2015 (6) TMI 962 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - determining the ALP on the basis of current year datas and not considering to prior two financial years 2005-06 and 2006-07 - Held that - In order to determine the arms length price in relation to international transaction, it has to be compared with uncontrolled and unrelated transactions by using the data relating the financial year in which year the international transaction has been entered into. It has been stipulated under rule 10B(4) read with Rule 10D(4) of Income-tax Rules, that contemporaneous information and document should be considered as far as possible for the purpose of comparing uncontrolled transaction with the international transaction. Therefore, the comparability of an uncontrolled and unrelated transaction with the international transaction has to be decided by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of abnormal circumstances, the multi year data can be considered. When there is no such abnormal or exceptional circumstances/ facts in existence for the year under consideration which could have an influence on the results as well as on the determination of the transfer prices, then the data relating to financial year in which the international transaction has been entered into shall be used.- Decided against assessee. Introducing and upholding to new companies as comparables while determining the ALP - issue of bringing in two new companies, i.e. Brescon Corporate Advisors Ltd. and another Keynote Corporate Services Ltd.- Held that - The factors for determining inclusion and exclusion of any case in the case of comparables are specifically provided under Rule. Therefore, unless and until there are specific reasons and factors as provided under Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making unit or loss making unit because no such factor finds place either in Rule 10B(2) or 10B(3). - Decided against assessee. Sustaining the selection of Khandwala Securities Ltd. as comparable even when exceptional profit earned by this company during the financial year 2007-08. As we have already mentioned earlier that Rule 10B does not provide the basis to exclude an entity or eliminate it from the list from comparables solely on the basis of high profit making, for same reasons, we find no merits in this ground of assessee s appeal also. It is evident that decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risk assumed, the contractual terms and conditions prevailing including the geographical location and size of the market, cost of labour and capital in the markets, etc. Nowhere the higher or lower profit rate has been prescribed as the determinative factor to make a case in comparable. It has been done rightly so because profit is not a factor itself, but consequence of effects of various factors. Only if the higher or lower profit rate results on account of effect of factors given in Rule 10B(2) read with sub-rule (3), that such case shall merit omission then only it can be considered. Higher profits achieved due to factors not mentioned in the Rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate Benches of the Tribunal including Exxon Mobil Company India (P.) Ltd. - (2011 (6) TMI 385 - ITAT, MUMBAI) and DCIT vs. M/s. B.P. India Services (P.) Ltd. 2011 (9) TMI 173 - ITAT, Mumbai - Decided against assessee. Considering the reimbursable expenses and corresponding reimbursements as part of operating expenses and operating income respectively of the assessee while determining the ALP - Held that - The functional analysis reveals that certain expenses amounting to ₹ 4.9 crores has been incurred in the course of services. Moreover, the agreements of the assessee with AEs stipulate that all ancillary expenses in connection with the services related to the function shall be paid out of the fixed fees paid by the management companies. The expenses incurred to with relation to services performed by the assessee, even if not part of the management fee, should be invariably routed through the profit and loss account and invited an appropriate mark up. In view of these facts, we find no infirmity in including the reimbursement amounting to ₹ 4.9 crores in the cost base.- Decided against assessee. Disallowance of benefit of /- 5% - Held that - This issue has been settled by the amendment made by the Finance Act, 2012 retrospectively thereby it has been made clear that benefit of /- 5% under the Proviso to section 92C(2) of the Act shall not be allowed as standard deduction for the purpose of computation of arm s length price. The benefit of proviso to section 92C(2) is available only when the price of international transaction is within the tolerance range of /- 5% of the ALP computed by taking arithmetic mean of more than one price. Thus, it is clear that benefit under this proviso is not available to the assessee. - Decided against assessee. Disallowance of bonus paid by the assessee to its shareholders-cum-directors - Held that - In assessee s case, the Managing Director, Ashish Dhawan and Director, Shri Kunal Shroff were holding share of assessee company in the ratio of 2 1. They were only shareholders of the company. Bonus was paid in the ratio of shareholdings. In assessee s case, the payment of the bonus was directly related to the shareholding patterns of the Directors. Shares were held in the ratio of 2 1. The bonus has been paid in the same ratio of 2 1. It is according to the shareholding of these two directors. Assessee had also failed to justify the payment as reward for the work. Had the same be a reward it could not have been paid in the ratio of shareholding. The Managing Director and the Director s reward could not have been in the ratio of 2 1. Further facts of the case clearly establish that had the bonus not been paid to these Managing Director and Director, then it could have been paid as dividend to these two shareholders in the same ratio in which the bonus had been paid. Therefore, the case laws relied upon by ld. AR are not of any help to the assessee. These two shareholders were Managing Director and Director of the company holding the shares in the ratio of 2 1 and had this bonus not been paid in the same ratio then the dividend could have been paid in the same ratio. Keeping these facts in view, we find no merits in this ground and the same stands dismissed. - Decided against assessee.

Summary

Issues Involved:

1. Determination of Arm's Length Price (ALP) using single year data.
2. Inclusion of two new companies as comparables.
3. Sustaining the selection of Khandwala Securities Ltd. as a comparable.
4. Treatment of reimbursable expenses and corresponding reimbursements.
5. Non-allowance of +/-5% benefit under proviso to section 92C(2).
6. Disallowance of bonus paid to shareholder-directors under section 36(1)(ii).

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) using single year data:

The assessee argued that the revenue authorities should consider data from two prior financial years (2005-06 and 2006-07) along with the current year (2007-08) to determine the ALP. However, it was held that, as per Rule 10B(4) of the Income-tax Rules, 1962, the data relating to the financial year in which the international transaction was entered into should be used. The Tribunal found no abnormal or exceptional circumstances that would necessitate using multi-year data, thus dismissing this ground of appeal.

2. Inclusion of two new companies as comparables:

The assessee contested the inclusion of Brescon Corporate Advisors Ltd. and Keynote Corporate Services Ltd. as comparables, arguing that their high profits should exclude them. However, the Tribunal ruled that high profits alone do not justify exclusion under Rule 10B(2) or 10B(3). The decisive factors are the specific characteristics of services, assets, risks, and market conditions, not profit levels. Thus, this ground of appeal was dismissed.

3. Sustaining the selection of Khandwala Securities Ltd. as a comparable:

The assessee objected to Khandwala Securities Ltd. being a comparable due to its exceptional profits. The Tribunal reiterated that high or low profits are not determinative factors for exclusion under Rule 10B. The inclusion or exclusion depends on service characteristics, assets, risks, and market conditions. As the high profits were not due to factors specified in Rule 10B, this ground of appeal was also dismissed.

4. Treatment of reimbursable expenses and corresponding reimbursements:

The assessee argued that reimbursable expenses and corresponding reimbursements should not be considered part of operating expenses and income. The Tribunal found that these expenses were incurred in the course of providing services and were stipulated in the agreement with the AEs. Thus, they should be included in the cost base and operating income. This ground of appeal was dismissed.

5. Non-allowance of +/-5% benefit under proviso to section 92C(2):

The Tribunal held that the amendment made by the Finance Act, 2012, clarified that the +/-5% benefit under proviso to section 92C(2) is not a standard deduction but a tolerance range. The benefit is available only if the price of the international transaction is within this range of the ALP. As the assessee's price was not within this range, this ground of appeal was dismissed.

6. Disallowance of bonus paid to shareholder-directors under section 36(1)(ii):

The assessee challenged the disallowance of bonus paid to its shareholder-directors. The Tribunal noted that the bonus was paid in the same ratio as the shareholding (2:1), indicating it could have been paid as a dividend. The Tribunal distinguished the facts from other cases cited by the assessee, noting that the bonus was directly related to shareholding and not as a reward for work. Thus, the disallowance under section 36(1)(ii) was upheld, and this ground of appeal was dismissed.

Conclusion:

The Tribunal dismissed all grounds of the assessee's appeal, upholding the revenue authorities' determinations on transfer pricing adjustments, inclusion of comparables, treatment of reimbursable expenses, non-allowance of +/-5% benefit, and disallowance of bonus to shareholder-directors. The appeal was dismissed in its entirety.