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TMI Blog2014 (9) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case and in law, the Id. CIT(A) erred in upholding/confirming the action of the Learned Additional Commissioner of Income Tax (Ld. TPO) in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a prerequisite condition to make any adjustment under the provision of Chapter X of the Act. C. Comparability analysis adopted for determination of arm's length price suffers from inherent defects: 3. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the Ld. TPO in conducting fresh benchmarking analysis substituting the Appellant's analysis with fresh comparability analysis on his own conjectures and surmises, 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in rejecting the following filters applied by the Appellant: i. Rejection of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis in accordance with the provisions of Rule 10B of the Income Tax Rules, 1902. 9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in benchmarking the transactions of the Appellant with companies having significant differences in the functions performed, turnover, research expenses and/or marketing expenses incurred and risk undertaken by the Appellant vis-a-vis the comparable companies. 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in selecting Maple e-Solutions Limited as comparable despite the fact that the data of the company was not available for the full 12 months period. Thus the ld. TPO has adopted inconsistent and selective approach for the selection of the comparable companies. 11. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding confirming the action of the ld. TPO in not rejecting VishaI Information Technologies Limited (Vishal) in spite of the fact that its salary cost as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, the ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the TPO in not appreciating the difference in infrastructure cost of the Appellant and the comparables selected and erred in not giving a downward adjustment to the mark-up of comparables on account of difference in infrastructure cost. F. Variation of 5%. from the arithmetic mean: 18. On the facts and in the circumstances of the case and in law. the ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the TPO in denying the benefit/reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act. while computing the adjustment to the total income of the Appellant. 3. Before us, the learned AR has not pressed ground Nos. 1, 2, 3, 4, 5, 6, 8, 9, 12, 13, 14, 15, 17 and 18 and argued only in respect of ground Nos. 7, 10, 11 and 16 of the grounds of appeal and accordingly, Ground Nos. 1, 2, 3, 4, 5, 6, 8, 9, 12, 13, 14, 15,17 and 18 are dismissed as not pressed. 4. Ground No. 7 reads as follows: 7. On the facts and in the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are contingent upon various economic factors and are subject to various influences in a free market economy. In a free market situation, one cannot ever perceive that all players would be making profits, with no one making losses. The rationale behind off-shoring services to India has been to curtail costs in a free global market, as against revenue maximisation. A profit or loss does not have any bearing on the comparability of a company. Accordingly, any company, which is functionally comparable, must be included in the set of comparables, irrespective of its profitability. 7. In view of the above, the AR submitted that in a transfer pricing documentation, for conducting a fair economic analysis, one need to follow a scientific methodology to eliminate companies on standard and economically viable filters. Thus, merely because the company has incurred losses, it should not be eliminated from the set of comparable. However, the CIT(A)/TPO has not taken due cognisance of the above mentioned submissions and rejected companies that fail to pass this filter. 8. He relied on the following precedents: (a) The Chandigarh Bench of this Tribunal in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aordinarily high profit or loss are to be excluded as comparables. Accordingly, the Assessing Officer is directed to re-calculate the ALP. This ground is partly allowed. 14. The next ground for our adjudication is ground No. 10 which is as follows: 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in selecting Maple e-Solutions Limited as comparable despite the fact that the data of the company was not available for the full 12 months period. Thus the ld. TPO has adopted inconsistent and selective approach for the selection of the comparable companies. 15. Facts of the issue are that the TPO selected Maple e-solutions Ltd. as one of the new comparable company. The AR contended that Maple was in operation only for a period of 4 months during the FY 2004-05 and, therefore, the same does not qualify the filter adopted by the TPO. However, the CIT(A) did not consider the submission made by the assessee-company. 16. The AR submitted that one of the filters adopted by the TP for the purpose of selecting the final list of comparable companies to determine the ALP is "Compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as the financial data of Maple e-Solutions cannot be considered as comparable to determine the ALP since it is part period data. This ground of the assessee is allowed. 19. The next ground of our consideration is ground No. 11 which is as under: 11. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding confirming the action of the ld. TPO in not rejecting VishaI Information Technologies Limited (Vishal) in spite of the fact that its salary cost as percentage of the total cost is very abnormal indicating difference in the functional profile of the Appellant and Vishal. Thus the TPO has adopted inconsistent and selective approach for the selection of the comparable companies 20. Brief facts of the issue are that the TPO in his SCN proposed to introduce Vishal Information Technologies Ltd. (Vishal for short) as a comparable in respect of the ITES service being rendered by the assessee company. It was also selected by the assessee company in the TP study. In response to the said SCN, the assessee-company furnished a detailed submission, wherein the assessee-company informed the TPO that the business model of Vishal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a comparable, due to its peculiar business model. Thus, based on the said analysis, the AR submitted that Vishal should be excluded from the final list of comparables selected by the TPO. The AR relied on the following decisions which squarely covers the ground of the assessee-company: (a) The Tribunal in the case of HSBC Electronic Data Processing (I) (P.) Ltd. v. Asstt. CIT held as under: "11. We have considered contentions of the parties and perused the material on record with regard 10 the aforesaid comparables. There is no dispute to the fact that the employees cost to total turnover of the aforesaid company works out to 1.42% as against the industry average of 30 to 40% and assessee's employees cost to turnover percentage o{ 43.76%. This fact implies that the aforesaid company has outsourced major portion of its work to third party vendors. Therefore, this company cannot be treated as a comparable by applying the ratio laid down by the co-ordinate bench in case of Brigade Global Services (P.) Ltd v. ITO [2013] 143 ITD 59 and Capital IQ Information Systems (India) (P.) Ltd. v. Dy. CIT while dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Taxation) [(2013) 32 taxmann.com 21), held as under: "17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand (POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables." In case of Maersk Global service Centre India (P.) Ltd. (supra), the ITAT Mumbai Bench has also directed for exclusion of the aforesaid company, by observing in the following manner: "Insofar as the cases of Tulsyan Technologies Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) 29 taxmann.com 412 (Bangalore ITAT); * Nomura Fin Services (India) (P.) Limited vs. ACIT (2013) 33 taxmann.com 4 (Mumbai ITAT); * Stream International Services (P.) Limited vs. ADIT (International Taxation) (2013) 31 taxmann.com 227 (Mumbai ITAT); * 24/7 Customer.Com (P.) Limited vs. DCIT [(2013) 28 taxmann.com 258/ (Bang ITAT); * M/s. HCL EAI Services Ltd., vs. DCIT (IT(TP)A No.1348/Bang/2011) (Bang ITAT); * M/s. Mercedes Benz Research & Development India Pvt. Ltd. vs. DCIT (IT(TP)A No. 1222/Bang/2011) (Bang. ITAT); * ITO vs. M/s. Nextlinx India Pvt. Ltd. (ITA No. 454/Bang/2011) (Bang. ITAT). 24. The DR submitted that the TPO has not adopted any filter with reference to salary cost. Thus, the 5 filters adopted by the TPO are as follows: (a) Companies whose ITES income Rs. 1 crore were excluded. (b) Companies who have more than 25% related party transactions (sales as well as expenditure combined) of the sales were excluded. (c) Companies who less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impact on the profit margin of the assessee company, then the assessee company should be allowed depreciation adjustment or can opt for PLI as PBDIT/TC. In view of the above, the Ld. TPO in his order calculated the revised margin of the assessee company and also the comparables by taking the PLI as PBDIT/TC and concluded that the margin of the Assessee Company even after considering the PLI as PBDIT/TC is lesser than the arithmetic mean of the comparables. The TPO did not consider the fact that the margin of the Assessee Company falls within the +/- 5% range of the arithmetic mean of the comparables. Also, the TPO while passing the rectification petition under section 154 of the Act failed to consider that once the PLI is taken as PBDIT/TC, the (-) 5% range from the arithmetic mean of 33.01% (34.60% less 1.59% working capital adjustment) of comparable companies as computed by the TPO himself comes to 26.36% and thus the margin of 26.80% of the assessee company as computed by the TPO falls within the said (-) 5% range. Therefore, the margin of the assessee company can be treated at ALP. 30. The AR further submitted that the TPO while passing the rectification order under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure which must be deducted in all situations. ... Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences. if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the assessee in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. ... Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings. Without considering obvious material differences, the contention of the assessee to take profit without depreciation was rejected. This rejection is not sound in law. This ground is allowed. Accordingly, we direct the Assessing Officer to re compute the ALP. " (c) The Delhi Tribunal in the case of Schefenacker Motherson Ltd v. ITO [2009] 123 TTJ 509, held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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