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2015 (5) TMI 648 - AT - Income TaxTransfer pricing adjustment - Computation of Deduction u/s.10A - Held that - As in Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that while computing the deduction under section 10A of the Act, if the export turnover in the numerator is to be arrived at after excluding certain expenditure, then the same expenditure should also be excluded from the total turnover also. Respectfully following the same, we dismiss this ground of revenue and direct the Assessing Officer to exclude the expenditure incurred in foreign currency towards daily allowance, support allowance and travel both from export turnover as well as from total turnover for computing deduction under section 10A of the Act. - Decided against revenue. Related Party Transactions (RPT) - selection of comparable - CIT (Appeals) held that companies having any RPT have to be excluded from the list of comparable companies - Held that - In the light of the above decision of the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. 2013 (1) TMI 45 - ITAT BANGALORE we find that the decision of the learned CIT (Appeals) in excluding those companies with any RPT is not in keeping with the above decision of the coordinate bench of this Tribunal. Respectfully following the above decision, we hold that the learned CIT (Appeals) was not correct in holding that companies with any RPT have to be excluded from the set of comparable companies, and direct the TPO / A.O. to apply the RPT filter at 15% of total revenues for including / excluding the comparable companies, excluded by the learned CIT (Appeals), in the final set of comparables. - Decided partly in favour of revenue. Companies with Abnormal Profits - CIT (Appeals) excluding companies with profit margin of more than 50% from the final set of comparable companies by holding the profit margin in excess of 50% to be abnormal - Held that - As find from a perusal of the impugned order that the learned CIT (Appeals) has excluded a number of companies from the list of 12 comparables merely because they have high profits in excess of 50%, without examining whether these companies satisfy the comparability analysis. In this factual matrix, respectfully following the decision of the Special Bench of the ITAT, Mumbai in the case of Maersk Global Centres (India) Pvt. Ltd.(2014 (3) TMI 891 - ITAT MUMBAI), we hold that the learned CIT (Appeals) was wrong in excluding the companies with profit margins of 50% or more merely because of high profit margins and reverse his finding in the matter and restore the matter to the file of the TPO. The TPO is directed to re-examine and decide on the comparability of the companies excluded by the learned CIT (Appeals) on grounds of abnormal profit - Decided in favour of revenue. Standard deduction 5%. - CIT (Appeals) granting standard deduction of 5% under the proviso to section 92C(2) - Held that - The new section 92C(2A) of the Act mandates that if the Arithmetic Mean Price falls beyond / - 5 % from the price charged in international transactions, then the assessee does not have any option referred to in section 92C(2)of the Act. Thus, as per this amendment, it is clear that the / - 5 % variation is allowed only to justify the price charged in the international transactions and not for adjustment / standard deduction purposes. The aforesaid amendment has settled the issue and accordingly the 5% standard deduction is not allowable to the assessee in the case on hand. The various judicial decisions cited pertain to the period prior to the retrospective amendment by way of insertion of section 92C(2A) of the Act by Finance Act, 2012 and are therefore not of any help to the assessee. In this view of the matter, we hold that the learned CIT (Appeals) erred in allowing the assessee the benefit of 5% standard deduction and accordingly reverse this order of this issue in view of the retrospective amendment w.e.f. 1.4.2002 brought about by the insertion of Section 92C(2A) of the Act by Finance Act, 2012. - Decided in favour of revenue. Exclusion of certain comparables - Turnover Filter of ₹ 200 Crores - Held that - As find that a coordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (2011 (8) TMI 952 - ITAT BANGALORE ) has held that turnover is an important filter of comparability which has to be adopted for determination of ALP and has determined the upper limit of the turnover filter to be applied at ₹ 200 Crores in cases where the turnover of the assessee is less than ₹ 200 Crores. In the case on hand, the turnover of the assessee being approx. ₹ 51 Crores only, following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd. (supra), we direct the Assessing Officer to exclude the above 5 companies from the list of comparable companies. RPT Filter - Four Soft Ltd. - Held that - As in the case of 24/7 Customer.Com P. Ltd. 2013 (1) TMI 45 - ITAT BANGALORE has held that companies having RPT in excess of 15% are to be excluded from the list of comparable companies. We, therefore, direct the TPO / A.O. to exclude this company, Four Soft Ltd. from the list of comparables if the RPT of this company is in excess of 15% after verification of the assessee's claim that the RPT is 19.89%. Exclusion of companies on grounds of being functionally different from the assessee - Held that - As find the learned CIT(A) has not considered and adjudicated on the issues raised by the assessee and the submissions made by the assessee in this regard are not examined. We therefore deem it appropriate to remand the issue of the comparability of the aforesaid five companies, challenged by the assessee on grounds of functional difference, for fresh consideration by the TPO. - Decided in favour of assessee for statistical purposes. Multiple Year Data - Held that - As it is a mandatory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of T.P. proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its report on the T.P. Study. Further, we are also of the view that 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 before us as to how such earlier years data had an influence on the prices of the current financial year. - Decided against assessee. Data used by the TPO - assessee challenges the action of the TPO in using data available at the time of assessment proceedings, while carrying out the fresh search process for comparable companie - Held that - The assessee is obliged to maintain the information and documentation as required relating to international transactions as per the specified data so that it can be made available to the TPO or the Assessing Officer or any other authority in any proceeding under the Act. We are, therefore, of the view that there is no infirmity in the action of the TPO in using contemporaneous data at the time of T.P. Audit, though the same may not have been available to the assessee at the time of preparation of the T.P. Study / documentation - Decided against assessee. Risk Adjustment - Held that - except for raising the claim for risk adjustment, the assessee ;has failed to substantiate the claim with any quantification so that it can be basis for examination by the TPO In a recent decision of the co-ordinate bench in the case of CISCO Systems (India) P. Ltd., 2014 (11) TMI 849 - ITAT BANGALORE the bench noted that risk adjustment was not allowed by TPO for the reason of chance of proper basis for quantification. Since such quantification was placed before the Tribunal, the bench directed the TPO to examine and consider the assessee's claim. In the case on hand it is not so. We are, therefore, of the opinion that in the case on hand, the assessee has failed to make its case for being allowed risk adjustment and concur with the order of the TPO in not allowing the assessee risk adjustment in the facts and circumstances of this case. - Decided against assessee. Reimbursement of Expenses considered as part of operating cost - Held that - It is settled principle that if the reimbursements are mere pass through expenses without any service element, then the same should not be added back to the cost base for the purposes of mark up. We, however, find that both the TPO and the learned CIT (Appeals) have decided the issue without examining the details of the expenses involved. The break-up of the said expenses are not given in detail and the claim that these expenses have been actually incurred by the assessee on behalf of the AEs and vice versa have not been examined. We therefore deem it fit to remit the issue to the file of the Assessing Officer / TPO for detailed verification. - Decided in favour of assessee for statistical purposes. Interest u/s. 234 - Held that - The charging of interest is mandatory and consequential as has been held by the Hon'ble Apex Court in the case of Anjum Hon'ble Ghaswala & Others (2001 (10) TMI 4 - SUPREME Court ) and we therefore uphold the Assessing Officer s action in charging the said interest. - Decided against assessee.
Issues Involved:
1. Computation of Deduction under Section 10A. 2. Exclusion of Companies with Related Party Transactions (RPT). 3. Exclusion of Companies with Abnormal Profits. 4. Standard Deduction of 5% under the Proviso to Section 92C(2). 5. Exclusion of Certain Comparables. 6. Use of Multiple Year Data. 7. Use of Data Available at the Time of Assessment Proceedings. 8. Use of Information Collected under Section 133(6). 9. Risk Adjustment. 10. Reimbursement of Expenses as Part of Operating Cost. 11. Charging of Interest under Section 234B. Detailed Analysis: 1. Computation of Deduction under Section 10A: The Revenue challenged the CIT(A)'s order to recompute the deduction under Section 10A by excluding foreign currency expenses from both export and total turnover. The Tribunal upheld the CIT(A)'s order, citing the Karnataka High Court's decision in Tata Elxsi Ltd., which mandates that if export turnover is reduced by certain expenditures, the same should be excluded from total turnover. 2. Exclusion of Companies with Related Party Transactions (RPT): The CIT(A) had excluded companies with any RPT from the list of comparables. The Tribunal held that this was incorrect and directed the TPO to apply a 15% RPT filter, based on the precedent set by the Tribunal in 24/7 Customer.Com Pvt. Ltd., which aligns with the decision in Sony India (P) Ltd. 3. Exclusion of Companies with Abnormal Profits: The CIT(A) excluded companies with profit margins exceeding 50%, deeming them abnormal. The Tribunal reversed this decision, referencing the Special Bench decision in Maersk Global Centres (India) Pvt. Ltd., which requires further investigation to determine if high profits reflect normal business conditions or abnormal circumstances. 4. Standard Deduction of 5% under the Proviso to Section 92C(2): The CIT(A) allowed a 5% standard deduction. The Tribunal reversed this, citing the retrospective amendment by Finance Act, 2012, which clarified that the +/- 5% variation is only to justify the price charged in international transactions, not for standard deduction. 5. Exclusion of Certain Comparables: The Tribunal remanded the issue of comparability of certain companies (e.g., Exensys Software Solutions Ltd., Tata Elxsi Ltd., Geometric Software Solutions Ltd., Sankya Infotech Ltd., and Thirdware Solutions Ltd.) back to the TPO for fresh examination. The Tribunal noted that the CIT(A) had not adjudicated on several filters applied by the TPO, such as turnover filters and functional differences. 6. Use of Multiple Year Data: The Tribunal upheld the TPO's decision to use current financial year data for comparability analysis, as mandated by Rule 10B(4) of the IT Rules, 1962. The Tribunal dismissed the assessee's ground for using multiple year data, as it failed to demonstrate how earlier years' data influenced the current year's prices. 7. Use of Data Available at the Time of Assessment Proceedings: The Tribunal found no infirmity in the TPO's use of contemporaneous data available at the time of assessment, as per the provisions of Section 92D of the Act. This ground was dismissed. 8. Use of Information Collected under Section 133(6): This issue was not pressed by the assessee during appellate proceedings and was dismissed as not pressed. 9. Risk Adjustment: The Tribunal upheld the TPO's rejection of the risk adjustment claim, as the assessee failed to provide any quantification for the same. The Tribunal emphasized that the burden of quantification lies with the assessee. 10. Reimbursement of Expenses as Part of Operating Cost: The Tribunal remanded the issue back to the TPO for detailed verification to determine if reimbursements were mere pass-through expenses without any service element. If so, they should not be added back to the cost base for markup purposes. 11. Charging of Interest under Section 234B: The Tribunal upheld the charging of interest under Section 234B as mandatory and consequential, as per the Supreme Court decision in Anjum Ghaswala & Others. The Assessing Officer was directed to recompute the interest while giving effect to the Tribunal's order. Conclusion: The Tribunal's decision resulted in a partial allowance of both the Revenue's appeal and the assessee's cross-objections, with several issues remanded for further examination and verification by the TPO. The Tribunal provided clear directives on the application of filters and the use of data, emphasizing adherence to statutory provisions and judicial precedents.
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