2017 (4) TMI 1491 - AT - Income Tax

TP Adjustment - comparable selection - exclude Twenty Twenty Television Company from the final set of comparables noticing that it has made a loss in this year - HELD THAT - Pune Bench of the Tribunal in the case of Bobst India (P.) Ltd. 2015 (12) TMI 684 - ITAT PUNE decided this aspect by examining the financial position of the particular concern over the last three years. The Bench noted that in one of the last three years the concern was in profits and therefore in this background it inferred that such a concern could not be considered as a persistent loss-maker. At the time of hearing assessee had drawn our attention to a tabulation prepared for three years ending 31.3.2006 31.3.2007 and 31.3.2008 which shows that in the year ending 31.3.2006 the said concern had made a profit while there was loss in the other two years. In this background therefore it could not be said that as on the year ending 31.3.2008 which corresponds to the assessment year before us such a concern was a persistent loss-maker so as to exclude it from the final set of comparables. Thus following the ratio of the decision of the Pune Bench of the Tribunal in the case of Bobst India (P.) Ltd. (supra) we deem it fit and proper to direct the TPO/Assessing Officer to include the said concern in the final set of comparables. Correction of margin of one of the concerns included in the final set of comparables i.e. Creative Eye Ltd. - margin of the said concern has been adopted at 7.33% whereas the stand of the appellant is that the correct margin of the said concern is 0.47% and that the lower authorities have erred in calculating the margin at 7.33%. - HELD THAT - As per the tabulation furnished by the assessee as Annexure - B to the written submissions it is clear that in the case of other comparable concerns the Total Operating Expenses have been calculated after taking into account the Depreciation and Provision of FBT; and that it is only in the case of Creative Eye Ltd. the same have been excluded. Quite clearly the determination of margin in the case of all the comparable concerns needs to be uniformly done so as to impart rationality to the comparability analysis. Having regard to the material on record we are satisfied that the correct margin of Creative Eye Ltd. is to be taken as 0.47% and that the DRP has unjustifiably rejected the plea of the assessee. As a consequence we direct the TPO/Assessing Officer to consider the margin of Creative Eye Ltd. at 0.47% and thereafter rework the determination of arm s length price. Assessee submitted that if the plea for inclusion of Twenty Twenty Television Company Ltd. and the corrected margin of Creative Eye Ltd. is accepted then the margin of the resultant comparables would fall within the 5% of the stated margin of the assessee and the necessity of making any adjustment would be obviated in terms of Sec. 92C(2) of the Act. Since we have accepted the aforesaid two pleas of the assessee therefore the other issues raised in the Grounds of appeal with regard to the Content and Support segment are rendered academic and are not being adjudicated for the present. Insofar as the Content and Support segment is concerned the TPO/Assessing Officer is directed to re-work the arm s length price of the international transactions in accordance with the aforesaid directions. Benchmarking of international transactions in the General Management Support Services segment - HELD THAT - Exclusion of Access India Advisors Ltd. on the ground that the profit margins of the said concern fluctuate widely and in the instant assessment year itself it is quite high at 45.97% which goes down to 6.62% in the next year and thereafter there is a negative margin of 74.60%. Similarly with regard to the earlier three years the margin levels are quite in variance not only in comparison with the level of margin in the instant assessment year but also in relation to the subsequent two years. Be that as it may the financial data of the succeeding years which is essential to examine any abnormal profit trends was not available to the assessee at the time of carrying out its Transfer Pricing Study and therefore once such an information is available in public domain it is only thereafter that the assessee can feasibly raise such a ground based on the abnormal fluctuations in the margins. Notably insofar as the instant case is concerned there is ostensibly a justifiable reason for the assessee to raise such a plea before us which was hitherto not raised before the lower authorities. Therefore on this aspect we admit for consideration the plea of assessee for exclusion of Access India Advisors Ltd. from the final set of comparables. Having admitted the plea of assessee seeking exclusion of Access India Advisors Ltd. from the final set of comparables and for the reason that such a plea was hitherto not before the lower authorities we deem it fit and proper to remand the matter back to the file of Assessing Officer/TPO for an appropriate verification. AO/TPO shall verify the working of the Operating margins of Access India Advisors Ltd. furnished by the assessee for the various years and if it is found to be volatile without reflecting any normal business condition then the Assessing Officer/TPO shall exclude the same from the final set of comparables. Segment of Provision of General management and support services is to seek inclusion of Educational Consultants (India) Ltd. - HELD THAT - The said concern has been accepted as a comparable even in the assessments finalised u/s 143(3) of the Act. Be that as it may it is also clearly emerging from the order of TPO that the said concern has been excluded by merely making a bald assertion about the dissimilarity of functions. Notably such an observation of the TPO is devoid of any factual support and in our view it was imperative for the TPO to bring out the distinguishing features considering that the said concern was taken as a comparable in the past years. Such a burden has clearly not been discharged by the TPO as is evident from the discussion in the order and therefore we find no reason to uphold his stand for excluding the said concern from the final set of comparables. Therefore on this aspect also assessee succeeds. Basis for working out the risk adjustment - Case of assessee for adjustment on account of difference in working capital and risks assumed has been shut out even before examining the same in some detail. HELD THAT - Before us the learned representative has furnished the workings of working capital adjustment and risk adjusted margin of the comparable concerns to point out that on facts also such adjustments are justified. Even otherwise we find that our coordinate benches in the case of Intellinet Technologies India (P.) Ltd. 2012 (6) TMI 237 - ITAT BANGALORE and Schlumberger Global Support Centre Ltd 2015 (10) TMI 2625 - ITAT PUNE have found that even in the course of comparability analysis carried out by applying the TNM method suitable risk adjustments are permissible if the facts of the case so warrant. O Workings referred by the assessee before us culling out justification for allowing working capital and risk adjustments have not been verified by the lower authorities. Therefore while we uphold the stand of the assessee in-principle so however it would be imperative for the assessee to factually demonstrate the justifiability of the adjustments on account of difference in working capital and risks assumed vis-a-vis the comparables before the lower authorities. Therefore the matter is set- aside to the file of TPO/Assessing Officer with directions to consider the plea of the assessee in accordance with law. Thus on this aspect assessee succeeds for statistical purposes. Addition of non-reconciliation of ITS data - HELD THAT - Onus is on the assessee to reconcile the details so however the reconciliation is to be based on availability of appropriate details. At the time of hearing the assessee-company had referred to a communication dated 12.12.2011 addressed to the Assessing Officer which succinctly details the reasons for the difference and the reason for which proper reconciliation could not be made. In the said communication assessee had explained that the ITS details was founded on the basis of name and address of the parties and the amount and date entered by the other party in its book of accounts. It has been pointed out that in the absence of PAN of other party the relevant invoice number and date it is difficult to exactly match the entries appearing in the assessee s book of accounts. The relevance of the aforesaid has also been brought out in some detail by the assessee in its communication to the Assessing Officer. One pertinent point which stands out is the assertion of the assessee before the Assessing Officer that wherever in case of a party the amount of revenue recorded in the Profit Loss Account of the assessee was found lower than the ITS details assessee explained that same is merely on account of timing difference inasmuch as assessee would have credited such sum to the Profit Loss Account of the other year. Assessee also asserted before the Assessing Officer in its communication dated 12.12.2011 that in respect of the parties mentioned in the ITS details on an overall basis the revenues reflected by the assessee in its financial statements was higher than the revenues noted in the ITS details. There is no repudiation to any of the aforesaid assertions and therefore we find that no addition is warranted on this count. Therefore on this aspect assessee succeeds. Grant of credit for TDS - HELD THAT - As assessee submitted that assessee had already moved an application to the Assessing Officer seeking credit for the TDS. Considering the aforesaid we direct the Assessing Officer to consider the application of the assessee in accordance with law. Thus on this aspect assessee succeeds for statistical purposes

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Rejection of Economic Analysis by Assessee
3. Benchmarking Analysis Rejection
4. Exclusion of Loss-Making Comparables
5. Exclusion of Companies with Super Normal Profits
6. Computation of Operating Margin for Creative Eye Ltd.
7. Comparable Segment for In House Productions Ltd.
8. Working Capital Adjustment
9. Risk Adjustment
10. Adjustment to Arm's Length Price
11. Addition on Non-Reconciliation of ITS Details
12. Insufficient Information for ITS Reconciliation
13. Short Credit of TDS
14. Levy of Interest under Section 234B
15. Levy of Interest under Section 234C

Detailed Analysis:

1. Transfer Pricing Adjustment:
The learned AO made a transfer pricing adjustment of ?34,185,321 under Section 92C(4) of the Act to the total income of the appellant for AY 2008-09. The TPO determined the arm's length operating margin for the international transaction of support and supply of content to be 22.55% and for general management support services to be 13.26%.

2. Rejection of Economic Analysis by Assessee:
The TPO/AO did not accept the economic analysis undertaken by the appellant in accordance with the provisions of the Act and the Rules. The TPO rejected the appellant's benchmarking analysis for its international transactions, particularly for the supply and support of content and provision of general management support services.

3. Benchmarking Analysis Rejection:
The TPO/AO rejected the appellant's benchmarking analysis maintained under Section 92D of the Act read with Rule 10D(4) of the Rules. The TPO used only the updated Financial Year 2007-08 operating margins of the comparable companies available at the time of the assessment.

4. Exclusion of Loss-Making Comparables:
The TPO/AO excluded loss-making comparables while determining the arm's length operating margin for the international transaction of supply and support of content. The Tribunal directed the inclusion of Twenty Twenty Television Company Ltd., which was excluded by the TPO for incurring an operating loss. The Tribunal noted that the concern was not a persistent loss-maker.

5. Exclusion of Companies with Super Normal Profits:
The appellant argued that companies earning super normal profits should be excluded if loss-making companies are excluded. The Tribunal did not specifically address this issue as other adjustments brought the appellant's margin within the acceptable range.

6. Computation of Operating Margin for Creative Eye Ltd.:
The TPO/AO erred in computing the operating margin of Creative Eye Ltd. The Tribunal found an inconsistency in the TPO's calculation and directed the margin to be corrected to 0.47% instead of 7.33%.

7. Comparable Segment for In House Productions Ltd.:
The TPO/AO considered the 'media division' as the comparable segment instead of the 'health care division' for In House Productions Ltd. The Tribunal did not specifically address this issue as other adjustments brought the appellant's margin within the acceptable range.

8. Working Capital Adjustment:
The TPO/AO did not allow the appellant the benefit of the working capital adjustment. The Tribunal upheld the appellant's claim for working capital adjustment and directed the TPO/Assessing Officer to consider the same.

9. Risk Adjustment:
The TPO/AO did not allow the appellant the benefit of the risk adjustment. The Tribunal upheld the appellant's claim for risk adjustment and directed the TPO/Assessing Officer to consider the same.

10. Adjustment to Arm's Length Price:
The appellant argued that any adjustment to the arm's length price should be limited to the lower end of the 5 percent range. The Tribunal did not specifically address this issue as other adjustments brought the appellant's margin within the acceptable range.

11. Addition on Non-Reconciliation of ITS Details:
The AO made an addition of ?77,13,648 on account of non-reconciliation of ITS details. The Tribunal found that the ITS details were insufficient for the appellant to undertake a reconciliation and deleted the addition.

12. Insufficient Information for ITS Reconciliation:
The appellant argued that the information provided by the AO was insufficient for reconciliation. The Tribunal agreed with the appellant and deleted the addition.

13. Short Credit of TDS:
The AO erred in granting short credit of TDS amounting to ?2,60,19,233. The Tribunal directed the AO to consider the application of the appellant for TDS credit in accordance with the law.

14. Levy of Interest under Section 234B:
The AO levied interest under Section 234B amounting to ?35,59,140. The Tribunal noted that the levy of interest is consequential and did not specifically address the issue.

15. Levy of Interest under Section 234C:
The AO levied interest under Section 234C amounting to ?3,74,452. The Tribunal noted that the levy of interest is consequential and did not specifically address the issue.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, directing the TPO/Assessing Officer to re-work the arm's length price of the international transactions in accordance with the Tribunal's directions and to consider the appellant's claims for working capital and risk adjustments. The Tribunal also deleted the addition on account of non-reconciliation of ITS details and directed the AO to consider the application for TDS credit. The issues of interest under Sections 234B and 234C were noted as consequential and dismissed.