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2012 (10) TMI 779 - AT - Income TaxTransfer Pricing Adjustment - working capital adjustments - assessee contested against the comparables selected - Held that - Assessee has surplus capital from reserve, share capital etc. but still it operates its activity from the borrowed fund, then on the surplus capital, it would earn interest income which is independent to the operation of the company. Such income would be assessed as income from other sources, but the profit margin from the operations would be on lower side because of interest expenses etc. Thus, the working capital as envisaged by the assessee would always effects its profit. If the assessee was not require to use its own working capital then it will be a relevant factor for determining the profit margin and an adjustment to eliminate the disparity would always require. Considering the stand of the learned TPO in assessment years 2007-08 and 2008-09 where benefit of working capital adjustment was granted to the assessee, the plea of the assessee is allowed and set aside the issue to the file of the Assessing Officer with a direction that AO shall grant working capital adjustments after considering the computation filed by the assessee before the DRP - in favour of assessee. Exclusion Allsec Technology Ltd. from the list of comparables - Held that - Extracting the filters applied by the assessee for eliminating the non-comparable companies or adjusting their profit margin, the assessee has not applied the filter i.e. the companies who have incurred expenses of more than 5% of its sales on advertisement and marketing which required to be excluded. At this stage, in the absence of any finding, at the level of the TPO or of the learned DRP, it is difficult to verify the version put forth by the the assessee. Apart from this profit margin of any company is dependent upon many factors. By taking into consideration the one aspect, if on excluding the comparables then not a single comparable would be identified. The simple reason is whenever any adjudicating authority would try to carry out a study of the result of any company with a particular angle then the result would be different. The assessee ought to have placed specific details before the TPO and demonstrated how a prejudice had caused to the assessee, if comparables who have incurred more than 5% of sales a expenses towards advertisement and marketing are selected. Therefore no in the contentions of the assessee for excluding of Allsec Technology Ltd. from the list of comparables - against assessee. Excluding of Maple E-Solution from the list of comparables - Held that - Maple e Solution has shown 100% loss in financial year 2002-03 but all of a sudden shown profit at 37.38% in financial year 2004-05. In financial year 2008-09, it again shown losses and its profit margin is -65.23%. Considering this aspect, we are of the view that this comparable deserves to be excluded from the list of comparables. With the above observations the issue is set aside back to the file of the Assessing Officer for re adjudication - in favour of assessee. Filter of 25% transaction with related party of the total revenue - Held that - In a scheme of Income-tax Act the expression associate enterprises is somewhat similar to that of related party , defined in section 92A(2)(a) i.e. if an enterprises holds 26% share in the other enterprises then it can be considered as an associate enterprises. Similarly, under sec. 40A(2)(b) interested persons means if a person is having not less than 20% of voting power in a company then such person would be considered as substantial interest in the company. This section relates to examination of the cases where some undue benefit is being extended by a company. These two provisions give an indicator that whenever any issue regarding an interest created in any company is being examined which has influenced over the results of the company then these aspects can be taken as guidance one can safely say that an entity can be taken as uncontrolled, if its related party transaction do not exceed 25% of the total revenue. Thus, no fault in the conclusion of the TPO for applying this filter to the extent of 25% transaction with related party of the total revenue - against assessee. Very large companies who have a turnover of more than Rs.260 crores cannot be considered as a comparable companies, in view of their huge turnover. Therefore, finding force in the contentions of the assessee and direct the AO to exclude these three comparables and thereafter reworked out the means profit of the comparables - in favour of assessee.
Issues Involved:
1. Validity of assessment orders. 2. Arm's length price (ALP) determination of international transactions. 3. Use of single year data vs. multiple year data. 4. Working capital adjustment. 5. Inclusion/exclusion of comparables. 6. Interest under sections 234A, 234B, 234D, and 220. 7. Initiation of penalty under section 271(1)(c). Detailed Analysis: 1. Validity of Assessment Orders: The assessee contested that the assessment orders passed by the Assessing Officer (AO) pursuant to the directions of the Dispute Resolution Panel (DRP) were "bad in law and void ab-initio." The Tribunal did not find merit in this contention and upheld the validity of the assessment orders. 2. Arm's Length Price (ALP) Determination: The main dispute was whether any adjustment was required in the value of international transactions reported by the assessee. The Tribunal noted that the assessee used the Transactional Net Margin Method (TNMM) as the most appropriate method, which was not disputed by the Transfer Pricing Officer (TPO). The TPO made adjustments to the ALP, which were partially upheld by the DRP. 3. Use of Single Year Data vs. Multiple Year Data: The assessee used multiple year data for comparables, while the TPO insisted on using single year data as per Rule 10B(4) of the Income Tax Rules. The Tribunal supported the TPO's stance, emphasizing that the rule mandates the use of current year data unless specific circumstances justify the use of multiple year data. 4. Working Capital Adjustment: The assessee argued for a working capital adjustment, which was initially denied by the TPO due to lack of computation details. The Tribunal found merit in the assessee's contention and directed the AO to grant working capital adjustments after considering the computation filed by the assessee. 5. Inclusion/Exclusion of Comparables: The Tribunal examined several comparables included by the TPO and contested by the assessee: - Allsec Technology Ltd.: The Tribunal did not find merit in excluding this comparable based on advertising and marketing expenses. - Maple E-Solution Ltd.: Excluded due to high fluctuation in profit margins. - High Turnover Companies: Companies like HCL Comnet Systems, Infosys BPO Ltd., and Wipro Ltd. were excluded due to their significantly higher turnover compared to the assessee. - Related Party Transactions: The Tribunal upheld the TPO's filter of excluding companies with related party transactions exceeding 25% of total revenue. - Functionally Different Companies: The Tribunal upheld the inclusion of companies like Mould-Tech Technology Ltd. and Eclerx Services Ltd., rejecting the assessee's argument of functional dissimilarity. 6. Interest under Sections 234A, 234B, 234D, and 220: The Tribunal did not find specific arguments or evidence from the assessee to contest the charging of interest under these sections. Therefore, the interest charges were upheld. 7. Initiation of Penalty under Section 271(1)(c): The assessee argued that the penalty initiation was mechanical and without proper satisfaction. The Tribunal did not provide a detailed ruling on this issue, implying that it was not a significant point of contention in the appeals. Conclusion: The Tribunal partly allowed the appeals, directing the AO to recompute the margins of the comparables after excluding certain companies and to grant working capital adjustments. The assessment orders were upheld as valid, and the use of single year data was supported. The Tribunal also provided specific directions regarding the inclusion and exclusion of comparables, ensuring a fair determination of the ALP for the international transactions.
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