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TMI Blog2012 (4) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... de to the TPO for computation of Arm's Length Price (ALP) in relation to the international transactions carried out by the assessee. The TPO issued notice u/s.92CA(2) of the Act requesting the assessee to make a submission to support the ALP computed by it in the Form No. 3CEB. During the year under consideration, the assessee received an amount of Rs.7,15,02,852/- on account of its international transactions by rendering market research analysis services. The TPO noted that the assessee has used TNMM method and its OP/TC comes to 1.8%. By taking comparable margins as per Annexure-I, the TPO noted that the OP/TC ratio comes to 20.42% for the sample set. For this purpose a sample of 102 companies from across a wide spectrum of ITES, software consultancy, market research, business process and outsourcing etc. were chosen including the loss making companies in an un-biased manner from Capitaline Database to arrive at the above result. 3.1 The TPO issued a show cause notice to the assessee to explain as to why an appropriate adjustment should not be made to its international transactions. According to the TPO, the assessee sought an adjournment to file the details but no such explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents. It was submitted that in the annexure to the show cause notice, there were about 149 companies which the TPO proposed to adopt as comparable companies. However, the Annexure did not contain any details as regards the business activity of these companies, the detailed computation of their respective operating profit margins and how the operations/business activities of these companies were comparable to the back office support services provided by GIC division of the assessee. It was submitted that in a very short time this exercise was not at all possible. Since no reasonable and sufficient opportunity of being heard was granted and since the order of the TPO is in blatant violation of principle of natural justice it was submitted that the same should be treated as void-ab-initio. Various other decisions were also brought to the notice of the Ld. CIT(A) for the above propositions. 5. Based on the arguments advanced by the assessee the Ld. CIT(A) deleted the adjustment made by the TPO by holding as under : "12. I have perused the TPO's order, assessment order and written submission filed by the appellant and heard the oral arguments. Transfer Pricing is a systematic, logical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of returns earned by similar companies similarly situated and one in approximation of the industry returns that an uncontrolled entity would expect to earn. Therefore the companies earning too low or too high profits are in the nature of aberrations and should have been excluded from the sample of selected comparables. While the TPO had excluded high (50% or more) loss making companies but he did not make corresponding exclusion of companies earning more than 50% of profits. The absence of any turnover filter/criteria in selecting comparables is also a sore point in the TPO's order. It is common business understanding that if a company's operating profit margin drops then one of the reasons could be that one is selling less number of units/goods/services. Thus turnover is material in a screening process. In any case, there is no justification for taking companies which are 100 times bigger than the appellant in terms of turnover. Obviously they are not in the same league as this company in question. By being in consistent in his approach he was neither fair or reasonable thus further weakened the case. 12.3 The appellant has carried out international comparison with its CP Divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of subjectivity and also reliability of comparability adjustments is not free from doubt Such adjustments do not automatically "provide increased levels of comparability" Further it is not clear whether such adjustments consistently increase the reliability of financial results for all comparable companies rather than just some comparable companies. Moreover there is the danger that making sophisticated adjustments create an incorrect impression that the adjusted numbers are "correct" from transfer pricing perspective. 12.9 To sum up, there is a serious violation of the principle of natural justice on the part of the TPO as adequate and proper notice and hearing was not provided to the appellant. The whole exercise of selecting comparables by the TPO was haphazard illogical and random without any FAR. Moreover, there are inconsistencies in standards adopted by the TPO while carrying out the determination of the ALP. The TPO has failed to expose any chinks in the Transfer Pricing study carried out by the appellant and the alternative exercise it has undertaken has gaping holes which cannot be accepted. The appellants AE at USA has suffered continous losses but still has com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook he submitted that the TPO had taken the comparables of large number of companies and the GP by TC determined at 28.23% is not the net profit figure. He submitted that the operating profit by TC comes to 8.6%, whereas the assessee has declared 10%. Referring to page no. 185 of the paper book he submitted that the TPO in the analysis has deleted 47 more companies in Annexure-1 of the assessment order treating the same as loss making companies and hence functionally different from the assessee. He submitted that this Annexure was given to the AO during the assessment proceedings. Referring to page no. 188 of the paper book he drew the attention of the Bench to Annexure-2 given by the TPO during the assessment proceedings which is incomplete and contain some fresh sets. Referring to the letter written by the assessee to the TPO on 28.11.2006, he drew the attention of the Bench to the contents of the letter according to which, it was not possible on the part of the assessee to reply to the query raised by the TPO in such a very short notice. He submitted that although the TPO passed order on 13.12.2006, no further notice was issued and no further hearing was granted to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given the list of 149 companies as samples according to which, the average GP /TC comes to 28.23%. We find the TPO after excluding 47 more companies as loss making companies and holding the same as functionally different from assessee company determined the OP/ TC at 20.42%. While doing so, the TPO has excluded the loss making companies. He, however, has not excluded the profit making companies. We find the AO has considered companies with huge turnover as comparables. For example, as against the total turnover of 10.82 crores by the assessee (Export turnover of Rs.7.30 crores and Domestic turnover of Rs.3.53 crores) the comparison taken by the TPO includes companies whose turnover are as follows :- COMPANIES AMOUNT (IN CRORES) Tata Sons Ltd. Rs.5869.39 Sonata Information Technology Ltd. Rs.141.79 Larsen & Tourbo Infotech Ltd. Rs.364.61 Tata Technologies Ltd. Rs.131.21 Birlasoft Ltd. Rs.168.90 Polaris Software Lab Ltd. Rs.578.49 Wipro Ltd. Rs.5132.70 Digital Global soft Ltd. Rs.628.09 Infosys Technologis Ltd. Rs.4760.90 I-Flex Solutions Ltd. Rs.684.46 Satyam Computer Services Ltd. Rs.2541.54 9.1 Similarly, although the TPO has excluded the loss making com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount received as advance from the holding company. The AO observed that the assessee is in the business of Market Research and Consultancy Services. Since the advance money has been received by the assessee towards market research analysis rendered during the year and since the assessee was following mercantile system of accounting, therefore, the amount received from the holding company towards market research rendered during the year is required to be shown as income for the Financial Year 2003-04. The AO, therefore, added the amount of Rs.1,13,84,034/- to the total income of the assessee. 12. In appeal the Ld. CIT(A) deleted the addition by holding as under : "I have perused the facts of the case, assessment order and written submission and oral arguments of the appellant. The appellant is a wholly owned subsidiary of Frost & Sullivan, USA which receives advance to carry out its business. The appellant raises the invoice for services to match the cost or expenses incurred by it during the year. It follows a mercantile system of Accounting in accordance with companies Act and accounting standards issued by the ICAI. As such income is to be credited in profit of loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X
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