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TMI Blog2012 (8) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... ables should not be taken as comparable on account of their having super normal profits. Nothing contrary to this has been demonstrated by Revenue Further, contention of the assessee that the loss making companies which have been excluded being not persistent loss making companies should be excluded is also required to be examined in detail. Hence, matter should be restored back to the file of DRP with a direction to pass a speaking order. It is also held that appropriate relief should be given to assessee for safe harbour of 5% as per laws. Dis-allowance of marketing expenses incurred in foreign currency - business expediency - Held that:- It is observed that assessee has furnished chart to show that all these expenses have been recovered as cost has also been able to show that most part of the cost is incurred on the media covering Indian territory. Since DRP has passed non-speaking order hence matter restored back to the file of DRP with a direction to bring all these facts on record and re-decide this issue. Dis-allowance of travelling expenses incurred in respect of travel to countries like USA, UK, Hong Kong , Sri Lanka etc, except Singapore where AE of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejecting some of the comparables selected by the Assessee, without providing any reason for the same. 6. Inclusion of CMC Ltd. in the set of comparable companies. Erred on facts by including CMC Ltd as a comparable in spite of substantial related party transactions that it has. 7. Acceptance of companies earning super normal profits as comparable companies Erred on facts and in law by selecting certain companies as comparable companies even though they have earned super normal profits during FY 2006-07. 8. Adjustment for differences in working capital position and risk profile of comparable companies vis- -vis of the Appellant Erred in not making any adjustments for differences in working capital position and risk profile of comparable companies vis- -vis the Appellant and thereby comparing the operating margins of the comparable companies assuming higher business risks with the Appellant s captive risk mitigated operations without making any adjustments for differences in functional and risk profile. 9. Applicability of +/-5% range Erred in computing the arm s length price as the mean of the comparable companies margins for international transactions without taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts and in law by effecting double disallowance of marketing and travelling expenses by holding the same as not incurred wholly and exclusively for the purpose of business, but at the same time considering the same to be part of operating cost while computing the operating margins earned by the Appellant for transfer pricing purposes thereby increasing the transfer pricing adjustment to the extent of these expenses. III. Common grounds 14. Proposing to penalty under section 271(1) (c ) of the Act Erred on the facts and in law by proposing to initiate penalty proceedings under section 271(1)( c) of the d Act in respect of transfer pricing adjustment and disallowance of marketing expenses and travel expenditure incurred in foreign currency. 15. Erroneous levy of interest under section 234B of the Act of Rs.810,809/- Erred in computing interest under section 234B of the Act of Rs.810,809/- 3. The assessee filed return of income on 30.10.2007 declaring total income at Rs.5,70,00,481/-. The assessee is engaged in the business of providing technical and marketing, pre-sale and after sales support, consulting and training services in India. It entered into three internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries Ltd.(Seg) 0.81% 15.79% 9.24% 75th Percentile 14.55% 16.48% 15.59% 50th Percentile (Median) 7.33% 15.46% 10.68% 25th Percentile 5.46% 12.67% 10.27% Absolute Maximum 18.75% 34.30% 26.30% Absolute Minimum 0.48% 7.00% 2.66% Average (Arithmetic mean) 9.02% 16.52% 12.88% Being not satisfied with the claim of the assessee, Ld. A.O vide order dated 15/12/2008 passed under section 92CA(3) of the Act referred the matter to TPO for determination of ALP. Ld. TPO vide his order dated 28/10/2010 taking into consideration following 13 comparables has computed the mean margin of 26.39% and has determined the adjustment of Rs. 5,39,76,994/- on account of ALP. Sr. No. Name of the company OP/TC 1 Cosmic Global Limited 11.31% 2 Cyber Media Events Limited 8.43% 3 Cybermedia India Online Limited 26.67% 4 Firstsource Solu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- which is 58.82%. Ld. A.R submitted that such contention was not only raised before T.P.O but also before Ld. DRP and Ld. DRP without appreciating the facts and contentions of the assessee has simply confirmed the action of TPO by observing that the Tribunal in the case of assessee in earlier year has confirmed the addition. Ld. A.R submitted that such issue was never decided by the Tribunal in earlier year. Ld. A.R also placed reliance on the following decisions: a) Sony India (P) Ltd. V/s DCIT (2008) 114 ITD 448 (Delhi); wherein the ITAT has expressed an opinion that an entity can be taken as uncontrolled if its related party transaction did not exceed 10 to 15% of total revenue; b) Starent Networks (India) P.Ltd V/s DCIT in ITA No.1350/PN/2010 (AY-2006-07), copy of the decision had been filed at pages 6 to 8 of paper book(2), wherein it has been held inclusion of the comparable is assailable on the ground that related party transaction of the comparable exceeding 25% of the total Revenue and it was found that the same was 28.78% which was in excess in 25%, therefore, TPO was directed to exclude the said comparable. 4.2 The Ld. AR submitted that similar view has also been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) CMC Limited : Operating margins earned by CMC Limited i.e. 31.74% are more than two times the average operating margins of the other comparable companies identified by the ld. TPO (Refer Annexure 5; page 469 to 473 of this submission providing margin computation and relevant extract of profit and loss account of CMC Limited). Separately, also as mentioned in Ground No.6 it is functionally different as compared to Appellant and has substantial related party transaction. Hence, this company earning super normal profit; being functionally not comparable to assessee and having significant related party transactions should be excluded while arriving at the ALP. 4.4 It was further submitted by ld. A.R that profits of these parties are super normal and it has been demonstrated as per the following table. Name of the company Operating margins (i.e Operating profit/Operating cost) FY 2004-05 FY 2005-06 FY 2006-07 ICC International Agencies Ltd. 46.94% 73.80% 82.92% TSR Darashaw Ltd. 10.39% 11.33% 78.29% CMC Ltd 1.05% -1.07% 31.47% For seeking the excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition. a) Technimount ICB Private Limited V/s ACIT in ITA No.7098/Mum/2010)Mumbai ITAT; b) Quark System Private Limited (2010) 30 SOT 307 (Chd) (SB), Chandigarh ITAT Special Bench 4.8 Relying upon the aforementioned arguments Ld. A.R submitted that the addition made with respect to transfer pricing is required to be deleted. 5. On the other hand, referring to the comparable selected by the assessee in its TP report and comparable relied upon by the assessee in earlier years and also the comparables relied upon by TPO in earlier years Ld. DR has submitted the following chart: Sr. No. Name of the company Asst. Year Decision 1 Cosmic Global Limited 2007-08 Accepted 2 Cyber Media Events Limited 2007-08 Accepted 3 Cyber Media India Online Limited 2007-08 Accepted 4 First Source Solutions Limited 2007-08 Accepted 5 Transworks Information Services Limited 2007-08 Accepted 6 R Systems International Limited 2007-08 Accepted 7 CMC Limited 2006-07 Accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,829 4,70,148 Miscellaneous Income 2,560 193,067 4,301 20,546 Kasar 8,247,628 33,09,055 Schedule 11 (in Rs) Stock variance 31.3.2007 31.3.2006 Closing stock 24,78,108 87,22,844 Less :Opening stock 87,22,844 14,59,130 (42,44,736) 52,63,714 From the above figures, it was pointed out by him that the aforementioned concern is maintaining opening and closing stock and is apparently engaged in the development of software. As against that the assessee company is engaged in providing marketing services, low end support services and consultancy services. Therefore, Ld. D.R submitted that this company cannot be compared with the assessee company. Therefore, he pleaded that rejection of this comparable should be sustained. 5.2. Coming to the Empire Industries Limited, he referred to the profit and loss account of the said comparable for the year ending 31.3.2007 and pleaded that segmental accounts of this company are also available in annual report. He submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone through the submissions of the assessee which has been filed in detail before TPO as well as before Ld. DRP. For example in ground -6 raised before Ld.DRP the assessee contended the exclusion of companies from the list of comparables who are earning extraordinary profits. In ground -7 the assessee had raised the objection regarding arbitrary rejection of comparable companies and in ground -5 the assessee has raised objection about inclusion of certain companies in the set of comparables and these grievances of the assessee are also reflecting in para 3.5 of the order of the DRP, wherein it has been clearly mentioned that CMC Ltd. could not be taken as comparable as it has 58.82% related party transactions and it is also mentioned that an application has been filed before TPO under section 154 of the Act. Similarly, it has been mentioned that CMC Ltd., ICC International Agriculture Ltd. TSR Darashaw Ltd should be excluded from comparables as they are earning significantly higher operating margin than the average margin. It is also mentioned that the TPO has wrongly rejected three comparables as they are loss making companies. Apart from the aforementioned specific objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded on the basis of the fact that it has significant related party transactions. The assessee has also demonstrated and pleaded before DRP that related party transactions of the said company are to the tune of 58.82%. If this fact is correct then the said party cannot be taken as comparable. Similarly, even leaving aside CMC Ltd. which is sought to be excluded on account of significant related parties transactions, the other comparables, ICC International Agricultural Ltd. TSR Darashaw Ltd. are required to be excluded on account of significantly higher operating margins which are stated to be 82.92% and 78.29% respectively. It can be seen from the list of comparables selected by TPO that none of the other parties except these two parties and CMC Ltd. have margin of more than 26.67%. If out of 13 comparables except three comparables do not have margin of the magnitude which ICC International Agricultural Ltd. TSR Darashaw Ltd. have then there is a merit in the contention of the assessee that these comparables should not be taken as comparable on account of their having super normal profits unless it is demonstrated that these super normal profits have earned by those compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it in Srilanka. The A.O observed that assessee was doing business in India, and there is no justification for incurring such a huge expenses in Srilanka. He asked the assessee to explain the same. Vide letter dated 28/12/2010, it was submitted that the assessee has to conduct marketing seminar in other countries to educate distributors and resellers about its products and marketing strategy to be adopted for the sale of these products. The assessee being marketing arm of Symantec Products in India has to lay these expenditure for popularizing and developing market in India for Symantec products. The AO did not accept such submissions of the assessee. He noted that the assessee has incurred expenditure on hoardings erected in Colombo, event launched in Srilanka, Advertising in daily news paper in Srilanka etc. Therefore, AO observed that these expenditure with no stretch of imagination can help in the business of the assessee company which is a separate legal entity and there is no justification for incurring these expenditure. In this manner a sum of Rs.1,27,12,134/- has been disallowed. 8.1 Ld. A.R submitted before us the following details with respect to the aforementioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 350 of Paper Book - I; Express Computer -Screenshot enclosed at Page 351 to 352 of Paper Book- I Network Magazine - Screenshot enclosed at Page 353 to 355 of Paper Book - I; PC Quest - Screenshot enclosed at Page 356 to 357 of Paper Book - I; 8.2 It was further submitted by Ld. A.R that for the Asia Pacific region, Symantec Group had an arrangement for availing publication services from Oracle Pvt. Ltd. The said arrangement benefited the assessee in the following manner: -The Appellant can avail competitive rates, favourable credit terms and long-term bookings, given the volume of work assigned to the service provider by all the entities across the Asia Pacific region; -Keeping a one point co-ordinator/ service provider brings consistency in the advertisements, which is essential to have uniformity in approach; -Common co-ordinator / service provider can influence and get better terms and conditions from the publications in various countries. 8.3 Referring to the marketing expenses of Rs. 7,59,265/- incurred for organizing seminars outside India, the Ld. A.R referred to pages 332 to 336 of the Paper Book-1 and it was submitted that these conferences and seminars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner it is the case of the Ld. A.R that since these expenses have been reimbursed they could not be disallowed. 8.5 Coming to Ground No.12, which relates to adhoc disallowance of traveling expenses amounting to Rs. 60.00 lacs incurred in foreign currency, it is the case of Ld. A.R that these expenses have also been incurred wholly and exclusively for the purpose of business of the assessee. All the relevant details were filed. Total traveling expenses incurred in foreign currency for the year are Rs. 70,22,867/-. He referred to details enclosed at pages 365 to 379 of paper book and submitted that without application of mind a sum of Rs. 60.00 lac has been disallowed. He submitted that these expenses have been incurred on the seminar / training organized by the group companies outside India on global basis and during the year seminar / training outside India were largely held on account of launch of new products as follows: - Backup Exec, version 11 [ BE 11 ] - Backup Exec Backup System Recovery [ BE BSR ] - Enterprise Vault [ EV ] - Storage foundation, version 5 [ SF 5.0 ], - Enterprise Messaging Management [ EMM ] etc. He submitted that these details are filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount by which the advance tax paid fall short of the assessed tax. Ld. A.R has submitted a chart before us to show that the interest has been wrongly calculated by the AO at Rs. 1,23,97,841/- and as per the calculations submitted by the assessee it should have been Rs.1,15,87,032/-. To support the aforementioned contention Ld. A.R has relied on the following decisions: - DCIT vs. M/s. Hind Rectifies Ltd. (ITA No.4456/Mum/1998(Mum ITAT) (enclosed at Page 148 to 151 of Paper Book II) - STS Chemicals Ltd. vs. DCIT (ITA No.1234/Mum/1998) (Mum ITAT) (enclosed at Page 152 to 154 of Paper Book-II) Alternatively, Ld. A.R submitted as under: In view of the above and without prejudice to the grounds on merits of the case discussed above, the learned AO has erred in levying additional interest of Rs.8,10,809 [Rs.1,23,97,841 - Rs. 1,15,87,032]. Accordingly, the Appellant prays before your Honours that the learned AO should be directed to re-compute the interest under section 234B of the Act for the period from payment of self assessment tax till the date of assessment order considering self assessment tax after reducing the interest liability of Rs. 5,02,865/- under section 234B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arguments of assessee. The assessee has also been able to show that most part of the cost is incurred on the media covering Indian territory. On all these aspects a finding has to be recorded by Ld. DRP that why such claim should not be admitted. Unless a finding of fact is recorded by Ld. DRP, the disallowance cannot be sustained. Therefore, it is considered just and proper to restore this issue to the file of Ld. DRP to ascertain the fact that whether all these expenses have been reimbursed and also the fact that whether the claim of the assessee is right that most of the expenses have been incurred on the media covering Indian territory and are expenses incurred by the assessee wholly and exclusively for the purpose of the business. Therefore, we restore this issue to the file of DRP with a direction to bring all these facts on record and redecide this issue after giving the assessee a reasonable opportunity of hearing. Ground No.11 of the assessee is allowed for statistical purposes in the manner aforesaid. 8.9 Coming to Ground No.12 the disallowance has been sustained by Ld. DRP except a sum of Rs. 47,49,719/-, which is found to be incurred in respect of countries other th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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