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TMI Blog2017 (5) TMI 1735X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (Transfer Pricing)-II (5), Mumbai [ Hereinafter referred to as "The TPO‟] vide order dated 28.01.2013 for AY 2009-10. 2. The assessee has raised the following grounds of appeal:- "The appellant objects to the order of Deputy Commissioner of Income - tax - Circle -II ('DCIT') dated 30 January 2014 (received on 30 January 2014) passed under section 143(3)(ii) r.w.s. 144C(13) of the Income tax Act, 1961 ('the Act'), for the aforesaid assessment year on the following among other grounds: 1. The order of the learned DCIT is bad in law, contrary to the provisions of law and facts of the case. 2. The learned DCIT erred in assessing the total income of the appellant at Rs. 14,36,66,350 as against Rs. 6,35,28,820 declared in the return of income by the appellant. 3. Adjustment of Rs. 65,00,000 with respect to international transaction of provision of provision of Infrastructure Support services needs to be deleted. 3.1 The learned DCIT has erred in making an upward adjustment of Rs. 65,00,000 to the total income of the appellant by holding that the international transaction relating to provision of Infrastructure Support services entered into by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, there is no question of further allocation of professional fees. 4.5 The learned DCIT erred in not appreciating that the managerial remuneration and auditor's remuneration are in the nature of corporate expenses which are not incurred for any STP unit and hence, there is no question of further allocation of these expenses. 4.6 The learned DCIT erred in not appreciating that the STP units have their own heads, whose remuneration has been allocated to the said units and hence no further allocation is called for in respect of managerial remuneration. 4.7 The learned DRP erred in not accepting the additional evidence submitted by the appellant to justify its claim. 4.8 The learned DCIT erred in rejecting the method of allocation of expenses, without appreciating that the same method is consistently being followed by the appellant even in the previous assessment years. 4.9 The learned DCIT erred in construing that the appellant has nothing to offer with regard to basis for allocation of expenses between its STP and non-STP units. 4.10 The learned DCIT erred in observing that non-furnishing of specific information by the appellant was a part of deliberate exercise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivate limited company engaged in the business of data warehousing solution. It filed its return of income on 30.09.2009 for Rs. 63528820/-. The assessee is engaged in the business of providing data warehousing solutions in the nature of sales support and service of electronic data warehousing hardware and software. During the year the assessee has entered into following international transactions as under:- S. No. Nature of transaction AY 2009-10 Method Used by assesse Business Segment 1 Purchases of Hardware & Software for Local Distribution 18,58,59,094 TNMM- Distribution Distribution of EDW 2 Provision of Technical/ Professional and R&D services (Receipt) 130,25,15,715 TNMM Software development and BPO 3 Availing of services (16,04,85,336) TNMM BPO 4 Import of fixed assets (45,38,608) TNMM 5 Reimbursement of expenses (receipts) 4,83,61,874 No method 6 Reimbursement of expenses (Paid) (4,12,63,895) At cost 6. The assessee benchmarked the above international transaction as under:- S.No. Type of International, transaction Method selected assessee Comparables &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and derived average margin of the comparables at 13.3%. With respect to infrastructure support services, the assessee computed the average margin of the comparables at () 8.93%, whereas Ld. Transfer Pricing Officer rejected the comparables of the assessee and further introduced 26 comparables whose average margin was 28.45%. The Ld. Transfer Pricing Officer computed the margin of the assessee at 8.18%. Thereafter, the Ld. Transfer Pricing Officer applied the weighted margin of all the three segments of the assessee based on segmental turnover to total turnover and determined weighted average of the margins of the comparable at 22.25%. On that basis he computed the arm‟s length profit of the International transactions of assessee at Rs. 337966670/- against the actual profit of Rs. 124268019/- and determined the adjustment because of transfer pricing of Rs. 213698651/-. Further, with respect to the intragroup services of transaction value of Rs. 100485336/- he computed ALP of the same at Rs. Nil. 8. Assessee preferred objections before the Ld. Dispute resolution panel who provided direction dated 28/11/2013 under section 144C of the income tax act directed the Ld. Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t services generally include certain finance, legal, human resources, information technology, and similar back-office functions. He submitted that during the year assessee provided infrastructure support services and received 7% markup on costs. He further referred to page No. 54 - 56 where functional analysis, assets employed and risk assumed by the entities are shown. 12. Coming to the functional dissimilarity of comparables i.e. BNR Udyog limited, he referred to page No. 167 to 169 of the paper book and submitted that that BNR Udyog Limited is carrying on medical transcription, construction and financial activities and it is also the member of National commodities and derivative exchange Ltd and multi commodity exchange of India Ltd. Further referring to the segmental reporting of the assessee, it was submitted that company‟s medical transcription segment has been considered as comparable wherein segmental revenue is shown to be Rs. 130.84 Lacs resulting into the profit of Rs. 37.44 Lacs. He further submitted that medical transcription business is not the same service compared with services provided by the assessee and therefore there is a functional difference between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding that TP Adjustment on account of Intra Group Services is double addition. The submission of the assessee is fit to be rejected on account of the following reasons:- a. All the five comparables selected by the assessee are functionally not comparable as evident from their profiles given at in the TP Study Report (pg 78 of Vol.-II of PB). Besides the above, in none of the cases data for the FY 2008-09 is available as mentioned in the TP Study Report (pg 288 of Vol.-II of PB). b. The TPO has rejected the use of multiple year data of comparables in view of the various decisions of the Court including of the jurisdictional High Court given in case of Chrys capital Investment Advisors [2015] 56 taxmann.com 417 (Delhi) (2015) 376 ITR 183 (Del) wherein the Hon'ble Court has held that while determining comparability of transactions, multiple year data can only be included in manner provided in rule 10B(4) and, thus, it is not open to the assessee to rely upon previous year's data as a general rule. c. The assessee has submitted for the exclusion of certain comparables adopted by the TPO on account of high RPT (RPT>15%). RPT filter of 25% has been universally accepted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit earned from the international transaction with that earned by the comparable independent parties in an uncontrolled situation. Thus, while choosing comparables, it must be ensured that the profit earned by them correctly reflects true profit as is earned by an enterprise from an independent third party. If such a chosen company, though functionally comparable, has also entered into international transactions beyond a particular percentage with the related parties, it is quite possible that its overall profit may have been distorted due to such transactions rendering it as incomparable. That is why, this filter is applied to make certain that a company sought to be considered as comparable should have its profit uninfluenced by the impact of the related party transactions. 18. In view of the foregoing discussion, it is manifest that the transactions which do not impact the profitability, such as loan given or taken or other items finding place in the balance sheet, can have no place either in the numerator or the denominator of this formula. However, any income or expenditure resulting/relating from/to or likely to result/relate from/to such items of assets or liabilities, sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd of RPT sales and service income as one unit with the total of sales and service income again as one unit. The decision as to whether such a company be included in the list of comparables by applying the filter of more than 25% RPT, would depend on the outcome of two such percentages of RPTs. If either of the two breaches the 25% threshold, then the company will cease to be comparable. If however, both the percentages are less than 25%, then the company would be liable for inclusion in the list of comparables. We want to make it clear that the above discussion about the components of RPT formula is relevant only in the case of an assessee who is a Trader/Distributor and not a Service provider/receiver or a Manufacturer. Since we are concerned in the extant case with the application of RPT filter in the case of a Trader, we have restricted ourselves only to a trader and have thus desisted from examining the contents and other relevant considerations in the application of this filter to a Service provider/receiver or a Manufacturer. d. The assessee has submitted for exclusion of certain comparables on ground of high profit/supernormal profit. It has been held by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement available at pg no 324 of Vol.-Il of PB." 15. We have carefully considered the rival contentions and also perused reliance placed by both the parties on several judicial precedents for exclusion or for inclusion of the two comparables in dispute before us. The Ld. departmental representative has also contested that functions performed by the assessee in the infrastructural support segment is not evident. Firstly, coming to the issue about the judicial precedents relied upon before us, we are of the opinion that comparability analysis of the assessee‟s international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :- a) the specific characteristics of the property transferred or services provided in either transaction ; b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the clear finding of the Ld. Transfer Pricing Officer that the class of the activity belongs to the domain or business process outsourcing now it cannot be said that the functions of assessee with respect to these services are not clear. Furthermore before us the submission made by the Ld. departmental representative in para number (a) to (g) have not been contested by assessee, as the assessee is only contesting for exclusion of 2 comparables as mentioned by the Ld. departmental representative in his written submission. In view of this, we reject this submission of the Ld. departmental representative on these counts. 18. Now we come to both the comparables to examine whether they can be excluded in conducting the comparability analysis of the international transaction of the assessee. 19. As per the annual report furnished before us for financial year 2008 - 09 BNR Udyog Limited, it is carrying on medical transcription, construction, and financial activities. It is also the member of the National commodities and derivatives exchange Ltd and multi commodity exchange of India. This company has assumed geographical risk, human resources risk as well as foreign exchange risk. With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company with respect to integrated support service agreement, services, which are the necessary for the day to day operations of the service recipients business, are provided. The natures of services are also described in the order of the Ld. Transfer Pricing Officer . The above services do not envisage employment of highly qualified professionals such as doctors, but operates as back-office functions. Therefore, there is a functional differentiation in the activities of the comparable vis-à-vis services of appellant assessee, hence, specific characteristics of the property transferred and functional profile according to us differs. Therefore, this comparable deserves to be rejected from comparability analysis. 20. Now coming to the functional profile of the Cross domain solutions private limited. Firstly, we find that the annual accounts provided by the Ld. Transfer Pricing Officer to the assessee does not contain the profit and loss account of the comparable company , which is an important piece of information giving the revenue model, cost model of the comparable, and therefore the information provided to the assessee is incomplete. It is interesting to note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we come to the ground No. 4, where there is a deduction under section 10 A of the assessee is reduced by Rs. 64666012/-. During the year the assessee has claimed deduction under section 10 A of the income tax act of Rs. 35080640/- and Rs. 53412877/- in respect of Pune and Hyderabad units of the assessee. The Ld. Assessing Officer compared the profit percentage of STP units, which is at 17.03% as against 5.16% in respect of other units. Assessee was asked to furnish unit wise profit and loss account and balance sheet and the basis of the allocation of expenses to the respective units. The assessee furnished the unit wise profit and loss account. However, the basis for allocation of expenses was not given. Therefore, the Ld. Assessing Officer found that managerial remuneration and auditor remuneration and foreign travelling expenses as well as professional services fees with respect to the STP units and non-STP units were not allocated properly and therefore the total expenses under this head amounting to Rs. 32665 0401/- was allocated on the basis of the sales of respective units. Therefore, after allocation a sum of Rs. 39562650/- and 73480877/- was allocated to Pune and Hyderabad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mon expenditure even otherwise based on the turnover is not appropriate. He further submitted that assessee submitted certain details before the Ld. Dispute resolution panel, which were not admitted by them due to paucity of time. He submitted that the need for submitting the additional evidence arose because of the reason that the Ld. Assessing Officer did not raise this query during assessment proceedings. He referred to para No. 8.2 of the order of Ld. dispute resolution panel to substantiate his claim. He also relied upon the host of judicial precedents to support its claim, such as a. Zandu Pharmaceutical works Ltd versus CIT 350 ITR 366 (BOM) (para No. 9) to submit that while computing the profits and gains of the concern undertaking only expenses relating thereto can be deducted. It was further held that the expenses attributable to any other unit or the head office expenses which have no relevance to the industrial undertaking cannot be deducted in respect of the said undertaking while computing the profits and gains of the undertaking. b. Commissioner of income tax versus JiyajiRao cotton Mills Ltd 79 taxman 51 (CAL) to say that managing agency commission proportionate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes reduction in the deduction u/s 10A of the act. 24. We have carefully considered the rival contention and also perused the orders of the lower authorities as well as the direction of the Ld. dispute resolution panel with respect to the allocation of common expenditure for working out deduction under section 10 A of the income tax act. According to the provisions of section 10 A of the income tax act assessee is entitled to deduction of profit derived by an eligible undertaking from the export of articles or things or computer software for a period of 10 consecutive assessment years from the total income of the assessee. To determine the sum of profit derived by an eligible unit, It is necessary that all expenditure directly or indirectly related to earning of such profit directly or indirectly should be reduced from the eligible profit. According to page No. 432 of the paper book the assessee has allocated expenditure amounting to Rs. 1520040914/- which is total of the expenditure debited in the profit and loss account comprising of cost of material consumed of Rs. 227291404/-, operating expenses of Rs. 1193276643/- and depreciation of Rs. 99472866/-. According to us, that does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that year. The note at point No. 5 is that the assessee has claimed deduction in respect of rent paid to the landlord of Rs. 24695642/- in the assessment year 2008 - 09, which was accounted as prepaid expenses. Accordingly, the rent amounting to Rs. 90 lakhs debited to the profit and loss account during the year ended 31st part 2009 is added back. The Ld. dispute resolution panel did not allow claim of assessee for the reason that assessee is in appeal before coordinate bench for that previous year objecting to the disallowance of the rent amount paid in that previous year. 26. Ld. authorized representative submitted that now the issue has been decided by the coordinate bench vide order dated 01/08/2016 wherein at page No. 22, while deciding the ground No. 9 of the appeal vide para No. 9, coordinate bench has set aside the issue to the file of the Ld. Assessing Officer for verification of the facts and to allow the claim of the assessee if the same is found to be admissible as per law. In view of this we also set aside this ground of appeal to the file of the Ld. Assessing Officer to decide it afresh which will depend on the outcome of the finding of the Ld. Assessing Officer with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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