9911796707
TMI Blog2012 (10) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer with a direction that AO shall grant working capital adjustments after considering the computation filed by the assessee before the DRP - in favour of assessee. Exclusion Allsec Technology Ltd. from the list of comparables - Held that:- Extracting the filters applied by the assessee for eliminating the non-comparable companies or adjusting their profit margin, the assessee has not applied the filter i.e. the companies who have incurred expenses of more than 5% of its sales on advertisement and marketing which required to be excluded. At this stage, in the absence of any finding, at the level of the TPO or of the learned DRP, it is difficult to verify the version put forth by the the assessee. Apart from this profit margin of any company is dependent upon many factors. By taking into consideration the one aspect, if on excluding the comparables then not a single comparable would be identified. The simple reason is whenever any adjudicating authority would try to carry out a study of the result of any company with a particular angle then the result would be different. The assessee ought to have placed specific details before the TPO and demonstrated how a prejudice had cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012 - - - Dated:- 12-10-2012 - SHRI G.D. AGRAWAL, AND SHRI RAJPAL YADAV, JJ. Revenue by: S/Shri Rahul Mitra, KM Gupta Ms. Shikha Gupta, ARs Assessee by: Shri Peeyush Jain, CIT(DR) ORDER PER RAJPAL YADAV: JUDICIAL MEMBER The present two appeals are directed at the instance of the assessee against the asset. orders dated 30.12.2011 and 27.10.2011 passed u/s. 143(3) read with section 144C of the I. T. Act, 1961 in assessment years 2006-07 and 2007-08 respectively. The grounds of appeals taken by the assessee in both the assessment years read as under: Grounds in assessment year 2006-07: 1. The assessment order passed by the Learned Assessing Officer ( Ld. Assessing Officer ) pursuant to the directions of Learned Dispute Resolution ( Ld DRP ) is bad in law and void ab-initio. 2. The Ld. DRP erred both on facts and in law in confirming the addition of ₹ 3,00,41,990/- to the income of the appellant out of the total addition of ₹ 3,71,89,793/- proposed by the Ld. TPO by holding that its international transactions do not satisfy the arm s length principle envisaged under the Act. In doing so, the Ld. DRP and the Ld. AO has grossly erred in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of natural justice by not sharing with the appellant (despite having adequate time at their disposal to do so) the concerns/issues in regards to the alleged/purported shortcomings/deficiencies in the appellant s claim for a working capital adjustment and thereby denying the appellant a reasonable opportunity to study/examine the same and provide its comments/objections thereto; 2.11 ignoring the business/commercial reality that since the appellant is remunerated on an arm s length cost plus basis, i.e it is compensated for all its operating costs plus a pre-aged mark-up, the appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 2.12 violating the principles of natural justice by not sharing with the appellant (despite having adequate time at their disposal to do so) the concerns/issues in regard to the alleged/purported shortcomings/deficiencies in the appellant s claim for a risk adjustment and thereby denying the appellant a reasonable opportunity to study/examine the same and provide its comments/objections thereto; 2.13 den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in; 2.3.1 interpreting the requirement of contemporaneous data in the Rules to necessarily imply current/single year (i.e. FY 2006-07) data; and 2.3.2 holding that at the time of creating/maintaining the TP documentation, the appellant could have procured current/single year date (i.e FY 2006- 07 data) from sources other than the electronic databases, when in fact practically no such other sources were available in case of most companies. 2.4 collecting information of the companies by exercising power granted to him under section 133(6) of the Act that was not available to the appellant in the public domain and relying on selective information for comparability purposes (and to the extent of completely ignoring reliable data available in public domain/annual reports in numerous cases); 2.4.1 and in doing so violating the fundamental principles of natural justice relying on the information sourced under section 133(6); and also by 2.4.2 not sharing with the appellant, in case of a number of comparables, the information/reply received by the TPO/Assessing Officer u/s 133(6). 2.5 rejecting comparability analysis in the appellant s fresh search and in conducting a fresh c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... range available to the appellant as per the old proviso to section 92C(2) of the Act; 2.12 disregarding judicial pronouncements in India in undertaking the TP adjustment. 3. The Ld. AO erred in not verifying the factual errors in computation of the operating margins of the comparables and accordingly re-computing the Arm s Length Price ( ALP ) while passing the order, pursuant to the directions of the Ld. DRP; 4. The Ld. DRP and the Ld. Assessing Officer (following the directions of the Ld. DRP) has erred in facts and in law in reducing depreciation allowance by Rs. 1,60,573/- during the year on items such as UPS, Date Card, Card Wireless, Redundant Power supply, Procurve switch and Digital Sender(Scanner) by holding that such items form part of Plant and machinery depreciable @ 15% and not Computers depreciable @ 60% and thus, not entitled to a higher rate of depreciation; 5. The Ld. DRP and the Ld. Assessing Officer (following the directions of the Ld. DRP) has erred in facts and in law by arbitrarily disallowing depreciation amounting to Rs. 2,28,821/- on 45% of the opening written down value of the block of computers without any basis and without appreciation that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciate enterprises. The value of international transaction with its AE, in assessment year 2006-07 has been disclosed as under: Sr. No. International transaction Method Value in Rs. 1. Advisory and Consultancy Services. TNMM 27,01,40,583 2. Sale of shares of Actis Global Services Ltd. - 99,990 In assessment year 2007-08, the value of international transaction for advisory and consultancy service is shown at Rs.35,42,09,910. On perusal of Form No. 3CAB, learned Assessing Officer found that the assessee has reported international transaction with associate enterprises within the meaning of sec. 92B of the Act, therefore, learned Assessing Officer had made a reference to the learned TPO as per sec. 92CA for determining the arm s length price of the international transaction shown by the assessee in both the assessment years. Learned TPO has made analysis of the TP Study Report submitted by the assessee in both the assessment years and recommended adjustment in the arm s length price of the international transactions declared by the assessee. He passed the order under sec. 92CA(3) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transaction reported by the assessee or the international transaction reported by the assessee with its associate enterprises is at arm s length price or not? 6. In order to determine the arm s length price of an international transaction, the first area of dispute which could arise between the parties is in respect of most appropriate method required to be adopted for determination of arm s length price as provided in sec. 92C of the Act read with Rule 10B of the Income-tax Rules. The section 92C provides five main methods i.e. (a) comparable uncontrolled price method; (b) resale price method;( c) cost plus method; (d) profits split method: and (e) transactional net margin method (TNMM) and (F) one residuary method i.e. such other method as may be prescribed by the Board. We find that on an analysis of an international transaction with the associate parties and comparable data, assessee has selected TNMM method i.e. using net profit margin based on cost as PLI. It has adopted operating profit over total cost. Learned TPO has not disputed the selection of TNMM method by the assessee. Thus, there is no dispute in this area. 7. The next area of dispute between the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected. 6. Companies with the ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3% were selected. 9. Learned TPO took objection with regard to the use of multiple year data. He is of the opinion that Rule 10B of the Income-tax Rules 1962 provides use of single year data. The multiple year data has been provided in the proviso appended to this Rule but that can only be applied in a case where it is difficult to collect the data for the relevant accounting year. 10. Learned representatives did not advance detailed arguments on this issue, however, from perusal of the learned TPO s order in assessment year 2006-07, we find that learned TPO has made a lucid analysis of this issue. Rule 10B(4) of the Income Tax Rules has a direct bearing on the controversy. Therefore, it is salutary upon us to take note of this rule it read as under :- 10(4) The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted on the basis of current year data, therefore, we would examine the analysis made by the assessee, of its arm s length price in the transfer pricing study report on the basis of current year s data in the respective assessment year. 12. We first take assessment year 2006-07. In this year, assessee has shown two international transactions with it s AE but one of the transactions is in respect of sales of shares of Actis Global Services for a consideration of Rs. 99,990. Learned TPO accepted this transaction and the other transaction is Advisory and Consultancy Services rendered by the assessee to its AE. It has shown the value of this transaction at Rs.2701,40,583. According to the assessee, it has provided information technology Enabled Office Support Services in the nature of information binding official advisory services to the group companies. In lieu of services, the assessee was remunerated at arm s length price cost plus basis. It was compensated all its costs plus an agreed markup thereon. 13. In order to demonstrate that remuneration received by it in lieu of services are at arm s length price, it was submitted by the assessee that it has earned a net margin of 10.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 7 comparables and ultimately accepted the four comparables shown by the assessee. Learned TPO thereafter observed that the search process applied by the assessee suffers from certain deficiencies and as such it was found logical to fine tune the same. In the Capital Line Data Base, he identified 103 companies after application of filters applied by the assessee. Learned TPO short listed 24 companies. He, thereafter, applied quantitative filters of these companies and finally identified 9 comparables. Similarly, in Prowess, he identified two companies and ultimately selected 12 comparables. After confronting the assessee, he found 8 comparables which are as under: S.No. Name of the company Used by/Proposed by Margin 1 All Sec Technologies Assessee 33.75 2 CS Software Enterprise Ltd. Assessee 10.53 3 Ace Software Exports Ltd. Assessee 14.47 4. Spanco Limited Assessee 20.32 5. Galaxy Commercial Selected by TPO 19.74 6. Maple e solutions Selected by TPO 35.83 7 Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards page No. 74 of the appeal papers wherein such computation has been placed on record. He also pointed out that vide letter dated May 28, 2009, the assessee has submitted all these details. The copy of this letter is available on page Nos. 51 to 60 of the paper book. He also submitted that in assessment years 2007-08 and 2008-09, learned TPO has allowed a working capital adjustment to the assessee. 18. We have heard the rival contentions and gone through the record carefully. For carrying out any business, an assessee would always require the capital. Now, it is for the assessee to contribute the capital from its own source or borrowed it from the financial institution. If the capital is borrowed from the financial institution, it will be serviced by interest etc. and which will ultimately effect the profit ratio. In a given case, an assessee has surplus capital from reserve, share capital etc. but still it operates its activity from the borrowed fund, then on the surplus capital, it would earn interest income which is independent to the operation of the company. Such income would be assessed as income from other sources, but the profit margin from the operations would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lters applied by the assessee. In these filters, assessee had not applied the filters canvassed before the ITAT i.e. the company who has incurred expenses more than 6% of its sales towards advertisement and marketing. Therefore, according to the Learned DR, there is no specific details available to test this claim. 20. We have heard the rival contentions and gone through the record carefully. Rule 10C(2) of the Income-tax Rules, 1962 read with other TP Regulations contained in Chapter X of the Income-tax Act, 1961 contemplates the very basic requirement of any transfer pricing analysis and the basic requirement is to select comparable, uncontrolled transactions after taking a detailed function, assets and risk (FAR) analysis. A company cannot be selected as a comparable if the FAR profile of such company is not comparable with that of the tested party. It is also to be kept in mind that if there are differences which can be adjusted then adjustments are required to be made. If the difference between the companies are so material that adjustment is not possible then such comparables are required to be rejected. However, if we have an overall look on the TP Regulation then it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Therefore, we do not find any merit in the contentions of the learned counsel for the assessee for excluding of Allsec Technology Ltd. from the list of comparables. 21. In the next fold of submissions, it was contended by the learned counsel for the assessee that Maple E-Solution has reported high fluctuation in its margin over a period of six years. In financial year 2003-04, it has shown 100% loss and in financial year 2004-05, a profit at 37.38% was shown. In financial year 2005-06, and 2007-08, the profits shown by this concern are at 36.83%, 34.42% and 22.94% respectively. In financial year 2008-09, it has again shown losses at 65.23%. He submitted that this company cannot be considered as a comparable because of vast fluctuation in its result. Learned DR on the other hand submitted that in the TP study report, assessee has included MCS Ltd. which has shown 15.43% as a profit in the year 2004. In 2005, the profit margin goes down to 3.4% and in the year 2006, it has shown losses at -5.81%. Inspite of this vast fluctuation from 15%, profit to loss of -5.81%, assessee has considered it as a comparable. He also contended that the profit of this concern in the last 3-4 year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sec. 92C(3) of the Act on 26th October, 2010 whereby he has recommended an adjustment of Rs.7,55,53,984 in the value of the international transaction conducted by the assessee with its AE. Learned TPO in order to determine the arm's length price has identified 26 comparables and worked out the mean operating profit by dividing it with total cost at 29.38%. The assessee has shown margin of 10.16% in this year and, therefore, an adjustment has been recommended. 24. The learned counsel for the assessee while impugning the orders of the Assessing Officer mainly raised four fold submissions. In his first fold submission, he pointed out that in assessment year 2007-08, assessee has applied a filter for eliminating the companies who have incurred expenses on advertisement and marketing more than 3% of the sales. Before the learned TPO, it was contended by the assessee that it is engaged in providing contract services. It does not undertake any marketing or advertising activity as the associate enterprises which contractually obliged to obtain the services from the assessee is responsible to incur all these expenses. The assessee is guaranteed of a regular work and thus insulated fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the future years. During the course of hearing, Learned DR pointed out that the argument put forth by the assessee is not such a simple step that can persuade the Tribunal to exclude the above comparable. He drew our attention to the comparable i.e. HCL Comnet System and Service and submitted that their concern incurred 0.65% of sales on AMP but shown profit at 45.91%. Similarly he suffered Maple E-solution Ltd., it incurred expense on AMP at 0.16% and shown profit at 32.06%. He also referred Genesys International Corporation Ltd., who incurred 0.68% of sales on AMP but shown the profit at 19.17%. 26. We have heard the rival contentions and gone through the record carefully. On pages 24 to 26, learned TPO has considered this aspect. According to the learned TPO, the filters applied by the assessee in the TP Study report for eliminating the companies who had incurred expenses of more than 3% of the sales on advertisement and marketing is not an appropriate filter. According to the learned TPO , independent enterprises has to incur marketing expenditure. In a service industries like I.T. enabled services, the assessee did not provide the basis on which such expenses result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the result of comparable. We have extracted such comparable in para 24 on page 32 of this order. Contrary to this, Learned DR also pointed out that HCL Comnet System Services incurred 0.65% of sales on AMP but shown profit at 45.91%. Similarly, Maple E-solution incurred 0.16% and shown profit at 32.06%. Visual Infra-tech did not incur any expenditure but shown profit at 44.15%. Thus, the details referred by the learned counsel for the assessee do not advance the case of the assessee. What is the actual impact on the earning of income could not be demonstrated on the basis of these comparative details, graph etc. The next reasoning is that such companies are functionally different. Creation of marketing intangible is brand by incurring such expenses may be helpful in future. But how their FAR is substantially so different could not be explained. Learned TPO has looked into this aspect. He observed that material showing impact on Information Technology Industry by such expenses had not been produced by the assessee. After taking into consideration the discussion made by the learned TPO as well as the DRP on this issue, we do not find any merit in the contentions of learned couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case, the arithmetic mean would not be upgraded by including those companies which have been eliminated by the Learned CIT(Appeals), therefore, directly there was no adjudication at the end of the ITAT on this issue. 29. We have heard the rival contentions. The expression Related Party Transaction (RPT) has not been defined in the Act. The ITAT in the case of Sony India had examined the facts of that case for verifying the arm s length price of the assessee. The ITAT has not interpreted any provisions of law which can be propounded as laying down the ratio of law. The ITAT has just made a reference to a figure which may be relevant while adjudicating the issue in the facts of that case. It may be a guiding factor while considering the cases of the assessee in other appeals. But neither it is a ratio of law nor it can be given status of a statute, which has a binding effect on all other adjudicating authorities. The Act does not provide directly as to what percentage of a related party transaction has to considered for exclusion. However, if we look to the scheme of Income-tax Act, then it would be reveal that expression associate enterprises which is somewhat similar to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, the turnover filter in between 1 to 200 crores was considered as a comparable. On the strength of these orders of the ITAT, it was contended that the companies who are having turnover of more than 200 crores deserves to be excluded. Learned DR on the other hand relied upon the order of the DRP. 31. We have heard the rival contentions and gone through the record carefully. In the case of Centillium India, the turnover of the company was in the range of Rs. 30 crores. The comparables were selected having turnover of Rs. 1 to 200 crores. However, we find that the three companies which have been pointed out by the assessee and extracted supra are very large companies who have a turnover of more than Rs.260 crores. They cannot be considered as a comparable companies, in view of their huge turnover. Therefore, we find force in the contentions of the learned counsel for the assessee and direct the Assessing Officer to exclude these three comparables and thereafter reworked out the means profit of the comparables. 32. In the next fold of submissions, it was contended by the assessee that learned TPO has erred in considering the companies who have volatile margin over the period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the next fold of submissions, learned counsel for the assessee has submitted that learned TPO has included functionally different companies in the comparables. The first objection raised by him relates to inclusion of Mould-Tech Technology Ltd. He pointed out that this company deserves to be excluded for four reasons because it is giving functionally different services. It has super normal growth. It has incurred significant expenses on advertisement and marketing. It has shown abnormal high profit. As far as the issues regarding incurrence of advertisement marketing expenditure are concerned, we have already discussed this aspect and did not find merit in the contentions of the learned counsel for the assessee. Similarly, we do not find any merit with regard to high margin of profit. The only issue left is whether this comparable is functionally different or not. We find that learned TPO has examined this aspect elaborately on pages 93 to 97 of his order. We have gone through the TPO s order. The basic argument raised by the learned counsel for the assessee is that Mould Tea Technology is rendering engineering services which are in the nature of producing design, drawings, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se aspects and also the contentions of the assessee. His order is quite speaking one. After looking into the findings recorded by him, we do not find any merit in the contentions of the learned counsel for the assessee. 36. The learned counsel for the assessee further submitted that learned TPO has included Asit C. Mehta Financial Services Ltd. which is engaged in providing high-end services in the nature of geographic information services. The activity performed by this concern are not comparable to the activities of the assessee. We find that learned TPO has rejected this contention of the assessee and which is identical to the other concern i.e. Mould Tec, Aelex Services etc. Learned TPO was of the view that he has not compared the services of these concerns vertically. The comparables are rendering I.T. Enabled Services. They are functionally similar, as far as I.T. Enabled Services are concerned. With regard to Vishal Information Technologies Ltd., learned counsel for the assessee submitted that this concern has low personal cost as a percentage of sales as compared to the assessee s personal cost to its sales, therefore, it is also not comparables. We find from the findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO got from this company, those were communicated to the assessee and after providing due opportunity, learned TPO found it as a comparables and only thereafter included it. We do not find any force in the contentions of the learned counsel for the assessee for excluding this concern. Learned TPO has considered the details of each comparables elaborately in paragraph No. 14 of the order. We have duly gone through his findings and thereafter upheld the inclusion of the comparables. In view of our above discussion, we exclude only four comparables, namely, HCL Comnet Systems Services Ltd. (Segmental), Infosys B.P.O. Ltd., Maple Esolutions Ltd. and Wipro Ltd. (Segmental). Out of the above four, three are excluded on account of huger turnover in comparison to the turnover of the assessee and one is excluded on account of huge fluctuations in the profit/loss margin in different assessment years. The appeal of the assessee is partly allowed. Learned Assessing Officer is directed to recomputed the margins of the comparables after excluding these four from the list of comparables and thereafter worked out the adjustments, if any, required in the A.L.P. of the international transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
