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TMI Blog2015 (6) TMI 959X X X X Extracts X X X X X X X X Extracts X X X X ..... of outsourcing had been included in other heads of the expenditure in respect of wages employee cost. In the present case, these aspects have not at all been considered by TPO. If the business module adopted by Sundaram Finance Distribution Ltd. materially affected the profit then the same had to be adjusted. We, therefore, consider it in the interest of justice that the matter may be restored back to the file of AO for examining the assessee’s plea afresh. Issue regarding ICC International, we find that assessee has demonstrated, as noted earlier, that it had earned super profits during the year because of increase in supply on account of government scheme. We find that TPO has considered the assessee’s objection regarding exclusion of high margin comparables in para 8.7 of his order and the DRP in para 7.1. They have merely, inter-alia, observed that comparables cannot be rejected simply because they are loss or high profit making comparables. However, they have not considered that if certain extra ordinary factors materially affected the profit in a particular year then that aspects had to be taken into consideration and due adjustment was required to be made to the net prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .V. MEHROTRA,And SHRI A.D. JAIN, JJ For The Appellant: Sh.Vijay Iyer, CA, Shri Anjit Chakrovorty Sh. Manoneet Dalal, Adv. For The Respondent :-Sh. Peeyush Jain, CIT(DR) ORDER PER S.V. MEHROTRA, A.M. This appeal filed by the assessee is directed against the order of AO dated 10/10/2011 for AY 2007-08 passed in terms of directions of Dispute Resolution Panel (DRP) u/s 144C(5) dated 02/08/2010. 2. The assessee company was incorporated in the year 1999 as a joint venture between American Express International Inc. and Tata Group. However, in the year 2002, American Express International Inc. became the holding company by acquiring stake from Tata Group. Presently 99.99% of share capital of the company is owned by American Express International Inc. and remaining .01% is owned by Tata Group. The assessee company is providing following services: - 1) Distribution of AEE charge, credit cards and other cards. 2) Distribution of AEB personal loans and other retail lending products. 3) Support for marketing and promotion of products, scheme etc. of AEB. 3. The assessee had filed its return of income declaring loss of ₹ 6,62,96,780/-. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in law, the Hon ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant and conducting a fresh search for identifying the comparable companies to the Appellant. 5.2That on facts and in law, the Hon ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in rejecting the Appellant s claim for use of multiple year data for computing the arm s length price and, instead used single year data of companies to conclude the arm s length price of the international transaction. 5.3That on facts and in law, the Hon ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in cherry picking comparables to accomplish pre-conceived conclusions, with the sole objective of rejecting comparables selected by the Appellant and arriving at skewed results. 5.4That on facts and in law, the Hon ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in accepting functionally dissimilar company namely Sundaram Finance Distribution Limited as functionally comparable to the Appellant. 5.5 That on facts and in law, the Hon ble DRP has erred in confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncreased 3.75%. Further amendments were carried out to the agreements on 24th May, 2005 with effect from 1st June, 2005 and the retainer ship fee was increased to ₹ 200 lacs per month and the service fee on personal loan disbursed was reduced to 3.50%. Another amendment was effected on 22nd November, 2005 with immediate effect through which the charges for the consumer card were revised as under: (i) ₹ 1800/- per approved card sourced through its sub contracted third parties who source card applications. (ii) ₹ 1800/- per approved card sourced through its sub contracted third parties who source loan applications. 3.2 The assessee has entered into another Service Agreement with American Express International Inc. on 25th September, 2006 w.e.f. 1st January, 2006 to provide the following services: 1. Analysis and trending of financial and back office data to identify out of pattern activity. 2. Root cause analysis and subsequent investigation with follow-up. 3. Remote control reviews with focus on protection of company assets and adherence to policies and procedures. 4. TID review and analysis. 5. Initiatives such as 6 Sigma, BCP coordination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering in detail Rule 10B(4) the TPO held that data of F.Y. 2004-05 and F.Y. 2005-06 is not to be considered for bench marking International Transactions and, therefore, he used the data for the F.Y.2006-07 only. The assessee furnished updated margins of the comparables. The TPO has observed that at this stage the assessee rejected SREI Money Mall Ltd., SREI Capital Market Ltd. and Allianz Capital and Management Services Ltd. as comparable which TPO considered to be in order. However, since only few comparables remained, the TPO carried out a fresh search to find out more comparables. On the basis of search carried out by TPO, he issued a show cause notice and on the basis of his examination of the companies with reference to the FAR, their annual reports and the comparables used in the earlier years by the assessee, the TPO proposed arm s length margin at 36.03%. 10. After considering the assessee s objections that the TP Documentation should not be rejected since the same was done in accordance with law, the TPO observed that the information or data used in the computation of arm s length price was not reliable or correct due to following defects: - 1. As per Rule 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined and considered the fourth objection of assessee with regard to use of Sundram Finance Distribution Ltd. as comparable on the ground that the Company did not employ any employee on its payroll. The TPO pointed out that the assessee s objection has following two aspects: - a) this information had been gathered by the assessee from the report for the purpose of section 217 of the Company's Act. He pointed out that there was possibility that the company wanted to report that they had no employee for whom the details were required to be reported. b) the company may have different business model. He rejected the assessee s objection mainly on the ground that this comparable was selected by the assessee in the TP Report. 15. The TPO rejected the assessee s fifth objection that the companies selected were not engaged purely in agency activities observing that under TNMM a broader comparability is required. 16. The assessee s sixth main objection was that high margin comparables should have been rejected. In this regard TPO observed as under: - There are no guidelines with regards to exclusion of loss making comparables and comparables-disclosing abnormal h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses. 3.66 A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables. Careful perusal of above referred guidelines clearly reveals that on the issue of loss making companies, the OECD is of the view that such comparables should not be automatically excluded from the comparability analysis. It is the view of the OECD that abnormal profit making comparable cannot be excluded without making analysis to know whether there is exceptional circumstances. In order to exclude the extreme result cases there should be either a defect in comparability or exceptional conditions faced by the comparables. To justify the removal of these company the assessee has relied upon the decision in the case of E Gain Communication Pvt. Ltd. and Philips Software Center Pvt. Ltd. I have considered the case laws relied upon by the assessee as well as other cases on this issue in the ensuing pargraphs: Hon ble ITAT in case of E-gain Communication (P) Ltd. vs. Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables. It is also important to mention here that the companies are being selected on the basis of comparability and not on the basis of margins. I am therefore inclined to reject the argument of the assessee on this ground. 17. The TPO rejected the assessee s following two comparables on the ground that assessee had not stated any criteria on the basis of which these companies had been selected: i) Technicom-Chemmie (India) Limited and ii) National Engineering Industry Limited. 18. Before TPO the assessee had claimed a risk adjustment on the ground that it is a capital service provider and had assailed return. The assessee s claim was that it provided marking support services to its AE and, therefore, its operations were devoid of any risk. The TPO rejected the assessee s objection for various reasons given in para 10 of his order and pointed out that since the assessee had made claim of risk adjustment, initial onus to file requisite information pertaining the claim was on assessee. However, the assessee did not discharge its initial onus. He relied on the decision of ITAT, Delhi Bench in the case of Vedaris Technology 2010-TII-10-ITAT-DEL-TP, wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ections before DRP and DRP rejected the assessee s objections. The main objection of assessee before us is in regard to taking Sundaram Finance Distribution Ltd. and ICC International Ltd. as comparables the operating margin on operating cost of which was 84.79% and 82.92% respectively. 21. Ld. Counsel submitted that as far as ICC International Ltd. was concerned, this company was engaged in the trading of embroidery, accessories and embroidery machines. He filed before us technology upgradation scheme issued by Ministry of Textiles and pointed out that this scheme was announced for modernization and technology upgradation in the textile sector. He pointed out that the scheme aimed at making available funds to the Domestic Textile Industry for technology upgradation of existing units as well as to set up new units. This claim was launched on 01/04/1999 for five years but subsequently, extended upto 31/03/07. Ld. Counsel referred to the year-wise progress of TUFS and pointed out that in 2006-07 number of applications sanctioned were 12,589, whereas in other financial years it ranged from 309 to 6072. He pointed out that the TPO had considered commission and servicing activity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited and M/s SBI Life Insurance Company Limited is ₹ 110.18 lakhs as against ₹ 136.10 lakhs in the previous year. Your company earned an income of ₹ 95.57 lakhs through distribution of various mutual fund/financial products as against ₹ 80.19 lakhs in the previous year. The profit after tax for the year amounted to ₹ 79.70 lakhs as against ₹ 100.30 lakhs in the previous year. PERSONNEL Your Company has no employees on its payroll. The provisions of sec. 217(2A) of the Companies Act, 1956 are not applicable. Income from Operations : Insurance Agency Commission 1,10,18,411 1,36,09,672 Brokerage, Service Charge Incentives etc. 95,56,540 80,18,870 Others - 4,22,734 2,05,74,951 2,20,51,276 Other Income Interest 52,068 3,99,212 Profit on Redemption of Investments 4,51,229 57,98,036 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies that may perform additional functions (while being engaged in providing comparable services). Further, the risk profiles of independent companies usually differ from that of AESIL, as they may undertake business risks, legal and contractual risks, etc. The effect of these functional and risk differences on profit margins, needs to be factored while determining the arm s length price. However, no adjustments have been made to account for such functional and risk differences between the tested party (AESIL) and the comparable companies and AESIL reserves the right to undertake an adjustment for such differences (including differences in the risks assumed and working capital employed), if warranted. 29. With reference to aforementioned assessee s study, ld. DR submitted that assessee did not point out any functional differences which were there and since this comparable was selected by assessee itself, therefore, it was rightly not excluded by TPO. He further submitted that comparables had been chosen by TPO after following due process. Ld. DR further referred to para 4.3 of DRP s order and pointed out that the assessee s contention regarding lack of employees in the case of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quence. 31. We have considered the submissions of both the parties and have perused the record of the case. 32. The main issue for consideration is in regard to selection of following two comparables for computing arithmetic mean of margins: - (a) Sundaram Finance Distribution Ltd. selected by assessee and (b) ICC International Ltd. selected by TPO. 33. The assessee s contention is that since both these comparables had earned super profits, therefore, they should have been excluded for determining the arithmetic mean of operating margin to operating cost. The assessee s contention is that as far as ICC International Ltd. is concerned DRP has not considered the assessee s objections in including this company as a comparable and, therefore, the matter should be restored back to the DRP/AO for reconsideration. As far as the issue regarding inclusion of Sundaram Finance Distribution Ltd. is concerned the main contention of assessee is that since this company had no employees on its payroll and it had outsourced all its operations, therefore, this should not have been included as comparable. 34. Before we consider the assessee s arguments, it would be useful to refer to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the international transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transaction, which could materially effect the amount of net profit margin in the open market. It goes without saying that comparision can be made amongst equals and not amongst dissimilar objects. The object is to bring the assessee s transaction in relation to all possible aspects on the same footing on which the comparable uncontrolled transaction is based. All the aspects of the two comparables cannot be same but the object is to bring the comparables on a platform at which the profit margin may become comparable. ITAT Mumbai Bench in the case of DCIT vs. B.P. India Service Pvt. Ltd., 133 ITD 255 has, inter-alia, observed in para 11 as under: - From the Transfer Pricing Study of the assessee it is essentially noticed that the services provided by it to its AEs were in the nature of Accounting and Control Support Services, Legal and Tax Support Services, Management, HSE and Human Resource Services, Lubricant Support Services, Marketing Support Services, Technical Support Services and services relating to development, maintenance and operation of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded because assessee had supplied the same and the second objection is that in the said comparable there was no staff. As far as first objection is concerned, we are in agreement with the assessee s counsel that merely because the said comparable was provided by assessee, the same could not be included without proper examination to account for the differences. The assessee is well within his right to demonstrate that a comparable supplied by it in the transfer pricing analysis was not correct and had to be excluded. This right of the assessee is not curtailed in any manner, whatsoever, in the rules. 37. Now the second issue is regarding adjustment of net profit margins of comparable uncontrolled transaction for material differences. The assessee s contention is that in case of Sundaram Finance Distribution Ltd. the operations of the company were conducted by the outsourced personnel. Ld. DR has very rightly referred to the decision of M/s Deloitte Consulting India Pvt. Ltd. vs. DCIT (supra) in this regard, wherein it was, inter-alia, observed that outsourcing the manpower does not materially affect the price or profit margins. The assessee has not demonstrated the effect on ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport that the assessee itself rejected certain comparables given by it and in ultimate analysis only three comparables were left. Therefore, TPO had resorted to such analysis in order to find out other comparables. The reference to TPO is made u/s 92CA(1), wherever AO consider it necessary or expedient to do so. We, therefore, reject the ground no. 3 4 raised by the assessee. Ground no. 5 is allowed for statistical purposes; ground no. 5.1 is rejected; ground no. 5.2 is decided against the assessee in view of specific provisions contained under rule 10B(4) as discussed earlier; Ground no. 5.3 is allowed for statistical purposes; Ground no. 5.4 is allowed for statistical purposes; ground no. 5.5 is allowed for statistical purposes; ground no. 5.6 is dismissed as not seriously pressed before us. Ground no. 6 was also not seriously pressed before us and, therefore, dismissed. Ground no. 6.1 was not seriously pressed before us. Moreover, we find that DRP has observed in para 9.1 to 9.3 of its order as under: - 9.1 We have examined the issue. The Memorandum explaining the Finance Bill, 2009 has clearly stated that the aforesaid amendment shall apply on all the cases pending with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in not appreciating that the database falls under the head of intangible asset and accordingly, depreciation should be allowed on the same. 9. Without prejudice to the above, the ld. AO has erred in disallowing the amount of ₹ 7,519,793 as depreciation on database without appreciating the fact that depreciation on database actually claimed in the return of income is ₹ 1,210,254. The ld. AO has erred in disregarding the fact that ₹ 7,519,793 is the tax depreciation on all the blocks of assets of the business of the Appellant including that on database of ₹ 1,210,254. 10. That on the facts of the case and in law, the Hon ble DRP has erred in confirming and accordingly, the ld. AO has erred in considering computer peripherals (other than printers, scanners and NT servsers etc.) to be in the nature of plant machinery and allowing depreciation at 15% thereon as against 60%, thereby making an addition of ₹ 339,849 alleging it to be excessive depreciation claimed by the Appellant on such items. 11. That in law, the ld. AO has erred in disregarding the directions of the Hon ble DRP and not allowing the relief in regard to the deletion of the propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores. He did not grant the depreciation to the assessee. Ld. CIT(A) accepted the value of database at ₹ 3 crores as determined by the AO but directed the AO to grant depreciation as admissible on plant and machinery. The dispute traveled to the ITAT in ITA No. 4106/Mum./07 and Crossobjection No. 202/Mum./09. The ITAT has held that value of database is to be accepted at ₹ 12 crores as disclosed by the assessee, because the transaction between the assessee and the Associate Enterprises for purchase of business database were subject to transfer pricing scrutiny. The ITAT further held that the depreciation would be admissible by treating the database as intangible assets. The ld. Counsel for the assessee pointed out that the ITAT s decision has come on 3/02/2012. Thus, for computing cost of acquisition and consequent depreciation, ITAT s order has to be given effect in the subsequent years and, therefore, the issues raised by the assessee in the additional grounds of appeal go to the roots of the dispute and ultimately effect the taxability of the assessee. The ld. Counsel for the assessee put reliance upon the decision of the Hon ble Supreme Court in the case of NTPC vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price by TPO u/s 92 of the Act, it cannot be open to the AO to disturb that price so paid as unreasonable. We have also noted that the AO has doubted the appropriateness of the consideration of ₹ 12 crores without any cogent material to come to the conclusion that this is excessive or unreasonable, but then the TPO whose duty is it to examine whether or not the price paid in intra associate enterprises transaction are at arms length price or not has accepted the transaction without making any arms length price adjustment. There is no material whatsoever to establish or even indicate that the price of ₹ 12 crores paid for the Acquired Business Database is excessive or unreasonable and only the basis of AO s coming to the conclusion about his subjective judgment. When the valuation of Acquired Business Database has been examined by TPO while concluding that the database price adjustment for the said year and no adverse inferences have been recorded in respect of the same, there could be no good reason for the AO to deviate from the stand of the TPO and substitute his own opinion as to what should be the correct price at which Acquired Business Database should have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed depreciation @ 15% treating them as plant and machinery. He, therefore, made an addition of ₹ 3,39,849/-. Before ld. DRP it was submitted that UPS forms part of computer system and, therefore, entitled to 60% depreciation. The assessee had relied on the decision of Delhi ITAT in the case of Nestle India Ltd. vs. DCIT, 111 TTJ 498 and Hon ble Delhi High Court decision in CIT vs. BSTS Rajdhani. Ld. DRP did not accept the assessee s contention observing that UPS was not mentioned in the said judgment. 51. We have considered the submissions of both the parties and have perused the record of the case. We find that this issue is covered by the decision of Hon ble jurisdictional High Court in the case of CIT vs. Orient Ceramics Industries Ltd., wherein it has been held as under: - 13. The third issue pertaining to depreciation on UPS arises only in the AY 2005-06. The assessee had claimed depreciation on UPS at the rate of 60 per cent whereas the AO had allowed it at the rate of 25 per cent and on this basis, disallowance of ₹ 1,470 was made. The issue now stands covered by the judgment of this Court in the case of CIT vs. BSES Yamuna Powers Ltd. [IT Appeal N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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