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2013 (10) TMI 747 - AT - Income TaxSelection of comparable for computing ALP in Transfer Pricing transaction Held that - Excluded companies whose turnover is more than Rs. 100 crores It is not applicable the employee cost to sale filter as relevant data/information for this filter are not available - Employee cost is included by many companies under different other heads. Selection of comparables applying the onsite income filter also stands on the same footing as relevant data/information are not available in respect of all the companies in the database - Loss making companies and companies having super normal profits cannot be considered as comparables in view of the ratio laid down in case of Mentor Graphics (India) (P.) Ltd. 2013 (5) TMI 49 - DELHI HIGH COURT and Philips Software Centre (P.) Ltd. v. Asstt. CIT 2008 (9) TMI 466 - ITAT BANGALORE-B Decided against the Revenue. Benefit of ( )/(-) 5% under the proviso to section 92C(2) of the Act to the Assessee Held that - The Provision of section 92C(2A) makes it clear that an assessee shall not be entitled to exercise its option as referred in the proviso to sub-section (2) if the variation between the arithmetical mean and the price at which such transaction has actually been undertaken exceeds 5% of the arithmetical mean As per the retrospective operation of the aforesaid provision, the benefit of ( )/(-) 5% as a standard deduction cannot be allowed. Allowance of risk adjustment of 1% while computing the adjusted average PLI Held that - There are divergent decision in this regard Therefore, in the facts and circumstances of this case, accepted the view favorable to the assessee - Allowed the benefit of risk adjustments at 1% - Decided against the Revenue. Selection of method for computation of arm s length price Held that - Assessee has itself accepted that TNMM is similar to CPM excepting that CPM is based on gross margins whereas TNMM is based on net margins - The assessee has also accepted that if proper selection criteria are adhered to application of TNMM would also result in the fact that the price at which the assessee has undertaken the international transactions are at arm s length Also, reliance has been placed upon the judgment of Hon ble Punjab & Haryana High Court in the case of Coca Cola India Inc v. ACIT 2008 (12) TMI 67 - PUNJAB AND HARYANA HIGH COURT has held that merely because the assessee has chosen one of the methods, it does not take away the discretion of the TPO to select any other method which may be considered to be more appropriate for the purpose of determining the true income Moreover, assessee has not disputed adoption of TNMM by the TPO in the earlier assessment years - Applied TNMM as the most appropriate method Decided in favor of Revenue.
Issues Involved:
1. Rejection of comparables selected by the TPO using different filters. 2. Adoption of TNMM over CPM for computing ALP. 3. Application of turnover filter. 4. Application of "employee cost to sales" filter. 5. Application of "onsite income/revenue" filter. 6. Allowance of 5% deduction under the proviso to Section 92C(2) of the Act. 7. Allowance of additional benefit of risk adjustment of 1%. Detailed Analysis: 1. Rejection of Comparables Selected by the TPO Using Different Filters: The department challenged the rejection by the CIT(A) of certain comparables selected by the TPO. The TPO had proposed 15 additional comparables and questioned the use of CPM by the assessee, suggesting TNMM instead. The TPO argued that CPM presents practical difficulties in identifying costs and lacks a discernible link between costs and market prices in software services. The TPO also criticized the taxpayer for not including all direct and indirect costs in its calculations and for excluding certain costs like rent and insurance. 2. Adoption of TNMM Over CPM for Computing ALP: The TPO rejected CPM and adopted TNMM, citing reasons such as practical difficulties in identifying costs and the lack of a discernible link between costs and market prices. The CIT(A) upheld this decision, referencing the Supreme Court decision in DIT (International Taxation) v. Morgan Stanley (291 ITR 416), which supported TNMM as the most appropriate method for determining ALP in such cases. The assessee's contention that CPM should be used was rejected based on the reasoning that TNMM captures all expenses and provides a more accurate reflection of financials. 3. Application of Turnover Filter: The CIT(A) accepted the assessee's contention that large companies with turnovers exceeding Rs. 100 crores should not be considered comparables. This decision was upheld by the Tribunal, which cited previous cases where companies with significantly higher turnovers were excluded from the list of comparables due to their disproportionate size compared to the assessee. 4. Application of "Employee Cost to Sales" Filter: The CIT(A) found the "employee cost to sales" filter inappropriate due to the unavailability of relevant data for all companies in the database. It was noted that employee costs might be included under different expense categories, making the filter inconsistent and unreliable. The Tribunal upheld this view, agreeing that the filter could not be uniformly applied. 5. Application of "Onsite Income/Revenue" Filter: The CIT(A) rejected the "onsite income/revenue" filter applied by the TPO, noting that relevant data was not available for all companies in the database. The Tribunal agreed, emphasizing that the TPO's application of this filter was inconsistent and not supported by sufficient data. 6. Allowance of 5% Deduction Under the Proviso to Section 92C(2) of the Act: The CIT(A) had allowed a 5% deduction under the proviso to Section 92C(2), which was challenged by the department. The Tribunal referred to the Finance Act, 2012, which amended the provision with retrospective effect from 1-4-2002, stating that the benefit of the 5% deduction could not be allowed if the variation between the arithmetical mean and the transaction price exceeded 5%. Consequently, the Tribunal modified the CIT(A)'s direction, disallowing the 5% standard deduction. 7. Allowance of Additional Benefit of Risk Adjustment of 1%: The CIT(A) had directed the Assessing Officer to allow a 1% risk adjustment, which was contested by the department. The Tribunal upheld the CIT(A)'s direction, recognizing that the assessee, being a captive service provider, bore minimal risk. This decision was supported by various Tribunal decisions that allowed risk adjustments for captive service providers. Separate Judgments: The Tribunal's judgment was comprehensive and did not involve separate judgments by different judges. Conclusion: The Tribunal upheld the CIT(A)'s decisions on most issues, including the rejection of certain comparables, the application of TNMM, and the exclusion of large turnover companies. It modified the CIT(A)'s direction regarding the 5% deduction under Section 92C(2) but upheld the allowance of a 1% risk adjustment. The appeal by the department was partly allowed, while the assessee's cross-objection was dismissed, and the appeal for the subsequent assessment year was partly allowed for statistical purposes.
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