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TMI Blog2015 (7) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that while calculating operating cost, the abnormal cost incurred on account of start-up should be excluded. Following the same parity of reasoning in the cases cited by him and keeping in view that the judgement of ITAT co-ordinate Bench in the case of Transwitch India (2012 (5) TMI 314 - ITAT DELHI) affirmed by Hon'ble Delhi High Court. Therefore, respectfully following the decision of Hon'ble High Court, we direct TPO / A.O. to adjust operating cost by excluding abnormal cost incurred on account of start-up company like salary, rent and depreciation. This matter is restored to the file of TPO/A.O. to re-determine the operating cost on the above lines to arrive at operating profit.- Decided in favour of assessee for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... for the transactions with AE on transactions and for the application of TNMM, the appellant selected …….. operating profit /on total cost was taken as profit level indicator (PLI). 5. For application of TNMM, the appellant identified the eight comparable companies engaged in rendering voice based I web based BPO/ITES. Further, the appellant considered the Profit Level Indicator ("PLI"), i.e., Operating Profit /Total Cost of the comparable companies for the financial years 2001-02 and 2002-03, as under: S. No. Name of the Company Margins (OP/TC) Weighted average 2003 2002 1. Ace Software Exports 11.64% 17.63% 14.88% 2. Allsec Technologies Ltd 12.55% 9.53% 11.65% 3. Apex Logical Data 14.30% 22.26% 17.80% 4. Compudyne 0.18% Winfosystems Ltd. 52.78% 20.05% 5. Fortune Infotech Limited 107.46% 68.03% 96.87% 6. Nucleus Netsoft and GIS India Limited (17.70) % (10.37) % (13.92)% 7. Twinstar Software Exports Limited (73.35) % (25.81) % (45.80)% 8. Zigma Software Limited 0.78%. 17.05% 6.96% Mean 6.98% 1.8.89% 13.56% 6. The actual operating profits margin (OPITC) was• (-) 37.35% in the financial year 2002-03, (-)2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions emphatically and with no ambiguity cast an obligation of benchmarking transaction on the basis of information as close as possible to the year in which the with the AE(s)' has been entered into international transaction. IT is understandable that since in. modern economics situations change so fast, use of non contemporaneous data can throw up slanted results. 6.1 In order to compare operating margins the assessee has used data of eight comparable companies using data' for the year ending March 2002 and March 2003 in each case. The data for multiple years has been used on the argument that it is permitted as per rule 108(4) of Income tax rules. In this case since the assessee company is in its start up phase therefore special conditions of even out results of more than one year of financial performance exist as enshrined in proviso to the above said rule deserving use of financial data for the multiple year. Therefore, the approach of the assessee in respect of use of multiple year data of comparables is not disturbed. It is also not out of place to mention that the comparables used by the assessee company has functional and product differences with the assessee com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociated enterprise. 12. The Ld. CIT(A) in his order restricted the Transfer Pricing adjustment to ₹ 1.19 crores holding as under: "The Transfer Pricing Officer has computed an adjustment of ₹ 17.04 crores while the value of international transactions is ₹ 13,00,89,632. The total revenue received by the associated enterprises in respect of BPO services rendered by the appellant amounting to ₹ 13,00,89,632 is ₹ 14,20,50,089. In other words, the associated enterprise has retained ₹ 1, 19,60,457 out of the total proceeds received from the customers. The adjustment computed by the TPO in the order passed under section 92CA(3) of the Act at best cannot exceed the net amount retained by the associated enterprises in respect 'of international transactions, i.e., gross revenue' received from the end customers less amount paid' to the appellant and, other operating expenses. It is observed that the gross revenue received from the end customers in respect of various contracts, the associated enterprise have retained only ₹ 1,19,60,457 at their end and the balance has been passed on to the appellant." 12.3 The issue has been consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived at when two associated or related' enterprises deal with each other". 14. Reference was made to the Finance Minister's Budget Speech for the year 2001 that the presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. The purpose of inserting these provisions is therefore to determine the arm's length price (ALP) of an international transaction involving an MNC and its local associate." 15. Reliance is placed on the decision of Delhi Bench of the Tribunal in the case of DCIT vs Global Vantedge P. Lid., (ITA No. 1432 & 2321/0ell2009 and 116/0eI/2011), wherein, the Hon'ble Tribunal held that adjustment on account of arm's length price of international transactions cannot exceed the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount received by the assessee in respect of international transactions. The Hon'ble Jurisdictional High Court vide order dated 14-03-2013 (in ITA Nos. 1828/2010, 1829/2010 & 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of tax the actual income earned by a resident. The Hon'ble Delhi High Court held as under: '77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Company Limited versus CIT, [1965J 57 ITR 521 (SC), means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, if any, on account of non-arm's length conditions resulting in lower profits, is corrected. XXX (xii) When segmentation or segregation of a bundled transaction is required, the question of set off and apportionment must be examined realistically and with a pragmatic approach. Transfer pricing is an income allocating exercise to prevent artificial shifting of net incomes of controlled taxp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely the first year of commencement of operations by the appellant, there was no justification for drawing an adverse inference by the learned TPO regarding the net margin of the appellant merely by comparing the appellant with the other companies which were well established companies. 4. That the learned Commissioner of Income-tax (Appeals) erred in ignoring the fact that since the profits of the appellant were deductible under Section 10A of the Income Tax Act, 1961, there was no motive on the part of the appellant to divert its profits outside India. 5. That, without prejudice, the learned Commissioner of Incometax (Appeals) erred in concluding that the TPA has correctly not allowed the variation to the extent of (+1-) 5%, while determining the arm's length price of the international transactions, in the case of the appellant." 23. The main grounds raised by the assessee in its appeal relate to the adjustment of operating profit as well as selection of comparables. During the course of appellate proceedings, Ld. Counsel for the Assessee had not pressed other grounds relating to adjustment of operating profit. The factual matrix relating to the grounds of appeal is noted be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28. Rule 10B(3) of the Rules provides that an appropriate adjustment is required to be made to account for the differences between the controlled and uncontrolled transactions: "An uncontrolled transaction shall be compara.ble to an international transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences." 29. Reliance in this regard is also placed on the recent decision of Chennai Bench of the Tribunal in the case of Mando India Steering Systems Pvt. Ltd. vs. ACIT (ITA No. 2092/Mds/2012), wherein, the Hon'ble Bench has remitted the issue back to the file of the assessing officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The relevant extract of the decision reads as under: "We are of the considered view that under-utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic adjustments on a reasonable basis." 31. On the same lines, Delhi Bench of the Tribunal in the case of Global Turbine Services Inc. vs. ADIT (ITA No. 3484/0e1/2011) allowed economic adjustment on-account of under capacity utilization considering the fact that the year under consideration was the first full year of operation of the appellant. Relevant extract of the decision reads as under: "10. -We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by coordinate Bench in the case of the Amdocs Business Services (P.) Ltd. (supra) and various other cases as cited here in above . 11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter and restore the issue of under capacity utilization back to the file of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmity is found in the impugned order of the CIT(A) as the adjustments made by the appellant in TNMM analysis were reasonable and accurate and as reflected in the said analysis, international transactions made by the appellant company with its associated concerns during the year under consideration were at arm's length requiring no adjustment/addition on this issue." 16. From the above, it is evident that the appellant is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the 14 instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break-up of the claimed adjustments amounting ₹ 7.32 crores '(rounded off), fixed cost versus the variable cost etc as they' summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. •Therefore and consequently, this key issue also has to be set aside to the files of the' TPO/AO for fresh examination of the issue." Prima facie we see the need for such economic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant that the sealing drive reduced its revenue is unsubstantiated. In this regard, appellant has submitted that the appellant had placed on record its quarterly 'capacity' utilization statement demonstrating the fall in its capacity utilization during the quarter January to March, 2006. The capacity utilization, of the appellant during the quarter January to March, 2006 fell to i2% as' against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. We find out ourselves in agreement with the appellant's submission in this regard." 37. Hon'ble Delhi High Court, in the appeal preferred by the revenue in the case of Transwitch India (supra), vide order dated 17.07.2013, upheld the adjustment claimed by the assessee on account of capacity utilization. Reliance in this regard is also placed on the recent decision Delhi Bench of the Tribunal in the case of DCIT vs. Panasonic AVC Networks India Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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