounds seeking its exclusion is rejected. M/s. Ultra Marine Pigments Ltd. - Held that - The assessee has not been able to demonstrate with any evidence to support that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also - grounds seeking its exclusion is rejected. Apollo Health Street Ltd. - Held that - Perusal of its annual report for F.Y. 2003-04 though it does not appear to have any related party transactions, it is seen that out of its total revenues of ₹ 12.2 Crores, only ₹ 6.50 Crores i.e. about 54% of its revenue was received from ITES. This shows that significant Revenue earning of about 46% is not from IT enabled services which will render it functionally different and not comparable. MCS Ltd Tata Share Registry - Held that - The assessee caters to the export market, whereas these two companies cater to the domestic market - rejection warranted. Depreciation adjustment - Additional ground of appeal - Held that - Mere claim for an adjustment will serve no purpose unless it is backed by proper details - remit the issue to the file of the AO/TPO to consider it.
Issues Involved:
1. Adjustment to the arm's length margin. 2. Revised benchmarking. 3. Applicability of multiple year data. 4. Adjustments for various risks. 5. Safe harbour. 6. Parent company loss. 7. Individual companies for comparability. 8. Additional ground of appeal regarding depreciation adjustment. Detailed Analysis: Adjustment to the Arm's Length Margin: - Ground 1: The assessee challenged the CIT (Appeals) for upholding adjustments made by the TPO to the arm's length margins for call centre services. The CIT (Appeals) accepted comparable companies with related party transactions, economies of scale, and intangibles, rejecting the assessee's comparables due to non-contemporaneous data. The Tribunal dismissed the ground as infructuous since it was not pressed. Revised Benchmarking: - Ground 2: The CIT (Appeals) did not consider the fresh benchmarking analysis conducted post the TPO criteria. This ground was general and not agitated before the Tribunal, hence dismissed as infructuous. Applicability of Multiple Year Data: - Ground 3: The use of multiple year data was not pressed in the appeal. The Tribunal reiterated that Rule 10B(4) mandates using current financial year data for comparability analysis, rejecting the use of earlier years' data unless it influences the determination of transfer prices. Adjustments for Various Risks: - Ground 4: The CIT (Appeals) concluded that business risk borne by the appellant did not warrant a market risk adjustment. The Tribunal found no infirmity in this conclusion. Safe Harbour: - Ground 5: The assessee sought the benefit of +/- 5% as per the proviso to section 92C(2). The Tribunal noted that the amendment by Finance Act, 2012, clarified that the 5% variation is only to justify the price charged in international transactions, not for adjustment purposes. Hence, the ground was dismissed. Parent Company Loss: - Ground 6: The assessee argued that the parent company's loss should impact the arm's length pricing. The Tribunal held that each entity is treated separately, and the parent company's loss is irrelevant in determining the assessee's arm's length price. Individual Companies for Comparability: - Comparable Companies Owning Intangibles: The Tribunal directed the exclusion of companies like Wipro BPO Ltd., Tricom India Ltd., and Fortune Infotech Ltd. due to their unique intangibles and significant advantages from such assets. - Related Party Transactions: The Tribunal directed the exclusion of comparables with related party transactions exceeding 15% of total revenues. - Economies of Scale: The Tribunal applied the turnover filter of Rs. 1 Crore to Rs. 200 Crores, excluding Wipro BPO Ltd. with a turnover of Rs. 322 Crores. - Other Comparables: The Tribunal examined individual companies like Vishal Information Technologies Ltd., Spanco Telesystems & Solutions Ltd., Ultra Marine Pigments Ltd., Ace Software Ltd., Apollo Health Street Ltd., MCS Ltd., Tata Share Registry, and Allsec Technologies Ltd., directing the exclusion or inclusion based on specific criteria like functional similarity, segmental results, and export filters. Additional Ground of Appeal: - Depreciation Adjustment: The Tribunal admitted the additional ground for depreciation adjustment but noted that mere claims without proper details are insufficient. The issue was remitted to the Assessing Officer/TPO for examination and consideration in light of operational differences affecting comparability. Conclusion: The Tribunal partly allowed the assessee's appeal, directing specific exclusions and inclusions of comparables, and remitting the issue of depreciation adjustment for further examination.
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