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TMI Blog2014 (3) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... eering companies which provide end to end solutions – thus, they cannot be compared with assessees who provide marketing support services to the parent company - They were held to be functionally not comparable with thee engineering companies – these companies are functionally different and cannot be applied as appropriate comparable to the assessee – thus, they are to be excluded from TP adjustment while determining the ALP. Exclusion of Saket Projects Ltd – Held that:- Relying upon Exxon Mobil Company India (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 3(1), Mumbai [2011 (6) TMI 385 - ITAT, MUMBAI] - The specific characteristics of services provided, assets employed, risk assumed i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables - The higher or lower rate of profit is nowhere prescribed as the determinative factor in this behalf - Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. No comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variation in functional si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be claimed in view of the provisions of Section 40(a)(i) in the year in which the tax has been deducted at source and paid to the government account –thus, the expenses are allowable – Decided in favour of Assessee. Claim of 'Warranty Expense – Held that:- As decided in assessee’s case in the earlier assessment years, as a normal rule when the provision for warranty is disallowed in earlier years, deduction then should be allowed in the year when actual expenses are incurred – thus, the ,atter remitted back to the AO for re-adjudication – Decided in favour of Assessee. Legal and professional fees paid to KPMG/ BSR & Co – Deduction u/s 40(a)(ia) of the Act - Held that:- Assessee contended that the requisite tax has already been deducted and deposited at the time of booking of actual expenses on receipt of the invoice - there is no default at the assessee's end and no disallowance is warranted in such a case - there cannot be a double levy of taxes on same income. Since the assessee duly deducted and deposited TDS on the basis of invoice received and any disallowance u/s 40(a)(ia) will lead to a double levy of taxes on the same income – thus, in accordance with section 40( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd apparatus for the purpose of communication of all kinds. The assessee is also engaged in providing marketing and after sales support services to Nortel group. 3.1 In the orders for AY 2007-08 and AY 2008-09, the TPO has accepted the arm's length price of all the international transactions undertaken by the assessee, except one, namely, Provision of marketing and after sales support services and considered this transaction to be not at arm's length. 3.2 The brief facts in respect of impugned transaction are that assessee entered into a service agreement for the provision of marketing and after sales support services from July 1, 2000 on a cost plus mark-up basis. By this agreement, assessee provides marketing and after sales support services to AEs in relation to sale of telecommunication equipments, software and other IT products to customers in India. 3.3 The assessee considered TNMM as the most appropriate method and has benchmarked the transaction taking Operating profit/ Operating cost ( OP/OC ) as PLI. Ld TPO though accepted assessee's TNMM method as appropriate method for the ALP, however reworked the same by applying inapplicable comparables as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... competitive strengths, lack operational efficiencies. It is also submitted that DRP wrongly noted that there financial data for companies having small turnover are not reliable. It is pertinent to mention that Capital Trust Limited is large company with Turnover of Rs. 13.92 Crores, the assesse has used it segmental profits for comparability analysis. The small size of segmental revenue from a particular stream will not make companies financial unreliable. While using TNMM for determining of ALP, difference such as turnover are neutralised by use of comparables with wide range of turnover. A risk mitigated contract service provider, like the assessee, is not dependent on scale or size of operations. Therefore, a turnover criterion should not be applicable in the case of the Assessee which operates on a cost plus pricing model. (ii) Segmental Information Available - Capital Trust Limited has maintained a foreign consultancy fee segment as per Accounting Standards( AS ) - 17 as a separate line of business which reinforces the fact that the management of the Capital Trust Limited considers the foreign consultancy segment as a significant and separate business activity and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and three comparable companies identified by TPO, namely, Choksi Laboratories Ltd, Rites Ltd, WAPCOS (India) Ltd. DRP rejecting assesses contentions, upheld the inclusion of all four comparable companies. 7. Ld. Counsel Shri Vijay Iyer contends that ; (i) Ld. TPO in AY 2008-09 cherry picked comparables and chose comparables which are functionally different. Comparable selected by the TPO are different from the comparables selected by the TPO in previous years and subsequent years, especially when there is no change in the assessee's business. (ii) Ld. Counsel pleads to apply the theory of consistency in income-tax proceedings as held in Brintons Carpets Asia (P.) Ltd. [2011] 12 taxmann.com 148/46 SOT 289 (Pune-Trib.) (URO) helding that the principle of res judicata was inapplicable to Income- tax matters, as long as the facts are different in different AYs. Otherwise, the rule of consistency is relevant to Income-tax matters and AO cannot ignore the same. (iii) It is further pleaded that companies engaged in providing high- end consultancy and engineering services should not be accepted as Nortel India is engaged in administrative support services. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) WAPCOS: WAPCOS renders consultancy services relating to water, power and infrastructure sectors. Services offered include market intelligence, feasibility studies, planning/ project formulation, field and geo-technical investigations, engineering design, contract management, quality assurance management and human resource development. It also executes turnkey projects on a regular basis. (vi) Similar issue has been considered in detail by Delhi ITAT in case of Dy. CIT v. MCI Com India (P.) Ltd. [2012] 25 taxmann.com 520/53 SOT 290 (Delhi-Trib.) where it is held that. Marketing support services cannot be compared with turnkey Engineering services. We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies and provide end-to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. - This decision was also followed in the case of H M Hennes Mauritz India Pvt. Ltd. v. Dy. CIT [ITA No. 4704 of 2012 and Actis Advisers Pvt. Ltd. Vs ACIT [ITA No. 6390/Del/2012] - Accordingly, it is sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Datamatics. The case of Datamatics is like that of Imercius Technologies representing extreme positions. If Imercious Technologies has suffered heavy losses and, therefore, it is not treated as a comparable by the tax authorities, they also have to consider that Datamatics has earned extraordinary profit and has a huge turnover. - ITAT Delhi Benches in the case of Adobe Systems India Private Limited held the following 5. We find that TPO has rejected the assessee's contention with regard to inclusion of these three supernormal profit companies without any cogent reason...... 9.2. It is pleaded that the TPO/DRP have followed an incorrect approach of selecting Saket Projects Limited as comparables for determining the ALP of the impugned international transactions. The impugned TP adjustments are unjustified in view of the facts, circumstances and arguments, they deserve to be deleted. 8. Ld. CIT (DR) supported the orders of authorities below and relied on the following judgments: - M/s Bayer Material Science P. Ltd. Vs. Addl. CIT - ITA no.7977/Mum/2010 - order dated 16-12-2011. - ITA no. 7894/Mum/2010 - M/s Symantec Software Solutions Pvt. Ltd. Vs. ACIT - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the determinative factor in this behalf. Only if the higher or lower profit rate results on account of effect of factors given in Rule 10B(2)read with sub- rule (3), that such case shall merit omission then only it can be considered. Higher profits achieved due to factors not mentioned in the rule then such case shall be continued to find place in the list of comparables. Similar view has been approved by various coordinate ITAT benches in the cases like Exxon Mobil Company India (P.) Ltd.- (2011-TTJ-68-ITAT-MUMTP) and DCIT vs. M/s. B.P. India Services (P.) Ltd. - ITA No.4425/Mum/ 2010. 11.3. On issue of comparability of Saket Projects Limited, we are in agreement with the ld DR that no comparable can be rejected merely on the basis of high margins if it is functionally comparable to the assessee or there is miner variation in functional similarity. The case of Saket Projects Ltd. has functional dissimilarity as it is organizing events with various kinds of sponsorships. The company in this division is earning revenue from selling event fees and offering space for rent which cannot be comparable with provision of marketing and sales support services. Besides segmental allocatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rage of opening and closing level of working capital can be compared for the purpose of making adjustment. This would give a representative level of working capital level. Working capital adjustment cannot be denied to the assessee simply because it did not claim such adjustment in its TP Study. Working capital adjustment improves the comparability. Vodafone India Services P. Ltd. (Formerly 3Global Services P. Ltd.) v. Dy. CIT ITA No. 7140/Mum/2012 and 7097/Mum/2012 The Tribunal held that under the provisions of Rule 10B(2)(d) the comparability has to be judged with respect to various factors such as marketing conditions, geographical locations, cost of labour and capital in the market, Accounts receivable/payable affect the cost of working capital. The more accounts receivable would mean more capital blocked with debtors which may also mean higher sale prices. Therefore, working capital adjustment is appropriate to improve the comparability. The Tribunal also stated that while making the working capital adjustment guidelines framed by OECD must be followed. 11.7. Ld. counsel has adverted to OECD guidelines to the effect that the account receivable/payable on the last d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee have been overlooked by the AO and DRP in these years and the earlier years revenue recognition has important bearing on the years in question. After hearing both the parties and perusing material available on record, we deem it appropriate to set aside the orders of the AO on the issues, i.e. revenue under BSNL project including percentage of completion, and remand it back to the file of the AO for re- adjudication. Needless to say that the assessee will be given adequate opportunity of being heard and to provide necessary details/ working in this behalf. The AO shall consider the same afresh in accordance with law. These grounds of the assessee are allowed for statistical purposes. 12. The other ground for AY 2007-08 agitates that the AO has erred in making an addition of INR 25,596,609 on account of expenses claimed by the Appellant in its revised return of income relevant facts of this ground are that the assessee e-filed the original return of income for the subject AY on October 31, 2007, declaring a taxable income of INR 527,189,641. Thereafter, the assessee e-filed its revised return of income for the subject AY on March 31, 2009, declaring a taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct any further scrutiny/ seek clarifications from the assessee. Where the DRP seeks to make any enhancement, it can be made in the directions u/s 144C(5) and the DRP cannot direct the AO to make further enquiries in the directions issued u/s 144C(5). This is further supported by the fact that as per sub-section (13) of section 144 of the Act, it has been clearly provided that upon receipt of the directions issued by the DRP, the assessing officer shall, in conformity with the directions, complete, notwithstanding anything contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee. 13.1. Ld. Counsel further contends that from the facts, circumstances, DRP directions and provisions of section 144(7) considered together, AO had no powers, whatsoever, to go beyond the direction and conduct further scrutiny/ seek clarifications from the assesse. In the absence of DRP directions AO cannot enhance the draft income in the garb of misinterpreting the DRP directions. Thus the ASSESSING OFFICER's action is unsustainable both on jurisdiction as well as on merits. 14. Ld. DR supported the order of AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. That the learned AO/Hon'ble DRP ought to have allowed deduction for warranty provision reversed/utilized during the subject AY amounting to INR 239,217,774 on the basis that the deduction for provision for warranty claimed by the Appellant was disallowed by the learned AO in the years in which it was created. b. Consequently, the learned AO/Hon'ble DRP ought to have deleted the net amount of INR 7,703,953 offered to tax by the Appellant in the return of income on account of warranty 17. The learned counsel for the assessee contends that the warranty is provided in respect of GSM telecom network equipment supplied to BSNL for a period of minimum 12 months from the date of commissioning of the complete network in a particular service area. Further, in the return of income filed for AY 2008-09, the assessee made a net addition of INR 7,703,953 on account of the warranty provision. The aforesaid addition was made in the return of income for AY 2008-09 on the basis that the assessee had claimed a deduction for 'provision for warranty' created by it in AYs 2005-06 and 2006-07, respectively and hence, did not claim any deduction of warranty expenses incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance is warranted in such a case. It is a trite law that there cannot be a double levy of taxes on same income. Since the assessee duly deducted and deposited TDS on the basis of invoice received from BSR Co./KPMG, any disallowance u/s 40(a)(ia) will lead to a double levy of taxes on the same income. The learned counsel for the assessee further contended that 'accrual of income', which is evidenced by the right to enforce payment in favor of an identified recipient is a primary condition to be met before determining applicability of the withholding tax provisions under the Act. The learned counsel for the assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of Shoorji Vallabhdas Co. (1962) 46 ITR 144 (SC), wherein Hon'ble Supreme Court has laid down the principle that even in the accrual system there should be a clear right to receive the payment. The accrual must be real. Unilateral credit in the payer's books would not cause charge of tax on another person. The learned counsel for the assessee also highlighted that in the case of ED Sassoon Co v CIT [1954] 26 ITR 27. 21.1. Without prejudice to these contentions, the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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