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TMI Blog2016 (7) TMI 1707X X X X Extracts X X X X X X X X Extracts X X X X ..... r ground. This leaves us with the issue correctness of the above stated transfer pricing adjustment only. 3. The assessee company is engaged in manufacturing and servicing of oil field equipment's. It filed return on 31-03-2009 stating income of Rs. 1,69,51,140/-. The same was summarily processed. The Assessing Officer took up scrutiny thereafter. He noticed assessee's international transactions with its overseas AEs. He made a reference dated 14-07-2010 to the transfer pricing officer "TPO" hereafter for ascertaining arms length price thereof. 4. The assessee company is admittedly a subsidiary of M/s. Weatherford group of entities holding 99% of its share holdings. It operates in manufacturing and engineering systems support divisions. The instant appeal pertains to latter division only. The above stated engineering systems support division was established in Nov, 2006 in order to support maintenance and development of software by the Weatherford group for its use in various segments of oil and gas. The assessee's revenue receipts in providing engineering, development and related services to its AEs read a figure of Rs. 2,90,55,055/-. It used transaction net margin method (TNMM) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year from 01-04-2007 to 31-03-2008 on the logic that a tested party ending its financial year by March as having appropriate filter leading to a better comparability. The TPO then took companies having income from computer software. He proceeded to include entities having 75% of revenue from export turnover under rule 10B(2). His next four filters would inter alia seek to exclude entities having employees cost less than 20%, those having related party transactions of less than 25% of their revenue as well as those having peculiar economic circumstances. All this increased relevant filters count to 13. 7. This case file demonstrates that the assessee had derived its income from software development services amounting to Rs. 2,90,55,055/-. Its operating expenditure was of Rs. 3,29,05,272/-. This left behind a negative figure of Rs. 38,50,217/- bringing PLI to - 11.7%. The assessee included 16 entities as comparables namely M/s Akhshaya Software Technologies, FCS Software Solutions, Goldstone Technologies, ICRA Technoanatics, Indus Netword Ltd., L & T Infotech, Mel star Information Technologies Ltd, Mindtree Consulting Ltd, PSI Data System Ltd, Power soft Global Solutions, SIP T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/-. The TPO accordingly computed assessee's receipts on an arms length to be of Rs. 4,23,95,152/- as against the actual receipt of Rs. 2,90,55,055/- thereby proposing differential adjustment of Rs. 1,33,40,097/-. 10. The assessee filed its objections thereto vide reply dated 04- 10-2011 inter alia taking various pleas of under utilization of the office on the ground that it had brought to use only 67% of the office taken on rent to pray for consequential adjustment, its next plea was that the relevant year was the year of its commencement making it entitled for necessary adjustment. It denied to have shifted any profit since it was already located in an STPI zone. The assessee's further case supported using multiple years data, opposed related party transaction filter of 25% as against 10% of its comparables. It submitted that export sales of 75% had been wrongly used. The assessee sought to make out a case that TNMM method used in its transfer pricing documentation took care of all functional differences in controlled and un-controlled transactions made in domestic and export market. The assessee further contested turnover filter of Rs. 5 to 150 in view of the fact that its tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tree consulting Ltd. and Compu Learn Tech India Ltd as comparables having respective PL/s of 20.86% and 88.83% by terming them as functionally different. Second argument is that the authorities below ought to have taken into account the preceding financial years' data of the above stated two comparables inter alia pointing out drastic fluctuations in margins. Next argument seeks working capital adjustment as prayed before the lower proceeding throughout but not granted for want of necessary details. 15. Shri Sanjay Agrawal representing Revenue as CIT- Departmental Representative strongly supports the impugned adjustment on all counts as made by the TPO. His only agreement with the assessee is qua working capital adjustment relief. He fairly submits that this adjustment is admissible in law if an assessee files all the relevant details. 16. We have given our thoughtful considerations to rival contentions. First issue between the parties is qua inclusion of M/s Bodhtree Consulting Ltd having PLI of 22.86% as comparables. The assessee files a chart of its PLI from financial year 2005-06 to 2012- 13 showing the same to be @ 13.87%, 80.15%, 19.89%, 62.27%, 33.42%, -4.46%, 3.29% and -1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on 31-03-2007. We observe that assessee's latter two arguments seeking exclusion of this latter entity on the basis of functional similarity and non-availability of segmental data are accordingly devoid of merits. We hold that this latter entity satisfies both the two tests raised at assessee's behest. 20. This leaves us with assessee's remaining argument that M/s Compu Learn India Tech has seen drastic fluctuating margins. The assessee quotes case law of Allscripts (supra) in support of this contention. We had heard the instant appeal on 17-12-2015. We noticed thereafter that hon'ble Delhi High court in its recent decision Chrys capital Investment Advisors India P. Ltd vs. DCIT (2015) 56 taxman.com 417 (Delhi) has considered all tribunal's decision on this issue of using multiple financial year data to be suffering from rote repetition. We accordingly re-fixed this case for hearing. The assessee strongly contested in the courses of rehearing that the above stated case law does not apply in its case since it does not consider multiple years data indicating wide fluctuating margins. Shri Agrawal vehemently argued in support of the above stated decision to be applicable in facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP in question. Hon'ble high court adjudicated the issues framed as under:- "31. Arm's length price determination, in respect of an international transaction has necessarily to confirm to the mandate of Rule 10B. In this case, the method followed for determining the arm's length price of the international transaction adopted by the assessee and the revenue is the TNMM. The comparability of an international transaction with an uncontrolled transaction has, in such cases, to be seen with reference to the functions performed, taking into account the assets employed or to be employed and the risks assumed by the respective parties to the transaction as per rule 10B(2)(b). The specific characteristics of the property transferred or services provided (contemplated by Rule 10B(2)(a)) in either transactions may be secondary, for judging comparability of an international transaction in the TNMM, because the price charged or paid for property transferred or services provided and the direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided go into reckoning comparability analysis in the transaction methods, i.e. the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to (f) of Rule 10B(1), while judging comparability. Rule 10B (3) on the other hand, indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company- otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. 34. The Court is also aware of the factors mentioned in Rule 10B (2), i.e characteristics of the service provided, functions performed taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; contractual terms of the transactions indicating how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve no bearing on this issue. 36. This Court holds that in the facts of the present case, the assessee was incorrect, both in its reliance placed upon previous years‟ data as well as the manner of such reliance. First, the assesse's justification for relying on such data is the volatility in the comparables' profit margins and the consequent inability to transact at a consistent ALP. However, this is not warranted herein. Whilst there may be a wide fluctuation in the profit margins of comparables from year-to-year, this by itself does not justify the need to take into account previous years‟ profit margins. The transfer pricing mechanism provided in the Act and the Rules prescribes that while determining the ALP, the arithmetic mean of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year- to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) legislation. Our Supreme Court has, in the area of human rights - particularly in personal liberty, been emphasizing that to the extent the provision of any treaty is in consonance with provision of the Constitution (such as Article 21) it would be read along with such provision or right (Jolly George Varghese and Anr. v. The Bank of Cochin, AIR 1980 SC 470, Apparel Export Promotion Council v. A.K. Chopra, AIR 1999 SC 625; Kubic Dariusz v Union of India AIR 1990 SC 605). Thus, the Courts are primarily bound by the law on the subject in India; if the law is clear and unambiguous, there is no question of resorting to extrinsic sources. The only rider is that if the terms of such conventions or treaties are similar to the law applicable in India, courts may consider precedents in that regard; however those are only of persuasive value. 38. The aforesaid conclusion is fortified by the Division Bench decision of this Court in Mentor Graphics (supra), where the Court noted: "We may also make it clear that the reference to the OECD guidelines by the Tribunal in the impugned order are in the context of the reliance placed by the Transfer Pricing Officer on the very same guidelines, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the results observed in other proposed "comparables" and that "further examination would be needed to understand the reasons for such extreme results". Similarly, para 3.65 states that "loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses". Further, para 3.64 states that "it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result". The same approach is prescribed in para 3.66 for entities making supernormal profits. Therefore, both the OECD Guidelines as well as Rule 10B (2) and 10B (3) do not, in any manner, prescribe automatic exclusion of entities with extreme financial results. Similarly, insofar as the use of multiple year data is concerned, Para 3.75 of the OECD Guidelines states that "[m]ultiple year data should be used where they add value to the transfer pricing analysis." This is akin to the proviso to Rule 10B(4) which provides for "data relating to a period not being more than two years prior to such financial year [to] be considered if such data reveals facts which could have an influence on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, this Court holds that such a contention cannot be raised for the first time at this stage. Therefore, Brescon and Khandwala Securities are held to be functionally similar, and the matter is remitted to the DRP for the purposes of examination under Rule 10B(3) of the Rules. In the event that the material differences arising out of the extremely high ITA 417/2014 Page 48 profits cannot be eliminated as per Rule 10B(3), these two entities will have to be discarded as comparables." It is therefore clear that their lordships have directed the DRP to carry out rule 10B(3) that in the event material differences arising out of the extremely high profits cannot be eliminated under the above rule, the comparable entities would stand discarded as comparables since having said abnormal PLIs. Their lordships accordingly answer the three substantial questions inter alia to the effect that the mere fact an entity is having extremely high profits would ipso facto not lead to its exclusion since the same is to be followed by rule 10B(3) exercise as to whether the material difference between such entity and the assessee concerned could be eliminated, multiple years data are to be used only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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