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TMI Blog2017 (4) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio. 2) That, without prejudice, the learned AO has grossly erred in making a transfer pricing addition of Rs. 116,939,450/- while computing the income of the Appellant. The addition made to the returned income is highly unjustified and also suffers from mistakes apparent from record. 3) That the Hon'ble DRP has committed gross errors in confirming the order passed u/s 92CA(3) of the Act by the learned Transfer Pricing officer (the learned TPO') proposing a transfer pricing adjustment to the actual value of the international transactions of the Appellant with its associated enterprises and only granting a partial relief thereof. 4) That, on the fact and the circumstances of the case and in law, the learned TPO/Hon'ble DRP has grossly erred in not accepting the economic analysis of the Appellant for international transactions related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng super normal profits as comparable to the Appellant to benchmark the international transactions. 8) That on the facts and in law, the learned TPO has grossly erred in treating foreign exchange gain/ loss as non-operating item while determining the arm's length price of the international transactions of the Appellant without considering the terms & conditions of the inter-company transactions of the Appellant. 9) That without prejudice, on the fact and the circumstances of the case and in law, the learned TPO / Hon'ble DRP has erred in not allowing a risk adjustment to the Assessee on account of the fact that the Appellant is remunerated on a cost plus basis for the international transaction related to provision of marketing and after sales support services to associated enterprise irrespective of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full-fledged risk taking entrepreneurs. 10) 10. That without prejudice, on the facts and circumstances of the case and in law, the learned AO/ TPO has made apparent mistakes in calculation of the operating margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 19/09/2011 and duly served upon the assessee within the prescribed statutory period. The learned Assessing Officer referred the case to the ld. Transfer Pricing Officer (TPO) for determination of the arm's length price of the international transactions carried out by the assessee. In transfer pricing study submitted before the ld. TPO, the assessee reported following international transactions and method of benchmarking of the transactions as under: Sl. No. Nature of Transaction Approach of taxpayers Value of transaction Method PLI 1. Availing of technical services (for providing technical services to Reliance & Others) TNMM OP/OR Rs. 503,120,607 2. Provision of marketing and after sales support services TNMM OP/OC Rs. 3,198,610,466 3. Import of telecommunication equipment for BSNL contract TNMM OP/OR Rs. 133,082,754 4. Import of components and availing of technical services for Bharti IVR contract TNMM OP/OR Rs. 4,599,982,641 5. Reimbursement of expenses to AEs BNR NA Rs. 327,634,879 6. Reimbursement of expenses from AEs BNR NA Rs. 203,080,093 Total Rs. 8,965,511,440 2.2 The Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27.20 21.38 11. WAPCOS Ltd. 223.92 75.21 0.41 100.00 27.92 0.00 25.57 20.36 12. Zipper Trading Enterprises Ltd. 1.02 1.04 1.16 93.58 62.35 NA 34.11 25.43 13. TCIL (Seg.) 5.39 5.11 25.66 19.44 After applying the PLI of 19.44 % over the operating revenue of the technical service segment computed the adjustment of Rs. 3,16,62,222/- as under: Operating Revenue 59,06,42,570 Arm's Length Margin 19.44% of Op. revenue Arm's Length Price (ALP) 11,48,20,916 Profit shown by taxpayer 8,31,54,694 Shortfall being adjustment u/s 92CA 3,16,66,222 2.4 In the case of transaction of business support services (marketing and sales support services), the assessee applied Transactional Net Margin Method (TNMM) and Operating Profit to Total Cost (OP/TC) ratio as the profit level indicator. The PLI of the assessee company was arrived at 12.98% on cost. The assessee chosen 12 comparables and average PLI of those comparables was arrived at 8.97% adopting weighted average of the current year and the immediately preceding two years. The average P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75.21 0.41 100.00 27.92 0.00 25.57 25.57 12. Zipper Trading Enterprises Ltd. 1.02 1.04 1.16 93.58 62.35 NA 34.11 34.11 27.38 27.36 2.6 Applying the average PLI of 27.36% of the comparables chosen above, over the cost of technical support service , which was bifurcated by the ld. TPO and the adjustment of Rs. 2,13,94,007/- was worked out as under: Operating Cost as calculated above 14,87,25,515 Arm's Length Margin 27.36% of Op. Cost Arm's Length Price (ALP) 18,94,16,816 Price shown in the international transactions as calculated above 16,80,22,809 Shortfall being adjustment u/s 92C 2,13,94,007 2.7 The learned TPO selected new comparables for market/business support services and average PLI of those comparables was worked out at 22.41% as follows: No. Company Name Sales NW lnt/TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) 1 Apitco Ltd. 11.03 12.43 0.00 96.33 28.35 #N/A 37.70 37.70 2 Cameo Corp. Serv. 24.37 3.42 5.35 100.00 63.19 0.00 14.95 14.95 3 Cyber Media Research Ltd. 16.85 4.90 1.39 99.65 26.96 12.34% 10.44 10.89 4 Global Procure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on filed on behalf of the assessee and hearing the Authorized Representative of the assessee, issued direction to the Assessing Officer under section 144C(5) of the Act on 20/12/2013. The Assessing Officer, in compliance to the direction of the Ld. DRP , recomputed the transfer pricing adjustment at Rs. 11, 69, 39, 450/-and passed the impugned assessment order on 30/01/2014 assessing the total income at Rs. 58,43,50,870/-. Further, on the request for rectification, the Ld. DRP on 30/10/2014, rectified its direction directing to re-compute that adjustment in respect of technical services (reliance on the segment) and accordingly the ld. TPO, also recomputed that adjustment. Aggrieved with the direction of the Ld. DRP and the consequent impugned assessment order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. Before us, the Ld. counsel of the assessee submitted that grounds No. 1 to 3 are general in nature. Accordingly, we are not required to adjudicate upon those grounds and same are dismissed as infructuous. The issue of use of multiple year data versus current year data for computing PLI of the comparables raised in ground No. 4.1 was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by the TPO in the year under consideration for marketing support services vis-à-vis position of the TPO in earlier years as under: 5. In respect of technical service segment, the learned counsel submitted that there is no change in facts/function or any other details compared to earlier and later years before the year covered in present appeal, however, the Ld. AO/TPO adopted a completely different stand in the year under consideration. He submitted that when relevant facts/FAR for current year remain same as in earlier and later years, both the assessee and the comparables, there is no justification to adopt completely different stand. Accordingly, he submitted that the comparables selected by the ld. TPO need to be excluded. Without prejudice to this claim, the Ld. counsel prayed for exclusion of comparables, namely, Archohm Consultant, Engineers India Ltd, IBI Chematur, L & T Ramboll Cons, Rites Ltd, TCE Consulting Engineers Ltd., Wapcos, Zipper Trading Enterprises Ltd, as the same would result in deletion of the TP adjustment. The ld. Counsel submitted a chart showing status of companies selected as comparable by the TPO in the year under consideration for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the same service agreement dated01/07/2000 and thus there was no question of change in the functions performed by the assessee in the assessment year under consideration viz-a-viz earlier assessment year in respect of the services. The Ld. CIT(DR) could not address on this issue before us in absence of records of earlier years. In the case of Thomas Cook (India) limited (supra), the TPO had accepted the same comparables in earlier years, however rejected in the relevant year. The coordinate bench of the Tribunal in the said case observed as under: "7.3. We find that the assessee was engaged in travel industry primarily providing travel and tour services, that the travel and related segment activities of the assessee included two IT.shandling of inbound tourists and handling of out bound tourists, that both the transactions were aggregated for the purpose of bench - marking analysis, that the assessee-company was selected as tested part, that TNMM was adopted as most appropriate method, that the profit level indicator (PLI) used was operating profit/operating cost (OP/TC),that it had selected four comparables to prove the arm's length of the IT.s., that the operating margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iformity and in treatment." In the case under consideration we find that the TPO/DRP has not proved that there was a change in the facts, as compared to earlier years and even if they existed same were not brought on record. In short, the TPO/DRP has failed to prove the justification for deviating from the decision taken earlier." 9. Though in our opinion, if there is a change in functions carried out, assets employed and risk taken (FAR analysis) of the comparables in the year under consideration viz-a-viz earlier years, the comparables selected in earlier year might be rejected in the year under consideration, but following the observation of the Tribunal in the Thomas Cook (India) limited (supra) , the TPO should assign reasons as what are the differences in the FAR analysis of the comparables as compared to the earlier years, which led to rejection of those in the current year. The departmental authorities (i.e. ld. TPO/DRP) are required to bring on record the salient feature of the year under consideration as compared to the facts of the earlier years, in absence of which, the departmental authorities cannot taken opposite view. This issue was taken up by the assessee befo ..... 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