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TMI Blog2015 (10) TMI 2576X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of Rs. 18,85,44,612 on account of adjustment to the arm's length price of the 'international transactions' of transaction processing and interest and voice based customer care services (hereinafter referred as IT enabled services). 2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding the appellant company as a captive unit of' the foreign associated enterprises and not an independent service provider. 2.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the appellant is to be considered as a hybrid unit having elements both from captive and entrepreneurial units and accordingly, the compensation received by the appellant should contain an clement of fixed return and a variable component based on risk assumption. 2.2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the arrangement between the appellant and the associated enterprises was not that of a captive service provider inasmuch as the appellant is responsible for effective utilization of its resources and the associated enterprise does not assure minimum level of utilization. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price of 'international transactions' . 5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in applying operating results for the relevant previous year as opposed to the contemporaneous data available at the time of effecting the Transfer Pricing documentation. a. The Commissioner of Income-tax (Appeals) erred on facts and in law in disregarding the multiple year data of operating results of the preceding two years of comparable companies relied upon for application of TNMM and accepted by the TPO. b. The Commissioner of Income-tax (Appeals) erred on facts and in law in considering only the current year's data of operating results. i.e., operating results for the relevant previous year for the purpose of benchmarking applying TNMM. c. That on facts and circumstances of the case. the Commissioner of Income-tax (Appeals) erred in not appreciating that preceding years' data of operating results of comparable companies had significant influence on determination of arm's length price of the' international transactions' and, therefore, such data ought to be relied upon for application of TNMM as per the proviso to rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is applying TNMM. 9. That in case benchmarking had to be done using current year's data, then the lower authorities erred on facts and circumstances of the case, in not taking into account other LT. enabled companies (identified using 'Prowess' data base of CMIE), performing identical functions as comparable companies for the said benchmarking. 10. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the associated enterprise, too, incurred losses in the transactions undertaken with the appellant and there could not be an allegation of diversion of profit to justify transfer pricing adjustment in the hands of the appellant. 11. Without prejudice that the Commissioner of Income-tax (Appeals) erred in not appreciating that no adjustment to the arm's length price of international transactions' was warranted considering the overseas associated enterprises as tested parties for benchmarking analysis applying TNMM. 12. Without prejudice that the Commissioner of Income-tax (Appeals) erred on facts and in law in not allowing variation to the extent of [+/(-)] 5%. while determining the arm's length price of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isk service provider inasmuch as the entire marketing effort is undertaken by the EXL US who bears the consequent risks and rewards. The assessee on the other hand it was submitted is exposed to the following risks:-(i) risk on account of receivable from its customers; (ii) marketing risk; (iii) price risk; (iv)recovery risk; (v) credit risk etc. However as far as the warranty risk is concerned it was submitted the risk is borne by the AE. In the event the customer is dissatisfied with the services provided by the assessee then the service liability risk falls on the AE. The assessee receives compensation for services rendered regardless of whether or not the AE receives payment from its buyers or not. The assessee it was submitted being a captive service provider operates on a cost plus basis and assumes limited risks. Accordingly the comparables considered by the TPO have assumed credit, marketing and technical risk during the year. The assessee on the other hand is insulated from enterprise risks marketing risk and credit risk etc. Thus appropriate downward adjustment it was submitted would be required for comparing operating profit margin of the assessee with the operating prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3484/Del/2011); (2) ACIT vs Fiat India Pvt.Ltd. (ITA No.1848/Mum/2009); (3) Brintons Carpers Aisa Pvt.Ltd. vs ACIT (ITA No.1296/PN/2010); (4) E.I.Dupont India Pvt.Ltd. vs DCIT (ITA No.5336/Del/2010); (5) Transwitch India Pvt.Ltd. vs ACIT (ITA no.6083/Del/2010)-The said order of the Tribunal was upheld by the Jurisdictional High Court vide order dated 17.07.2013; (6) DCIT vs Panasonic AVC Networks India Co. Ltd. (ITA No.4620/Del/2011) 5.1. Reliance was also placed on the decision of the dated 10.07.2014 in ITA No.3547/Del/2010 in the case HCL Technologies BPO Services Ltd. vs ACIT (copy filed).after considering various decisions including the decisions has mandated such an adjustment. Accordingly relying upon Paper Book page 7882 it was his submission that after excluding the abnormal cost the operating profit margin of the assessee, the operating cost ratio to work out to 27.92% as against 12.80% in the case of the comparables. Thus since the operating profit to cost ratio of the assessee is higher at 27.92%, the entire adjustment made would be deleted. 6. The Ld. Sr. DR submitted that the calculations may be verified however no contrary view judgement or fact was refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otech limited 107.46% 68.03% 96.87% 6. Mapro Industries Limited (4.19)% 21.43% 6.09% 7. Necleus Netsoft and GIS India Ltd. (17.70)% (10.37)% (13.92)% 8. Twinstar Software Exports Limited (73.35)% (25.81)% (45.80)% 9. Zigma Software Limited 0.78% 17.05% 6.96% Mean 12.73% Appellant's Margin (AY 04-05) 3.14% Appellant's margin (AY 04-05 & 05-06) 11.42% 8.3. These calculations it was submitted were without making adjustments on account of depreciation/idle capacity. The TPO as per internal page 8 of his order rejected 6 comparables out of the above list of comparables selected by the assessee and retained only the following three comparables:- S. No. Name of the Company Data for year OP/TC% 1. Ace Software Exports Limited 2004 1.14% 2. Apex Logical Data Conversion Pvt. Ltd. 2003 14.3% 3. Fortune Infotech Limited 2004 44.22% Average 19.88% 8.4. The issue it was submitted was carried in appeal before the CIT(A) who deleted the Apex Logical Data Conversion Pvt. Ltd. one of the comparables retain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that as far as the calculations are concerned the issue has to be verified by the TPO and in the face of the order of the Co-ordinate Bench as the issue has to go back it was submitted that he would have no objection if the calculations as considered by the TPO are taken on record and the departmental ground is allowed. The Ld. AR in reply submitted the let the TPO consider both the calculations and he would have no objection. 11. We have heard the rival submissions and perused the material available on record following the judicial precedent in the light of the submissions of the parties, we allow the departmental appeal as canvassed by the ld. CIT DR and not opposed by the Ld. AR and direct the TPO/AO to recompute the operating margins of the comparables retained by the TPO in line with the rates of depreciation charged by the assessee under the straight line method. Accordingly departmental appeal is allowed and Ground No.3.1(ii) of the assessee is also allowed for statistical purposes. 12. Qua Ground No.7 the assessee prays for exclusion of Fortune Infotech Ltd. The request for such a relief was based on the argument that the said company has extraordinary profits during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... misplaced. The palpable reason for our this conclusion is that the Tribunal order in that case is for the assessment year 2004-05 and we have noticed from the Annual report of this company that it was an abnormal year of its operations in which it sacrificed immediate profits for larger gains in future by developing its own intangible. It is further relevant to note that the functional profile of this company is similar to that of the assessee company as it is also a BPO, as is the assessee. It was not due to some inadvertence that the assessee initially included this company in the list of comparables. It can be seen from page 43 of the impugned order that this company figured in the TP reports of the assessee across the earlier years and the assessee chose it on the basis of functional similarity and this continued even for the succeeding year. Further there are no specific intangibles used by Fortune Infotech Ltd in its operations for the year under consideration. We cannot permit the exclusion of this otherwise comparable company from the list of comparables on the simple ground of higher profit earned by it during the extant year. First proviso to section 92C(2) provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of profit by the assessee to AE in other jurisdictions. The issue in assessee's own case has been dismissed by the ITAT in ITA No.1939/Del/2008 for 2003-04 assessment year vide para 7.1 to 7.3 and in the present proceedings the assessee is not serious in contesting the issue as on facts the assessee is confident that there would be no transfer pricing adjustments. Thus the ground has been filed only to keep the issue alive and reliance is placed on Sony India Pvt. Ltd. vs CBDT 288 ITR 52 (Del.) and Sony Ericson Mobile Communications India Pvt. Ltd. vs CIT and Ramp Green Solutions Pvt. Ltd. vs CIT (ITA No.102/2015) of the Delhi High Court. 16. The Ld. CIT DR relying upon the decision of the ITAT in assessee's own case in the 2003-04 assessment year submitted that he would want to rely on the detailed finding therein on similarity of facts and circumstances and it was further stated that facts of no two case can be identical. 17. We have heard the rival submissions and perused the material available on record where the ground is raised only to keep the issue alive. In view thereof the assessee's ground is dismissed following the order of the ITAT in assessee's own case. The dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bills not received up to the year-ending. When in the subsequent year, the bills are received, such provision is reversed. If the actual amount of expenses for which the provision was made falls short of such provision, then deduction is claimed for the excess expenditure and in the converse situation, the earlier excess provision created is reversed in the succeeding year. This method of accounting has been accepted by the Revenue in the past without any question. Now simply because the invoices were not available when the matter was considered by the ld. CIT(A), it cannot be said that the liability ceased to exist. From the details of the sustenance of disallowance, it can be seen that the expenses are basically in the nature of professional fee, telephone expenses, communication expenses and consultation, etc. The point for determination of the question of deduction is the crystalization of liability for incurring such expenses and not the actual receipt of the invoices. This contention raised on behalf of the assessee about the incurring of actual liability in respect of these expenses has not been controverted on behalf of the Revenue. Going by the mandate of the mercanti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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