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TMI Blog2011 (9) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... (BP).BP is one of the world's largest petroleum and petrochemical group which is divided into four main business segments: Exploration and Production; Refining and Marketing; Petrochemicals; and Gas, Power and Renewables. BP operates in over 100 countries. The assessee(BPISPL) is engaged in providing support and advisory services to BP and its other group companies. It had international transactions with its Associated Enterprises (AE) exceeding Rs.5 crore during the year relevant to the assessment year under consideration. The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for ascertaining the Arm's Length Price (ALP) in respect of such international transactions. The TPO noted that BPISPL entered into following international transactions with its AEs:- Sr. No. Name of Associated Enterprise Description of transaction Value of International transaction Method used 1. BP Gas marketing Ltd., UK Business support service 9,187,812 TNMM 2. BP International Holding, UK Business support service 410,278 TNMM 3. BP Singapore Pte. Ltd., Singapore Business Support service 3,996,896 TNMM 4. BP France (Dubai Branch) - BP Middle East, UAE. Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not charge mark-up on such pass through' costs. The same was found to be contradictory to the assessee's submissions by which it was stated that it charged its AEs with a mark-up of 2.5% on expenses reimbursed to CIL in respect of proportionate cost on personnel and further mark-up of 7.5% to its AE in respect of out of pocket expenses reimbursed to CIL. As regards infrastructure supporting common utilities, the TPO noted that the details of markup held by CIL for those services was not provided. It was also observed that the assessee-company computed its OP /TC at 12.12% considering the cost reimbursed by it to CIL in respect of the latter's personnel and out of pocket expenses as pass through' charges and not pertaining to the cost base of the assessee-company. He noted that such pass through' cost was debited in the books of account of the assessee-company and formed part and parcel of the cost-base of providing services to AE. 5. In support of its claim that the recorded value of the transactions was the ALP of the transactions, the assessee submitted a list of comparable cases using the results of financial year 2003-2004 with adjusted OP /TC percentage as under:- Name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of benchmarking assessee's international transaction, the TPO worked out adjusted profit rate of the comparable cases in relation to the remaining 10 parties at 20.55%on the penultimate page of his order. This was found to be much less than the assessee's profit rate of 4.79%. He, therefore, computed ALP as under:- Total cost of the assessee for rendering business support services to its AEs A Rs.93,707,000 Operating Profit @ 20.55% of the total cost B Rs.19,256,789 Revised Sales (ALP) A+B C Rs.112,963,789 Sales as shown in the P and L A/c. D Rs.98,191,676 Adjustment (C-D) E Rs.14,772,113 7. It was, therefore, proposed that an upward adjustment of Rs.1,47,72,113 was required to be made by the Assessing Officer. After considering the report of the TPO, the AO made such addition u/s 92CA(4). 8. Apart from several other contentions raised in the first appeal with which we are not concerned as not having been assailed, it was contended on behalf of the assessee that the TPO was not justified in excluding the above mentioned two low profit cases. It was also argued that in the eventuality of the exclusion of these cases, two extreme profit cases also ought to have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th its AEs and determined the ALP of such transactions at the same level at which these were recorded in the books of account. In determining the ALP, the assessee followed TNMM. The application of such method as the most appropriate method has not been disputed by the TPO. The difference in computation of ALP has arisen because of the exclusion by the TPO of FI and ME from the list of comparable cases supplied by the assessee. The learned CIT(A) vide para 4.16 of the impugned order, extracted above, has held that these two cases ought to have been retained in the set of comparable cases. He further proceeded to hold that if these two loss making cases were to be excluded, then the two extreme profit making cases, namely, HT and DT should also be excluded. Apart from that, there is no dispute on any other aspect on the computation of ALP. We will distinctly examin these issues under challenge. WHETHER CASES OF FI andME WERE RIGHTLY INCLUDED BY CIT(A)? 11.1. From the TP study report of the assessee it is essentially noticed that the services provided by it to its AEs were in the nature of Accounting and Control Support Services, Legal and Tax Support Services, Management, HSE and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as ME is concerned, it is seen from that company's Profit and loss account for the year ending 31.03.2004 that as against the total income from operations at Rs.13.52 crore, the income from Infotech training, stated to be the only activity similar to that carried on by the assessee is only Rs.3.60 crore, which constitutes 26% of the total income. It was in such factual backdrop that the TPO held that the product profile of this company was quite different from that of the assessee-company. The learned CIT(A) has considered other irrelevant details in holding it to be comparable, which are really not germane to the issue. 11.4. Section 92 of the Income-tax Act, 1961 provides that any income arising from an international transaction shall be computed having regard to the ALP. Section 92C deals with the computation of ALP. Sub-section (1) of section 92C prescribes that the ALP in relation to an international transactions shall be determined by any of the prescribed methods, which inter alia include TNMM. Rule 10B of Income-tax Rules, 1962 provides the mechanism for determination of ALP u/s 92C. Rule 10B(1)(e)(i)provides that the ALP in relation to an international transaction sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Rule 10A(a), which talks of comparable uncontrolled transactions. As a major chunk of the comparable income of FI has resulted from its associated enterprise, it would thus become controlled transactions, thereby losing the tag of uncontrolled transactions. The second case which was included by the assessee in the list of comparable cases but excluded by the TPO is that of ME. When we consider the Annual accounts of this company at pages 116 onwards of the assessee's paper book, it becomes vivid that the income from Infotech business' stated to be comparable to the services provided by the assessee is Rs.3.60 crore. This entire amount was earned from the transactions with its related parties as is apparent from pages 144 and 145 of the paper book. Thus such transactions also do not fall in category of uncontrolled transactions. The case of ME also thereby fails the test for finding its place in the list of comparable cases. 11.7. It was contended by the ld. AR that the argument now raised by the ld. DR on rule 10B read with rule 10A was not considered by the authorities below and hence the same should be ignored. We are not persuaded by this submission. The ld. DR has not set u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FI and ME were outliers i.e. extreme cases of losses, then HT and DT having extreme profit rates, were also outliers qualifying for the elimination from the list of comparable cases. To buttress this submission he relied on the Special Bench order in the case of DCIT vs. Quark Systems (P) Ltd. [(2010) 132 TTJ (Chd.) (SB) 1]. He stated that in the case of Quark Systems (P) Ltd. (supra), it has been held that if one case representing extreme position in terms of loss was to be excluded, then the elimination of another case representing extreme profit should also be done away with. 12.2. It is noticed that the TPO worked out mean of profit rate at 20.55% by excluding the cases of FI and ME. In this calculation of 20.55%, the other 10 companies also including DT giving profit rate at 75.6% and HT giving profit rate at 68.7% were continued to remain in the list. We are not convinced with the submission advanced on behalf of the assessee that simply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 10B(1)(e)(ii) clearly refers to a compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 12.5. Further sub-rule (3) of rule 10B provides that an uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule 10B. As such we are not inclined to uphold the impugned order on this score. 12.9. The learned A.R. submitted that relevant factors of these two cases did not match with that of the assessee. However he was not readily equipped with the financial statements and other relevant details of HT and DT to demonstrate his point of view. In our considered opinion and respectfully following the special bench order in Quark System (supra), it would be just and fair if the view taken by the ld. first appellate authority on this aspect of the matter is set aside and the case is sent back to the AO for considering whether or not HT and DT are comparable, and then deciding consequently as per law, after allowing a reasonable opportunity of being heard to the assessee. It is made clear that the assessee shall place all the relevant material before the AO/TPO so as to facilitate the determination of the question as to whether or not the cases of DT and HT should be excluded from the list of comparable for the reason of their incomparability in terms of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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