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TMI Blog2017 (9) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... me to the fixed cost so as to bring it at the level playing field with the comparables. In view the decision in case of MGE UPS System India Pvt. Ltd. Vs DCIT, Circle-6(1), New Delhi (2016 (5) TMI 1387 - ITAT DELHI) deem it appropriate to set aside this case back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. Appeal of the assessee is allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price of the international transaction of the appellant using TNMM. The CIT(A)/AO have also erred in using data which was not available to the Appellant at the time of preparing transfer pricing documentation. 8. The CIT(A)/AO erred in the use of Comparable Uncontrolled Price ("CUP") for benchmarking the international transaction involving availing of management and administration support services and concluding that the arm's length value for the transaction is NIL. 9. The Learned AO has erred in facts and in law in initiating the penalty proceedings u/s 271(1)(c) of the Act against the appellant for concealing the particulars of income or furnishing inaccurate particulars of income. 10. The CIT(A)/AO erred in ignoring the fact that FY 2007-08 was the first year of operations of the Appellant and the Appellant was in its nascent stage of business cycle experiencing high fixed cost of operations and therefore there was a valid case for adjusting the excess fixed costs incurred by comparing the capacity utilized by the Appellant in FY 2007-08 viz-a-viz the budgeted projections or profitability before the start of operations with the actual profitabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umed and assets employed by such PE and in order to execute the services, M/s Hitachi High Technologies (Singapore) Pte. Ltd. ('HTS') had entered into an agreement with its Branch Office (BO) who agreed to provide the following services: * "Marketing, including advertisements, exhibition participation and the necessary sales co-ordination activity. * Communicating the price details from HTS to potential customers * Follow up assistance services in respect of purchase orders and letters of credits from customers. * Communicating purchase order details to suppliers based on the instructions of HTS from time to time. * Services pertaining to credit and collection, follow up on payments due from customers. * Periodical budgeting analysis." 6. The AO noted that the assessee entered into an international transaction as mentioned in Form No. 3CEB as under: Nature of transaction Method selected Total value of transaction (Rs.) Provision of marketing support services TNMM 2,64,99,480 7. The AO asked the assessee to submit TP documentation in respect of international transaction with AE. The AO referred the matter to the TPO who rejected the TP study of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity utilization in service sector does not carry any meaning, as the concept of capacity utilization is more relevant in manufacturing sector, where heavy plant & machinery are installed. - The adjustment for capacity utilization is always calculated with respect to the capacity utilization of the comparables. The assessee has not done any such analysis and has sought for 60% adjustment purely on ad-hoc basis without referring to the financials of the comparables. This has probably been done just to artificially bring the operating margins in close range of that of comparables. Therefore this contention of the assessee is also rejected. 12. However the assessee has claimed working capital adjustments. The same are being allowed and the working capital adjusted margins of the comparables are being taken, as submitted by the assessees vide annexure 4 of its submission dated 23.12.2010: Name of the Company Unadjusted OP/OE Working Capital Adjusted OP/OE Access India Advisors Limited 45.97% 42.52 Educational Consultants (India) Limited (Segmental) 5.20% 12.64 ICC International Agencies Ltd (Segmental) 55.28% 49.98 IDC India Limited 14.87% 13.91 India Tourism De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price in respect of this transaction was determined at Nil. 10. Being aggrieved the assessee carried the matter to the ld. CIT(A) who sustained the addition by observing in paras 5 to 7.2, as under: "5. In Ground No 2, the appellant has contended that the AO has erred in determining the price of the international transaction of the appellant as the circumstances necessitating the determination of price as mentioned in subsection (3) of section 92C did not exist in case of the Appellant. The AO has rejected the TP study of the appellant. The AO has given the reasons for rejection of TP report furnished by the appellant. If the AO on the basis of material or information or document in his possession is of the opinion that the information or data used in the computation of arm's length price is not reliable or correct, the AO may proceed to determine the arm's length price in relation to international transaction in accordance with section 92C(1) and 92C(2) on the basis of information or material or document available with him. On perusal of the order passed by the AO, it is found that the transfer pricing study conducted by the appellant is defective and not reliab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground of appeal is dismissed. 7. In ground no. 5, 6 & 12, the appellant has objected to the rejection of the use of projected operating margins of the appellant for the purpose of determining arm's length price for the international transactions pertaining to provisions of sales and marketing support services and provision of market research/development services to its AEs on the ground that FY 2007-08 was the first year of operations. The appellant has objected to the rejection of the quantitative adjustments claimed by the appellant in accordance with the transfer pricing provisions on account of significant differences in capacity utilization of the appellant vis-a-vis the comparable companies. The appellant has also stated that the AO did not consider the updated margins of comparable companies for determining the ALP of the international transactions pertaining to provision of sales and marketing support services and provision of market research /development services to its AE. 7.1 In Market Support Services Segment the appellant company has made provision of sales and marketing support services during FY 2007-08. M/s. Hitachi India BO has rendered sales, marketi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Agencies Ltd (Segmental) 55.28% 49.98 IDC India Limited 14.87% 13.91 India Tourism Development Corporation Limited (Segmental) 9.40% 11.91 Priya International Ltd. (Segmental) 18.15% 17.07 In House Productions Ltd. (Segmental) 0.56% -5.90 Arithmetic Mean 21.35% 20.30% 7.2 The appellant has submitted that in order to earn the Market Support and Research Services charges of ₹ 2,64,99,480/-, the appellant has incurred expenses of ₹ 3,15,02,986/-. It is evident that the appellant has incurred losses in this segment and because of the losses in this segment, the appellant had used data for future years for establishing comparability. In effect, the appellant has submitted that the financials of FY 2009-10, 2010-11 and 2011- 12 of the tested party should be compared with the financials of comparables of FY 2005-06, 2006-07 and 2007-08. As per the provisions of Indian Transfer Pricing Regulations, the comparability analysis has to be of contemporaneous data only, i.e. the financials of the tested party of FY 2007-08 are to be compared with financials of comparables for FY 2007-08 only. Considering the facts of the case, I am of the view that the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned AO are performing more complex functions as compared to the Assessee. A brief description of business profile of the comparables selected by the Learned AO is given below: Company Business Description Access India Advisors Limited Provision of services such as statutory, legal and accounting filings, relationship management for clients, feasibility studies, detailed position papers, political insight and analysis, business plan and market entry strategy, weekly intelligence updates, breaking news updates, competitive positioning analysis, research, legal positioning, media intervention and discrete lobby groups and union budget insight and analysis. Educational Consultant (India) Limited Provision of services such as technical assistance, secondment/ recruitment of teachers & experts for clients in India and abroad. ICC International Agencies Ltd. Provision of commission and service activity, and is also into trading of embroidery accessories and embroidery machines. IDC India Limited Provision of research and survey service and products. The company provides user research, verticals research, go-tomarket services and the consulting services income. India Tourism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer and its AE from the third party independent clients. * The ALP cannot be equivalent to 100% of the revenues earned by RCS from third party independent clients, as this would imply that RCS performs the marketing activities without any consideration, which is an absurd and an improbable business proposition." 14. It was further submitted that the comparable choosen by the assessee were well established and their informations were available in the public domain which earlier were not available during the preparation of TP study and that in this regard specific contention was raised before the ld. CIT(A). A reference was made to page nos. 199 to 201 which read as under: "3.6 Ground 6: The Learned AO erred in law by not accepting the quantitative adjustments claimed by the Appellant in accordance with the transfer pricing provisions on account of significant differences in capacity utilization of the Appellant vis-a-vis the comparable companies, and also failed to appreciate and give due cognizance to factual data submitted on the number of years of operations of the comparable companies. In this regard, we wish to submit that FY 2007-08 was the first year of operations f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the transactions being compared or between the enterprises entering into the transactions are likely to materially affect the price or cost charged or paid in or the profit arising from such transaction in the open market. Where there are material differences between the transaction under examination and the uncontrolled transaction, reasonably accurate adjustments can be made to eliminate the material effect of such differences. The Appellant commenced its operations in only FY 2007-08. Accordingly, the Appellant believes that due to under-utilization of its capacity, its financial statements do not reflect the true profitability. Hence, to improve the reliability of the results, we have adjusted the Appellant's reported financial data to account for unutilized or unabsorbed capacity. The adjustment methodology is described below: * The costs for the tested party was categorised into fixed and variable costs based on the nature of expenses. * The fixed cost of Appellant was adjusted using the ratio of capacity utlisation of 60% * Lastly, the adjusted fixed costs are considered as part of costs to arrive at the adjusted operating profits the Appellant. The adjus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary event and it is only when the assessee satisfied the basic condition of showing presence of some specific expenses confined to initial phase then it becomes entitled to claim adjustment. The reliance was placed on the decision of the ITAT Delhi Bench in the case of JCB India Ltd. (2015) 59 Taxmann.com 211. It was further submitted that the assessee had not shown the reason for claiming the ad-hoc adjustment of 60%. Therefore, the AO rightly made the additions and the ld. CIT(A) was fully justified in confirming the same. 17. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that a similar issue has been decided by this Bench of the Tribunal in the case of MGE UPS System India Pvt. Ltd. Vs DCIT, Circle-6(1), New Delhi (supra) wherein the relevant findings have been given in paras 14 & 15 which read as under: "14. We have considered the submissions of both the parties and perused the record of the case. 14.1 We find considerable force in the submission of Id. Counsel for the assessee that for determining the arm's length price of international transactions between associated enterprises if the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were available at the time of preparing the TP study were not later on available and furnished to the ld. CIT(A), but those were not appreciated in right perspective. Moreover, from the submissions of the assessee before the ld. CIT(A) as discussed in the former part of this order, it is clear that the comparables selected by the TPO were operating since long and the assessee is in the initial stages of its operation then considerable adjustments has to be made to the operating expenses in order to give due leverage to the contribution of income to the fixed cost so as to bring it at the level playing field with the comparables. We, therefore, considering the totality of the facts and by keeping in view the decision of the co-ordinate Bench in the aforesaid referred to case of MGE UPS System India Pvt. Ltd. Vs DCIT, Circle-6(1), New Delhi (supra), deem it appropriate to set aside this case back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
19. In the result, appeal of the assessee is allowed for statistical purposes.
(Order Pronounced in the Court on 28/08/2017) X X X X Extracts X X X X X X X X Extracts X X X X
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