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TMI Blog2013 (10) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... light that the average hourly rate charged to the third parties were lower compared to the AE and hence the international transactions were at arm's length - No material on record to justify that the assessee is precluded from taking support from any other method for benchmarking its transactions - Income Tax Act does not preclude the assessee from benchmarking its transactions with the help of any other method other than the one which is taken for consideration in its study report. For the purpose of sub-section (1) of section 92C of the Act the most appropriate method has to be selected by the AO. Rule 10C also provides that most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction - AO/TPO has to exercise their judicial discretion in considering as to whether the method/methods adopted by the assessee is suitable to the facts of the case and if, in their opinion, the method followed by the assessee is not suitable, the AO/TPO has to give show cause notice to the assessee before adopting an appropriate method. Ordinarily, in service contracts, CUP method is more suitable, where an assessee enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the help of Transactional Net Margin Method (TNMM) as a primary method. During the course of assessment proceedings the assessee company has also compared the rates charged to AE vis- -vis third party (non-AE) and benchmarked the price by applying CUP methodology in support of the international transactions. Vide letter dated 18th August, 2006 it was submitted that the assessee charged fees at hourly basis from the AE and also stated that the company had also entered into a contract with third party and the average hourly rate charged from the third party works out at Rs. 331/- which is lower compared to the fees charged from the AE i.e. Rs. 488/-. Again, vide letter dated 25th August, 2006 the assessee furnished figures to compare the fees charged from AE with that of the fees charged from non-AE company to highlight that even by applying the methodology of CUP there is no case for making any transfer pricing adjustment. Page 57 to 70 of the paper book highlights that the assessee benchmarked its international transactions by applying the methodology of TNMM and taking the berry ratio as profit level indicator (i.e. OR/OE). The company submitted that there is no case for mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO proceeded to complete the assessment under section 143(3) of the Act by making an adjustment of Rs. 1,19,59,656/- to the income declared by the assessee. The main case of the assessee before the AO was that the learned TPO has not followed the principles of natural justice while rejecting the comparable companies listed out by the assessee company and he has also wrongly taken Rites Ltd. as a comparable case. 8. Aggrieved, assessee contended before the first appellate authority that the AO erred in making a reference to the TPO and also contended that the transactions entered into by the assessee are at arm's length and hence no adjustment is called for in the circumstances of the case. We are concerned herein with the adjustment made by the AO and hence the facts highlighted before the CIT(A) vis- -vis the methodology followed by the assessee, to support that the international transactions are at arm's length, is highlighted herein. 9. The case of the assessee is that as per the Transfer Pricing Study Report the assessee furnished detailed analysis to highlight that the most appropriate method in the case of the assessee is TNMM and the most appropriate "profit level ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormula the arithmetical mean of the berry ratio of the comparable cases given by the assessee works out to 1.06 whereas the berry ratio of the assessee worked to 1.05 before adjusting non-operational/extraordinary expenses and thus it is comparable with the average of the berry ratio of the independent comparable service companies. Therefore, the fees charged by the assessee has to be treated as reasonable and the price charged is in tune with the arm's length principle. It was also highlighted that selection of multiple year financial data for the comparables is in tune with Rule 10B(4) of the IT Rules. 12. With regard to inclusion of Rites Ltd. as a comparable case the assessee company submitted that it is a multi-disciplinary consultancy organisation in the filed of transportation, infrastructure and related technologies. Since it provides an array of services under a single roof, and being a Government of India enterprise, it is not comparable with the services rendered by the assessee company. In fact foreign contracts executed by Rites Limited are with the governments of several countries such as Sudan, Myanmar, U.K. etc. and not with independent private parties. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd prices because of the potential for variation of operating expenses across enterprises. In this regard he observed that the extraordinary expenses highlighted by the assessee should not figure in the operating expenses and if such adjustment is made before determining the ALP, the TNMM method employed by the assessee would offer a practical solution; further if the above mentioned material difference on account of "extraordinary expenses" is adjusted by removing them from operating expenses on PLI of the assessee then its berry ratio comes to 1.10 and the operating profit on operating cost comes to 10.40% which is higher than the berry ratio of 1.06 and operating profit to operating cost of 5.73% of the comparables. He thus concluded that the assessee's international transaction is at arm's length. 15. With regard to inclusion of Rites Limited as comparable, for bench marking, the learned CIT(A) was of the view that there is a difference in the activity of Rites Limited and hence it cannot be considered as comparable with the assessee company. In this regard he observed that it is a part of the government enterprise and was assured of obtaining contracts through Railways. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not taken into consideration since only operating revenue and operating expenses are taken into account. Therefore, the PLI adopted by the assessee is not in accordance with the rules prescribed under the IT Rules. 18. He also adverted our attention to pages 127 and 129 of the paper book to submit that as per berry ratio it works out to 1.05 and operating profit and operating cost also comes to 11.17% only on account of the fact that extraordinary expenses claimed by the assessee were reduced from the cost, as otherwise it will be 5.04%. He also adverted our attention to pages 130 and 195 of the paper book to submit that exclusion of extraordinary expenses was the main basis upon which the learned CIT(A) arrived at a conclusion that the profit margin declared by the assessee is within the safe harbour limit. However, the learned CIT(A) has not given any clear cut finding as to why this expenditure has to be excluded. He thus submitted that the CIT(A) erred in accepting the plea of the assessee with regard to exclusion of extraordinary expenses from the cost. 19. With regard to the new comparable adopted by the TPO i.e., including Rites Limited in the list of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traordinary expenses from the cost/operating expenses the learned counsel submitted that this issue was specifically raised before the TPO (page 130 of the paper book) but the TPO did not question as to how these are not extraordinary expenses. The TPO had proceeded to adopt the ratio of operating profit to operating expenses as PLI but the most important factor that needed to be kept in mind was that the "cost that needs to be taken for computing the profit must be identical both in assessee's case as well as in the comparable cases". The extraordinary expenses are one time expenditure which are not commonly found in other comparable cases; where a specific issue was raised before the TPO as well as before the AO, in the absence of any material to reject the plea of the assessee, the TPO ought to have accepted the contention of the assessee instead of merely rejecting the same that too without calling upon the assessee to furnish further information in that regard if he is not satisfied with the claim of the assessee. It was also highlighted that the assessee gave due explanation (page 194 of the paper book) as to why such extraordinary expenses should be excluded from the cost an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able companies which are taken into consideration by the AO/TPO the learned CIT(A) has correctly held that Rites Limited is a Government of India enterprise and considering the nature of the contracts and the implicit guarantee provided by the Government of India, etc. Rites Limited cannot be taken as a comparable case and hence the learned CIT(A) was justified in excluding the same. 26. Further, the Act does not provide that an assessee has to choose a particular method for benchmarking its transactions. Even if a particular method is chosen at the time of furnishing it study report the company can always support its transactions with another method. In the instant case all the details were furnished before the TPO and the AO to highlight that the average hourly rate charged to the third parties were lower compared to the AE and hence the international transactions were at arm's length. Even at this stage the learned D.R. could not place any material on record to justify that the assessee is precluded from taking support from any other method for benchmarking its transactions. In other words, the Income Tax Act does not preclude the assessee from benchmarking its transactions wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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