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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 ..... upport services, consultancy services and low end services to group companies. 2. Use of contemporaneous data Erred in computing the arm's length price using the financial information of the comparable companies available at the time of assessment, although such information was not available at the time when the Appellant complied with these regulations. 3. Use of multiple year data Erred in considering the operating margins earned by comparable companies based only on the financial data pertaining to the year ended 31 March 2007, and rejecting the financial data of comparable companies for prior two years, which is permitted in terms of Rule 10(B)(4) of Income Tax Rules, 1962. 4. Application of turnover filter for identification of comparable companies Erred in rejecting the application of turnover filter for identification of comparable companies, thereby, accepting comparable companies without considering their scale of operations and turnover. 5. Exclusion of certain companies from the set of comparables Erred on facts and in law by rejecting some of the comparables selected by the Assessee, without providing any reason for the same. 6. Inclusion of CMC Ltd. in the set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed by the Hon'ble DRP. - in disallowing the travelling expenses incurred in foreign currency of Rs.6,000,000, without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and hence allowable under section 37(1) of the Act. 13. Double disallowance in respect of marketing and travelling expenses Without prejudice to the ground No.11 and 12, erred in disallowing marketing and travelling expenditure incurred in foreign currency without appreciating the fact that the assessee is a captive unit and invoices its group companies on a cost plus basis. Hence, all the expenditure incurred by the assesses, including travelling and marketing expense incurred in foreign currency, in effect on the basis/ part of its invoice/revenue. Accordingly, it the expenditure disallowed on the ground that the same is not incurred wholly and exclusively for the purpose of business, recovery of the said cost through invoicing should also not be taxed. Without prejudice to the ground No.11 and 12 above, erred on facts and in law by effecting double disallowance of marketing and travelling expenses by holding the same as not incurred wholly and exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware Exports Ltd. 14.55% 7.00% 10.68% 2 Cosmic Global Ltd. 18.75% 16.48% 17.33% 3 Cyber Media Events Ltd. 0.48% 9.22% 2.66% 4 Cyber Media India Online Ltd. 16.42% 34.30% 26.30% 5 Firstsource Solutions Ltd. 7.33% 12.67% 10.27% 6 IDC (India) Ltd. 11.71% 14.49% 13.34% 7 Transworks Information Services Ltd. 5.69% 23.25% 15.59% Prowess-Segmental 8 R Systems International Ltd. 5.46% 15.46% 10.53% Capitaline-database 9 Empire Industries 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,76,000/- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imes 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 exclusion of aforementioned parties Ld. A.R relied on the following decisions: a) Quark Systems (P.) Ltd V/s ITO in ITA No.115/Chd/2009, Chandigarh ITAT Special Bench. b) ITO V/s M/s Saunay Jewels Pvt.L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eted. 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 8 CRISIL Limited 2006-07 Accepted 9 Educational Consultants (India)Limited 2006-07 Accepted 10 ICC International Agencies Limited 2006-07 Accepted 11 Priya International Limited 2006-07 Accepted 12 TSR Darashw Ltd. 2006-07 Accepted 13 IDC (India) Limited 2007-08 Accepted 14 Ace Software Exports Limited 2007-08 Rejected 15 Empire Industries Limited 2007-08 Rejected 16 Capital Trust Limited 2006-07 Rejected 5.1 He submitted that the TPO has rejected three companies. The assessee has raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that result of trading and indenting segment may be compared with the business activity of the assessee company and that may be accepted as a comparable. He submitted that the margin of the trading and indenting after allocation of unallocated expenditure works out to 24%. 5.3. Coming to the third comparable viz Capital Trust Limited, the Ld. DR submitted that this company is NBFC and is deriving an income from sale, hire purchase, interest, management consultancy fee and other sources. He submitted that from the Annual Account of the said company it is clear that the said company can be compared only for "Management Consultancy Division". He submitted that no segmental data of that company are available in respect of Management Consultancy Division, therefore, the said comparable has rightly been rejected. 5.4 Coming to the Ground No.6 of the assessee's appeal i.e. exclusion of CMC Limited in the set of comparables, the Ld.DR relied upon the order of TPO. 5.5. Coming to the Ground No.7, the ld. DR submitted that the TPO has selected the company on the basis of FAR and not on the basis of margins of any of the companies. The assessee has not been able to point out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... servations: "3.6 We have considered the draft order and the assessee's submissions, we find that in A.Y. 2006-07, the Hon'ble ITAT has adjudicated all the above issues as under:- (a) The Hon'ble ITAT upheld the TPO's action in using the updated financial data of the comparables for the relevant year. (b) The Hon'ble ITAT observed that the Proviso to Sub- Rule 4 of Rule 10B does not mandate the user of multiple years' data of comparables. On the contrary comparison and analysis of data of the relevant year is more pertinent. Besides, the market and economic conditions of earlier years are not required to be reckoned with. For this reason, the ITAT held that the TPO's action was justified. (c) Regarding turnover filtering, the ITAT observed that this objection of the assessee is general in nature as the assessee has been unable to demonstrate how the difference in turnover has influenced the operating profit of the comparables. In fact no such turnover filtering had been done by the assessee itself in the TP Study. (d) The ITAT acceded to the assessee's claim that it is entitled to the benefit of 5% variation as the amendment in Proviso to Sec. 92C(2) is applicable from 01/10/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se companies were in accordance with normal activities of their business. The 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. However, there being no findings recorded by Ld. DRP with regard to facts and figures pointed out by the Ld. A.R of the assessee , we are of the opinion that the matter should be restored back to the file of Ld. DRP with a direction to pass a speaking order on these contentions of the assessee and re-adjudicate the adjustment made in transfer pricing in accordance with law after giving the assessee a reasonable opportunity of hearing. The issue raised by the assessee with regard to transfer pricing adjustment is set aside to the file of DRP for deciding afresh as per aforementioned directions. Since no other arguments were raised by Ld. A.R and the matter relating to TP adjustment is restored back to the file of DRP, the grounds regarding TP adjustment are considered to be allowed for statistical purposes. 6.1 Before parting with the grounds relating to transfer pricing adjustment, we may mention that assessee has raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in India. 1,19,52,869 Symantec group as a whole has engaged Oracle Pty., Australia to provide services in connection with popularizing Symantec product (including India) to maintain brand uniformity across the whole Asia Pacific region. The said expenses, though paid to Oracle Pty., Australia, but the same has been incurred for the purpose of advertisement in various magazines and web-sites published in India like Times of India, business Today etc. The copy of invoices raised by Oracle Pty Ltd. is enclosed at page 322 to 329 of Paper Book-1. 2. Marketing expenses incurred on seminars organized by the appellant outside India. 7,59,265 The said expenses were incurred for organizing seminars outside India to educate the resellers and distributors regarding the product specifications, features etc. and marketing strategy which should be adopted in varying circumstances (sample copy of invoices are enclosed at Page 330 to 336 of Paper Book- 1. l Total 1,27,12,134 To support aforementioned contention ld. A.R drew our attention towards copy of invoice which contains the details of magazines/ publication and are placed at pages 322 to 329 of the paper book. For exampl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred wholly and exclusively for the purpose of business . It was further submitted by Ld. A.R that the justifications and reasonableness of expenditure has to be adjudged from the view point of businessmen and for this contention Ld. A.R relied upon the following decisions: (1) CIT v. Walchand & Co. (P) Ltd. 91967) 65 ITR 381 (SC) (2) JK Woolen Manufacturers v. CIT (1969) 72 ITR 612 (SC). (3) Aluminum Corporation of India Ltd. v. CIT (1972) 86 ITR 11(SC) (4) CIT v. Oracle India Pvt. Limited (ITA No. 383 of 2009, 987,1242,1247 of 2010) (Delhi H.C). 8.4 It was further submitted that during the subsequent assessment year i.e. 2008-09 the AO had called for similar details in respect of marketing expenses incurred in foreign currency and no disallowance was made for that assessment year. Thus it was submitted that the expenses having been incurred wholly and exclusively for the purpose of business are allowable. It was further submitted that as per representative agreement dated 1/4/2006 entered into by the assessee with its associate company, a copy of which is placed at Pages 479 to 484, the assessee was entitled to receive cost + 2% of the net revenue as per clause 5.1 and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee on year to year basis. Referring to the assessment proceedings for assessment year 2008- 09 it was submitted by him that a sum of Rs.45,35,616/- was incurred on similar expenditure and no part thereof was disallowed by the AO. He submitted that Ld. DRP has directed the AO to allow relief of the actual travel expenses to Singapore amounting to Rs. 25,98,415/- from total expenses of Rs. 70,22,867/- and thus restricted the disallowance to Rs. 44,24,452/-. He submitted that AO has failed to take cognizance of such direction of Ld. DRP and has disallowed the entire amount of Rs. 60.00 lacs. This disallowance is also assailed by Ld. A.R on the basis of reimbursement by the parent company for which also he has referred to aforementioned chart. He submitted that though Ld. DRP has referred to these arguments of the assessee but those were rejected simply with the observation that assessee was not able to establish nexus between subject expenses and corresponding receipts. Therefore, Ld. A.R submitted that in respect of Ground No.11 & 12 the assessee should be allowed complete relief on both the counts that these expenses were incurred wholly and exclusively for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the assessee for the purpose of its business. He submitted that the advertisement made in foreign media could give no gain to the assessee for its business activities as operation of the assessee is limited to India only. Thus it was submitted that with respect to Ground No.11 & 12 the disallowance made by the AO should be sustained. So far as it relates to levy of interest under section 234B Ld. D.R submitted that it has been rightly been calculated. Thus it was submitted by Ld. D.R that order passed by AO in respect of Ground No.11, 12 & 15 should be upheld. 8.8 We have carefully considered the rival submissions in the light of material placed before us. So far as it relates to disallowance relating to marketing expenses incurred in foreign currency, the grievance of the assessee has been dealt with by Ld. DRP as per para 8.5 and 8.5.1. The disallowance has been sustained mainly on the ground that assessee has been unable to justify the incurrence of such expenditure wholly and exclusively for the purpose of its business. The assessee did not describe that why it was incurring such expenditure for its group companies. Ld. DRP has also rejected the submission of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the submission of the assessee that disallowance has been made on adhoc basis without bringing any material on record to show that these expenditure were not incurred by the assessee for the purpose of its business. The relevant details of these expenses have been filed at pages 383 to 388 of the Paper Book. When complete details are filed, disallowances cannot be made on adhoc basis as it has to be brought out that a particular expenditure was not incurred for the purpose of business of the assessee. The expenses relating to traveling to Singapore has been allowed by Ld. DRP only on the ground that assessee has AE in Singapore and for other countries these expenses have not been allowed on the ground that travel to other countries was not justified. In our opinion such reason is not sufficient to make disallowance as it has to be specifically brought on record that which expenditures is not incurred by the assessee for the purpose of its business. Therefore, we consider it just and proper to restore this issue to the file of Ld. DRP to pass a speaking order on the disallowance which has been sustained by it and direct the AO to give appropriate relief to the assessee regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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