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TMI Blog2012 (11) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... Rajpal Yadav, Judicial Member - The assessee is in appeal before us against the order of Learned Assistant Commissioner of Income-tax dated 17.09.2010 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 for assessment year 2006-07. It has raised thirteen grounds of appeal which are not in consonance with Rule 8 of the ITAT's Rules, they are descriptive and argumentative in nature. In brief, its grievance is that learned Assessing Officer has erred in making an addition of Rs. 104,37,360 to the total income of the assessee by recomputing the arm's length price of the international transaction under section 92 of the Act. In other grounds, the assessee has taken arguments in support of its contention that such an addition could not be made on the basis of pleas raised in these grounds. 2. The brief facts of the case are that assessee has filed its return of income electronically on 22.11.2006 declaring taxable income of Rs. 33,92,504. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) of the Act was issued and served upon the assessee. Learned Assessing Officer has observed that assessee company was forme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following adjustments in the arm's length price of international transaction: "8. Computation of arm's length price: 8.1 In view of the above discussions, I proceed to make the computation of the arm's length price as under: Operating Income Rs. 18,75,00,000 Operating cost Rs. 16,84,00,000 Arm's length Revenue 117.54% * 16,84,00,000 =Rs. 19,79,37,360 Book Value of Revenue =Rs. 18,75,00,000 Difference =Rs. 1,04,37,360 % of adjustment of arm's length revenue to cost = 6.19% 8.2 Since the price charged by the assessee varies by more than 5% from the Arm's Length Price, an adjustment of Rs. 1,04,37,360 is to be made to the income of the assessee, being the difference between the arm's length price and the price charged by the assessee from it's A.Es for export services. The Assessing Officer shall enhance the income of the assessee by an amount of R.1,04,37,360 while computing its total income. The Assessing Officer may examine issue of initiation of penalty u/s. 271(1)(c) of the Act in accordance with Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the TPO/A.O. As regards initiation of penalty proceedings and charging of interest we find it to be premature at this stage. Therefore, we do not find any pressing reasons to interfere with the order of TPO/A.O. sd/- sd/- sd/- (Vijay Sharma) (J.P. Massar) (Gopal Kamal) CIT-I, New Delhi. CIT-II, New Delhi. CIT-XI, New Delhi" 5. With the assistance of learned representatives, we have gone through the record carefully. The first area of dispute which could arise between the parties while determining the arm's length price of international transaction entered into by the assessee with its associate enterprises is in respect of most appropriate method required to be adopted as provided in section 92C of the Income-tax Act, 1961 read with Rule 10B of the Income-tax Rules. Section 92C provides five main methods, namely, (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; and (F) one residuary method i.e. such other method as may be prescribed by the Board. The assessee in order to determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is M/s. Mercury Outsourcing Management Ltd. This company is in the field of provisions of BPO/ITES Services. The subsidiary has been suffering persistent losses since 2001 and the function of the subsidiary are not comparable to the functions performed by the assessee. He also observed that VJIL Consulting Ltd. has fallen into huge operating losses for financial year 2006-07. Learned TPO noticed that on a turnover of Rs. 13.10 crores. The company has incurred a net losses of Rs. 10.53 crores. The company has been effected badly due to difference between the management of the company. The matter is now subjudice before the Hon'ble Andhra Pradesh High Court. That concern has created huge provisions for doubtful debt and has written of some items in the balance sheet. As per financial report, important documents, records and register relating to statutory accounting matters are not traceable. The stock and inventory registers have been lost. Thus, according to the learned TPO, this loss and untraceability of important statutory and accounting register and documents throws doubt on the veracity of the accounts of the previous year also. Learned TPO after excluding VJIL has worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on at the end of assessee are discernible. At this stage, without giving a chance to the learned TPO to make a detailed analysis about its exclusion, it cannot be excluded. As far as the exclusion of VJIL Consulting Ltd. is concerned, we find that learned TPO has assigned five reasons on page nos. 13 to 17 of the order. The first reason is that this concern mainly engaged in software development, its software export is Rs. 1494.22 lacs which is quite high in comparison to the business profile of the assessee as well as the functional profile of the assessee. Learned TPO, thereafter recorded a finding that on an analysis of annual report for financial year 2006-07, it revealed that there was dispute in the management important statutory and accounting register and documents are missing hence veracity of its result cannot be ascertained. It has shown huge losses in financial year 2006-07, though in our opinion, profit and loss is an incident of the business and solely on that basis a comparable would not lost its status of comparability, but the cumulative setting of all other factors highlighted by the learned TPO on an FAR analysis, we are of the view that learned TPO has rightly e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue notes on comparability public invitation to comment on a series of draft issue [CTPA/CFA (2006)] may be relied upon to make comparability adjustment. (c) The comparability adjustment can be made for working capital, risk and growth and R D expense. (d) Rule 10B(3)(ii) provides for only reasonable accurate adjustment. (e) As per OECD draft issue notes quality of data being adjustment, purpose of the adjustment, reliability of the adjustment and documentation are essential pre-requirement before a comparability adjustment could be made. (f) Hon'ble ITAT in cases of Sony India Pvt. Ltd. (supra) and M/s. Philips Software Centre Pvt. Ltd. (supra) has allowed ad hoc or flat comparability adjustment however, Hon'ble Kerala High Court has stayed operation of the order in case of M/s. Philips Software Centre Pvt. Ltd. on the plea of the department that Rule 10B(3) stipulate for only reasonable accurate adjustment. 7.9. Claim of Working Capital Adjustment: Whether there was material deviation in working capital of the assessee and finally selected comparables? The working capital adjustment could be considered when a tested party exhibits different working capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparales which require adjustment. During transfer pricing audit, I have not selected any new comparable but had chosen a few comparables out of list of finally selected comparable by the assessee." 13. Alongwith letter dated March 4, 2009, the assessee has submitted an annexure which is placed on page 399 of the paper book also and the annexure is as under: 14. This annexure suggests that assessee has given the relevant details but these details have neither been looked into by the learned TPO nor by the Dispute Resolution Panel. According to the assessee, learned TPO has not asked any further details after this letter otherwise assessee could have submitted any other details if required. Taking into consideration this aspect of the matter, we deem it appropriate that the issue required to be readjudicated, therefore, we set aside the impugned order, remitted it to the Assessing Officer for a limited purpose i.e. learned Assessing Officer shall investigate the issue about granting working capital adjustment to the assessee and if he wishes he can take help from the learned TPO. Learned Assessing Officer shall decide the issue in accordance with law after providing due opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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