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TMI Blog2017 (6) TMI 722X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the price charged by the assessee for its BPO services (international transaction) was ₹ 31,21,86,866/-. Hence we hold that the price charged by the assessee for its international transaction is at Arm’s Length as it falls within the permitted range as supra and hence no adjustment is required to be made to its ALP - Decided in favour of assessee. - ITA No. 1111/Kol/2011 - - - Dated:- 2-6-2017 - SHRI N. V. VASUDEVAN, JUDICIAL MEMBER, AND SHRI M. BALAGANESH ACCOUNTANT MEMBER For The Assessee : ShriR.N. Bajoria, Sr. Advocate For The Revenue : ShriG. Mallikarjuna, CIT, DR. ORDER Per M. BALAGANESH, AM 1. This is an appeal preferred by the assessee for the Assessment Year 2007-08 against the order of the Learned Dispute Resolution Panel (ld. DRP in short) u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) on 19.4.2011 against the draft assessment order passed by the Learned Assessing Officer (ld. AO in short). 2. The only issue to be decided in this appeal is as to whether the ld. DRP is justified in enhancing the addition to ₹ 7,21,92,932/- by making adjustment to Arm s Length Price (ALP), in the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions with its associated enterprise Equinox: SI No. Nature of transaction Amount Received by assessee (Rs.) 1 Sale of Call Manager Phones 76,686/- 2 BPO services provided 31,21,86.866/- 3 Recovery of expenses 2,92,51,866/- Total 34,15,15,418/- 4.1. The assessee submitted that after due study, two issues were found to have international transactions. These issues were required to be considered for determination of the Arm s Length price as per the provisions of Section 92CA of the Act. These issues are: a) Recovery of expenses b) BPO service provided 4.2. Recovery of expenses On page 33 of the TP report submitted by the assessee on 02.09.2010, it was found that the assessee had made payments on behalf of Equinox. These amounts, as per the report submitted by the assessee, were recovered on cost-to-cost basis. The assessee also stated in this respect that this did not include any provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NA 10.62 8 FirstSource Solutions Ltd. 3.59 7.13 19.39 11.05 9 Fortune Infotech Ltd. 15.25 NA NA 15.25 10 Galaxy Commercials Ltd. 21.73 19.72 NA 20.47 11 HCL Technologies Ltd. 18.11 16.73 NA 17.28 12 KPIT Cummins Global Business Solutions Ltd. NA -18.83 NA -18.83 13 M C S Ltd. 11.06 13.95 16.41 13.65 14 Maple Esolutions Ltd. 39.45 35.83 NA 36.43 15 Mphasis Ltd. 13.71 10.17 11.31 11.63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken absolute adjustment of 5% instead of 5% of mean. b) It is seen that three years data have been taken for the comparison. IT Act mandates use of same F Y data. Previous two year data can be used if such data reveals the facts which could have an influence on the determination of the transfer prices in relation to the transactions being compared. In the absence of any submission please explain why data only for FY 2006-07 be not considered for comparison of PLIs. The new mean will be 22.09 and will require an adjustment of 10.48%. Please explain as to why this adjustment be not done. 7. The assessee replied on 21.9.2010 that with regard to 5% variation, the benefit of the variation / reduction of absolute 5% from the arithmetic mean should be given while determining ALP and not 5% of the arithmetic mean. With regard to the second objection for usage of multiple year data, the assessee submitted that there was lack of sufficient data for the FY 2006-07 at the time of performing the search in data base. Since Rule 10C(2)(c ) states that the availability, coverage and reliability of data necessary for application of the method had to be considered in selecting the MAM, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... result will be unchanged even if mean of PLI is taken to arrive at mean ALP. Mean of PLI of comparables computed by assessee = 12.51%. Hence OP/TC for the tested party would be 12.51% to compute mean of ALP. Thus ALP = 31,09,36,578 * ( 1 + 0.1251) = Rs 34,98,34,744/-. The transaction undertaken by assessee was at ₹ 34,70,28,935/-. The above calculation is just to verify whether the method of calculation would have any bearing on the ALP determination. On the basis of the above calculation, it is seen that the difference between the two APs arrived have a difference. b) Regarding the second issue of use of multiple year data, the contentions of assessee are not accepted for following reasons: (i) The assessee submitted that there was lack of sufficient data for FY 200607 at the time of performing the search in the data base. What is the lack of data is a very general term. Analysis has to be done on basis of what is available. What is not available cannot determine the due procedure prescribed by Act and Rules. The Act and Rules are the deciding factors. If law lays down the procedure that data should be of same FY in which international transaction has taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not available. The intent of Act is not so. It is not so that there is no data available since assessee himself has taken many comparables where data for F Y 2006-07 is available. What the Act merely requires is that assessee should restrict to data which is available. The selection of previous year data can be used in separate set of circumstances which is mentioned under Rule 10B. Non availability of data not the basis of deviating from prescribed procedures in Act and Rules. (v) Assessee had submitted that use of multiple year data ensured that the outcome for relevant year would not be not unduly influenced by abnormal factors as one year data may be distorted by differences in economic or market conditions, features and operation of enterprise. But as stated earlier, the onus of how this statement was applicable in present case was on the assessee. The assessee did not discharge that onus. It did not bring out how one year data was distorted by the differences in economic or market conditions, features and operation of enterprise. (vi) It was stated by the assessee that participants in industry may be uniformly affected by business and product cycle and therefore diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is mean of ALP would be ₹ 1,89,81,123. 40. Thus the allowable range of ALP, which can be chosen by assessee, would be from ₹ 36,06,41,344.60 to ₹ 39,86,03,591.40. The transaction undertaken by assessee is at ₹ 34,70,28,935/- which is not within the range as arrived at above, i.e., from ₹ 36,06,41.344.60 to ₹ 39,86,03,591.40. Allowing the above 5 % variation benefit to assessee, the upward adjustment required to be made to the transaction would be ₹ 1,36,12,409.60 (36,06,41,344.60 34,70,28,935). The revenue of the assessee for FY 2006-07 would be ₹ 36,06,41,344.60 instead of ₹ 34,70,28,935/-. 10. The assessee preferred objections before the Hon ble DRP which agreed to the view of the ld. TPO that only contemporaneous data for FY 2006-07 should be adopted by the assessee for the comparables instead of multiple year data chosen by the assessee. Before the ld. DRP, the assessee submitted the audited financials of the 13 comparables which data was not available before the ld. TPO and hence not considered thereon. The arithmetic mean was accordingly arrived at 18.94%. The assessee pleaded for exclusion of certain comparables on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the TPO 7 Fortune Infotech Ltd. 17.64% Not considered by the TPO 8 Galaxy Commercials Ltd. 14.75% Not considered by the TPO 9 HCL Technologies Ltd. 31.73% Not considered by the TPO 10 KPIT Cummins Global Business Solutions Ltd. 31.95% Not considered by the TPO 11 M C S Ltd. 16.23% Considered by the TPO 12 Maple Esolutions Ltd. 34.09% Not considered by the TPO 13 Mphasis Ltd.(Seg.) 11.31% Considered by the TPO 14 SpancoTelesystems Solutions P Ltd. 30.31% Not considered by the TPO 15 T S R Darashaw Ltd. 35.86% Not considered by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanced the ALP adjustment to ₹ 7,21,92,932/- as against ₹ 1,36,12,409/- arrived at by the ld. TPO. Aggrieved, the assessee is in appeal before us. 11. We have heard the rival submissions and perused the materials available on record. The facts stated hereinabove are not reiterated for the sake of brevity. The selection of MAM as TNMM is not in dispute. The PLI of OP / TC is not in dispute. We hold that the contemporaneous data should be considered for the purpose of arriving at the arithmetic mean and accordingly the ld. TPO and ld. DRP was right in considering only the data for FY 2006-07 for arriving at the arithmetic mean ignoring the multiple year data. The short point that arises for our consideration is two fold:- a) whether the ld. DRP was justified in ignoring the other two international transactions entered into by the assessee viz Sale of Call manager phones amounting to ₹ 76,686/- and recovery of expenses amounting to ₹ 2,92,51,866/- and correspondingly not reducing the same from the total cost incurred by the assessee as the recovery of expenses had been made cost to cost, in the facts and circumstances of the case. b) whether the ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exclusion of certain comparables on the following grounds:- a) Companies having Related Party Transactions (RPT) more than 25% ; b) Companies not functionally comparable as they are engaged in business of Registrar and Share Agents ; c) Companies having irregular business operations ; and d) Company having huge brand value. The details of the same are summarized as under:- i) Companies having RPT more than 25% (computed from annual report) B N R Udyog Ltd - RPT of 359.35% C M C Ltd in ITES segment RPT of 59.14% Datamatics Technologies Ltd - RPT of 66.91% Firstsource Solutions Ltd - RPT of 173.44% Fortune Infotech Ltd - RPT of 99.96% H C L Technologies Ltd - RPT of 66.90% Mphasis Ltd (BPO Services Segment) - RPT of 80.55% K P I T Cummins Global Business Solutions Ltd - RPT of 42.46% The ld. DR vehemently opposed to the exclusion of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in fraud and the business reputation came under serious indictment. For this extraneous reason also, they deserve to be excluded from the list of comparables. Hence respectfully following the said decisions, we hold that the aforesaid 2 comparables having irregular business operations should be excluded for arriving at the arithmetic mean. (iv) Company having brand value Wipro Ltd (BPO Services Segment) We find that the co-ordinate bench of Hyderabad Tribunal in the cases of a) Virtusa (India) Pvt Ltd reported in 38 taxmann.com 166 for Assessment Year 2007-08 b) LGS Global Ltd reported in 151 ITD 242 for Assessment Year 2007-08 c) Capital IQ Information Systems (India) Pvt Ltd reported in 32 taxmann.com 21 for Assessment Year 2007-08 had held as below:- This company is also a global IT company having varieties of service and products and looking to the magnitude of its operations, sales and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee company at all. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the inclusion of this company cannot be interfered with. We, therefore, uphold the same and dismiss the ground taken by the Revenue. Respectfully following the said decisions, we hold that the aforesaid comparable should be included for arriving at the arithmetic mean. 11.2.2. We find that if the aforesaid 13 comparables are excluded (ie comparables having RPT more than 25%, functionally not comparable, irregular business operations and having brand value as stated supra) and one comparable is included (i.e. Ask Me Info Hubs Ltd), then the PLI as per the annual report (audited results) for the relevant period would work out as under:- Sr. No. Name of the Comparable OP/TC as per DRP directions OP/TC as per the Annual Report 1 Allsec Technologies Ltd 27.39% 27.31 2 Cosmic Global Ltd. 11.31% 11.31 3 Galaxy Commercials Ltd. 14.75 14.22 4 SpancoTelesystems Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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