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TMI Blog2019 (5) TMI 1832X X X X Extracts X X X X X X X X Extracts X X X X ..... .1 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in not considering the Transfer Pricing analysis submitted by the Appellant and confirming the upward adjustment made by the learned transfer pricing officer to the extent of Rs. 1,67,98,967. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of learned transfer pricing officer in rejecting the Internal Comparable Uncontrolled Price ("CUP") method adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.3 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in rejecting the Internal Transaction Net Margin Method ("TNMM") adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.4 The learned CIT (A) has erred by not considering risk adjustments proposed by Appellant for adjusting in different risks assumed by Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry Drive, Nacogdoches, TX - 7564 USA 18,63,87,386/- Reimbursement of expenses (Call termination and internet charges) Etech Inc. 1903, Berry Drive, Nacogdoches, TX - 7564 USA 1,11,74,431/- 2.1 The Assessee filed the transfer pricing study report in respect of these transactions wherein it benchmarked its international transaction with AE by applying internal CUP method. 2.2 The assessee also claimed that similar services were rendered to Non AEs. The assessee in respect of the services rendered to its AE charged the fees at the rate of Rs. 275.49 per hour whereas in case of non AE it calculated the hourly rate charged at the rate of Rs. 126.24 per hour. Accordingly, the assessee in its TP study report claimed that price charged in case of non AEs is lower than AE, therefore, the transactions with the AE are at Arm Length Price (ALP). 3. However, the TPO on perusal of TP study report noted certain facts in respect of internal CUP as under: (i) In case of AE, fee is receivable on per hour basis whereas in case of Non AE fees are being received on the basis of per unit sales or leads provided by the assessee. (ii) The nature of services such as inbound and outbound services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of adjustment of risk by taking the difference between PLR rate and Bank rate where PLR rate as a normal risk bearing rate whereas Bank rate is as risk free return. Accordingly, the assessee worked out the difference in rate as 5.25% (11.50%-6.25%) and contended that by making the upper adjustments of 5.50% in non AE segment, both the segment would be comparable as after adjustments margins of non AE would reach to -75.65%. 3.8 However, TPO disregarded the contention of assessee and held that CUP can be applied in the cases where services rendered are highly comparable which is not in the present case as discussed in the SCN, therefore, internal CUP applied by assessee for the purpose of benchmarking is rejected. 3.9 In respect of internal TNMM, the TPO held that assessee has only submitted calculation of quantification of the risk but has not established any link for the difference in the return between Government security and AAA rated bonds with the risk profile of AE and non AEs segment. 3.10 The TPO further held that as per the provision of rule 10B(2) and 10B(3), reasonable accurate adjustment can be made to eliminate the differences only where differences are such which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded is required. Further, the basis of remuneration charged in both the case is different. Accordingly, ld. CIT (A) dismissed the appeal of assessee by following his own order of AY 2009-10. 4.6 In respect of TNMM, the ld. CIT(A) held that there is huge difference between the turnover of the AE segment and non AEs segment. Therefore the same are not comparable. Thus the contention of assessee that the turnover needs to be ignored while applying the internal TNMM is not tenable in the present facts and circumstances. 4.7. Further, in the case (supra), as relied by the assessee, the matter was remanded back to determine the cost allocation properly and further held that if non AEs transactions are more only up to 5% but cost allocation is more than 50% then further examination is required. In the present case also assessee has not justified the basis of allocation of cost between AE and Non-AEs as the non AE business forms only 1.7% of AE business and 1.6% of total turnover. Accordingly, ld. CIT (A) dismissed the appeal of assessee. Aggrieved by the order of ld. CIT (A), assessee is in appeal before us. 5. The Ld. AR before us filed a written submission as detailed under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternal CUP method was raised in assessee's own appeal in the assessment year 2009-10 in ITA No. 2411/Ahd/2014 where issue was decided in favour of assessee by the ITAT vide order dated 16-01-2018 by observing as under: "10. We have given thoughtful consideration to the orders of the authorities below. We find that the assessee is eligible for tax holiday u/s. 10A of the Act, therefore, we do not find any merit in holding that the assessee manipulated the prices and shifted the profits to the overseas jurisdiction for avoiding taxes in India. Moreover, the taxes rates in the USA are higher than the tax rates prevailing in India. Moreover, the AE of the appellant company has incurred losses in providing end to end services to third parties. If the assessee had directly undertaken contracts with the third parties in USA, it would also have incurred operating losses as against operating profits earned while undertaking transactions with AEs. 11. We find that the appellant company has earned average hourly rate from its AE business at Rs. 274.39 per hour. As against the same, the average hourly rate from Non AE business was Rs. 108.82 per hour. Thus, the average hourly rate earned f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocation of the common cost between AE and non AEs and whether they are scientific and at arm's length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. Insofar as the difference in the turnover, we find that the Tribunal Delhi Bench in the case of Lummus Technology Heat Transfer BV Vs. DCIT 42 taxmann.com 342 has held as under:- 5. Rule 10B(l)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that "the net profit margin realised by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base" is compared with " the net profit margin realised by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base" - of course, subject to comparability adjustments which could affect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with non AEs, on the ground that the volume of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... working in peculiar economic circumstances, after giving valid reasons, were excluded, * Companies having turnover less than Rs. 1cr. and more than Rs. 200cr. were rejected. 7.1 In view of the above the TPO selected 8 companies as comparables. The list of such comparables is available on page 60 to 61 of the TPO order. At the same time the assessee suggested three companies as comparables but the TPO rejected the same. The details of the companies suggested by the assessee stand as under: i. Informed technologies India Ltd ii. CG-Vak Software and exports Ltd iii. R systems International Ltd 7.2 On appeal to the ld. CIT-A rejected some of the comparables suggested by the TPO and all the comparables suggested by the assessee. 7.3 Against the order of the ld. CIT-A, the assessee is in appeal before us in respect of the exclusion of the company confirmed as comparable. The detail of the company stands as under: i. Cross Domain Solution Pvt. Ltd 7.4 Similarly, the assessee is also in appeal for the inclusion of certain companies which were rejected by the ld. CIT-A as detailed under: i. CG-Vak Software and exports Ltd ii. R systems International Ltd 7.5 Now we are p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out the observation of TPO. Accordingly, ld. CIT (A) dismissed the appeal of the assessee. Aggrieved by the order of ld. CIT (A), the assessee is in appeal before us. 9. The LD. AR before us submitted as under: Cross Domain Solution Pvt Ltd The learned TPO and CIT(A) has erred in considering this company as functionally comparable to the Appellant. In this regard, the Appellant submits that this company is engaged in rendering high-end KPO service and hence cannot be compared with the Appellant who is a low end BPO services provider. For detailed discussion kindly refer Para 2.6,4 of submission filed dated 15 May 2015 before the learned CIT(A). (Refer page no 187 of the factual paper book) Further, reliance in this regard is also placed on the following judicial precedents: -ACIT vs Monster.com (India) Private Limited (Hyderabad ITAT) [2017] (86 Taxmann.com 186) (Refer para 17.1 at page 30 of legal paper book) - BP India Services (P.) Ltd vs ACIT (Mumbai ITAT) [2015] (55 Taxmann.com 150) (Refer para 9 at page no 39 of legal paper book) 10. On the other hand, the Ld. DR vehemently supported the order of authorities below. 11. We have the heard the rival con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce: http:/ www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. III. 1 We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this c9mpany as a comparable, this company should be excluded from the list of comparables, accepting the plea of the Assessee. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. We hold accordingly". 14.3 Facts are being similar in this year, the same has to be excluded. Moreover the web report placed indicates that this company is in market research and analysis and IT services which include software development and maintenance. There is no segmental information. In the absence of segmental data, it cannot be stated that the company is functionally similar. In view of the order in earlier year and based on annual report a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hardly constitute only 0.015% of total sales. 12.2 However, the TPO observed that assessee itself has admitted the fact that the company has incurred the AMP. Accordingly the TPO held that the ITES segment of R system was incomparable. 12.3 The TPO from the information obtained from R system u/s 133(6) also observed that it has given segmental result in respect of software development services and BPO services. The TPO further observed that on one hand the assessee is objecting the inclusion of entities engaged in diversified activities whose segmental data is not available and on other hand it seeks to include R system at an entity level. Accordingly, the TPO held that R system is not to be included as comparable case. 12.4 The aggrieved assessee carried the matter to ld. CIT (A) who held that the reason given by the TPO in respect of concept of AMP may be wrong but his findings were correct as extraordinary margins require adjustments. As such only ordinary margins can be considered for the comparison. The ld. CIT(A) further held that R system cannot be compared as the assessee company is having low risk whereas the comparable R system is having high risk due to incurring ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) in assessment year 2009-10 has confirmed this company as comparable. Now this year it has been rejected on account that it is a risk bearing entity. In this regard we are of the view that department cannot cherry pick the comparables as per its convenience. Once in a year it has been held that it is a case fit for comparable then in later years it cannot be excluded as comparable company unless there is any material change within the entity related to its structure or business. Just because a company in any particular year incurred any heavy expenditure on account of AMP cannot be held as non comparable. 16.2 The relevant finding of the ld. CIT-A for the AY 2009-10 stands as under: After considering the above, the operating margins of the comparable companies comes to 29.045% [i.e (53.17 + 4.92)/2 i.e OP/TC of remaining comparables viz Cosmic Global Limited and R Systems International Ltd respectively] and accordingly the AO/TPO are directed to rework. 16.3 It is also pertinent to note here that assessee before TPO also submitted that the AMP expenditure also includes some expenses such as marketing salary, marketing travel, commission on sales and advertising & sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable segment business is less than 1 crore and hence does not qualify turnover filter. In this regard, the Appellant submits that the turnover of the relevant segment of the company is Rs. 82.78 lakhs which is less than Rs. 1 crore. However just because this company does not pass the turnover filter of 1 crore this should not be rejected as the business is exactly similar to that of the Appellant. Further the turnover of the relevant segment of the company only not very much less than 1 crore and hence this company should be selected as comparable. Further, in Appellant's own case for AY 2009-10, your Honour's has considered this company as a comparable to the Appellant. Kindly refer para 19 of ITAT order at page no 10 of legal paper book. Further reliance in this regard is also placed on the following judicial precedent: -Cadene Design Systems (India) (P) Ltd. Vs DCIT (Delhi ITAT) [2018] (89 Taxmann.com 443) (Refer para 11.3 at page 63 legal paper book) 19. Ld. DR before us vehemently supported the order of authorities below. 20. We have heard the rival contention and perused the materials on record. In the instant case we note that the same company was al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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