2014 (5) TMI 107 - AT - Income Tax

Tribunal directs exclusion of comparables and adjustments in transfer pricing calculations.

M/s Avineon India Pvt. Ltd. Versus Dy. Commissioner of Incometax

The appeal was partly allowed for statistical purposes. The Tribunal directed the Assessing Officer/Transfer Pricing Officer to exclude certain ... Rejection of contemporaneous data and undertaking fresh comparable – Held that:-The relevant data was not available at the time of preparing TP documentation, the Tribunal uniformly is holding that comparable data available at the time of analysis by the TPO should also be used provided information available with either in the public domain or specifically obtained by the TPO was made available to Assessee for its objections, if any – the TPO has given enough opportunity to Assessee, there was no merit in the contentions raised - There is no necessity for re-preparing the TP documentation, which has already been furnished to the TPO at the time of filing return as exercise of verifying arm's length price is with the TPO and in the proceedings before the TPO enough opportunity was given to Assessee – Decided against Assessee. Segment wise data – Held that:- The Assessee has a valid ground - assessee's computation of profits on different units, two units being eligible units i.e. GIS and Engineering Division and one non-eligible unit of IT Division are available separately and the AO has neither raised any objection on the profit computation nor made any adjustments to the working given by Assessee – each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling, etc.- The FAR analysis in each of the activity will have distinct and separate considerations - the TPO as well as DRP have ignored the fundamental fact and have erred in not considering this aspect of the economic substance of the transactions – Decided in favour of Assessee. Determination of ALP at entity level – Restriction to transaction with AEs – Held that:- Assessee has suffered losses in software services where the AE transactions are less - Assessee also had very meagre AE transactions in Engineering Services and there are separate profits which were already arrived at and accepted by AO in the order itself - When profit margins of different units are available separately, it could not be understood as to why TPO and DRP should adopt total profit at 10.74%, which included non-AE transactions on which according to Assessee, profit margin was less - Relying upon Dy. CIT v Starlite [2010 (4) TMI 704 - ITAT, MUMBAI] - since segmented profits are available and profits are separately computed under the provisions of section 10A, it is not difficult to arrive at the correct profit margin on cost, on the basis of information available on record and making the addition accordingly – thus, the AO is directed to re-work out the addition – Decided in favour of Assessee. Selection of Comparables of various companies – Held that:- The foundation for comparability analysis is the need for a comparison between conditions made or imposed between AE and those which will be made between independent enterprises - As per the provisions, FAR analysis is must - As per Rule 10B if there are any differences between comparables, relevant transactions should be taken and differences to be adjusted to arrive at the ALP for the reason that after taking number of companies as comparables, the TPO should allow adjustments towards differences in depreciation, differences in risk perceptibility, of working capital adjustments, etc depending on the facts of the case - But selecting a company, which is not comparable at all or which affects comparison due to unusual features cannot be taken as a comparable company – thus, the AO is directed to exclude the companies as comparables as taken by the AO – Decided in favour of Assessee. Improper calculation of working capital adjustment by the TPO – Held that:- Assessee contended that trade practice of advances and subsequent adjustment of these advances against invoices raised, being captive service provider has a bearing on profit margin, therefore, working capital requirement should be taken care of by way of adjustments - Whether similar conditions exist for other comparables require examination and adjustment towards working capital – assessee furnished detailed annexure making working capital adjustment to justify 3.30% sought by Assessee as against 1.38% given the TPO - Relying upon M/s Bearing Point Business Consulting Pvt. Ltd. vs. DCIT [2014 (4) TMI 997 - ITAT BANGALORE] - working capital adjustment require verification by the TPO, thus, the matter is remitted back to the TPO for examination – Decided in favour of Assessee. Setting off of brought forward losses and unabsorbed depreciation before giving effect to deduction u/s 10A – Held that:- The decision in CIT v. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court] followed - deduction u/s 10A of the Act has to be computed prior to setting of losses of other industrial units - The AO is directed to rework out the computation of income – Decided in favour of Assessee. Issues Involved:1. Rejecting the contemporaneous data and undertaking fresh comparable.2. Ignoring segment-wise data provided by the Assessee.3. Wrongly applying ALP at entity level instead of restricting to transactions with AEs.4. Selection of wrong comparables by the TPO.5. Using a higher threshold for related party transactions.6. Employee cost filter.7. Improper calculation of working capital adjustment.8. Setting off of brought forward losses and unabsorbed depreciation before giving effect to deduction u/s 10A.Detailed Analysis:(A) Rejecting the contemporaneous data and undertaking fresh comparable:1. Assessee contended that the TPO used comparable data unavailable at the time of preparing the TP documentation, violating the principle of natural justice. The TPO should have allowed Assessee to re-prepare the TP documentation considering the data available during assessment proceedings.2. The Tribunal held that comparable data available at the time of TPO's analysis should be used, provided it was made available to Assessee for objections. Since TPO provided enough opportunity to Assessee, the Tribunal found no merit in Assessee's contentions. Ground No. 3(i) was rejected.(B) Ignoring segment-wise data provided by Assessee:1. Assessee argued that it has three business verticals with separate profit centers, and the segmental data should be considered for benchmarking. The TPO rejected this data, citing it was not audited.2. The Tribunal found merit in Assessee's contention, noting that the AO himself categorized profits for different units while considering deduction u/s 10A. The Tribunal directed TPO/AO to consider GIS services, Engineering Services, and Software services separately for benchmarking.(C) Wrongly applying ALP at entity level instead of restricting to transactions with AEs:1. Assessee argued that the TPO made the addition based on overall profit instead of considering the margin from AE transactions, resulting in an addition with reference to non-AE transactions.2. The Tribunal upheld Assessee's objection and directed the AO to re-work the addition only with reference to AE transactions, not on non-AE transactions, following the decisions of coordinate benches.(D) Selection of wrong comparables by the TPO:1. Assessee objected to certain comparables selected by the TPO, arguing they were not comparable due to extraordinary events or different business models.2. The Tribunal directed the AO/TPO to exclude certain companies like Accentia Technologies Ltd., Eclerx Services Ltd., Mold Tek Technologies Ltd., Vishal Information Technologies Ltd., HCL Comnet Systems & Services Ltd., Infosys BPO Ltd., Wipro Ltd., Asit C Mehta Financial Services Ltd., and Triton Corporation from the list of comparables while determining ALP.(E) Using a higher threshold for related party transactions:1. Assessee contested the higher threshold for related party transactions.2. The Tribunal found no need to separately adjudicate on this filter as Assessee's objections to other comparables were already addressed.(F) Employee cost filter:1. Assessee contested the employee cost filter.2. The Tribunal found no need to separately adjudicate on this filter as Assessee's objections to other comparables were already addressed.(G) Improper calculation of working capital adjustment:1. Assessee argued that the TPO did not correctly calculate the working capital adjustment by ignoring advances from customers.2. The Tribunal restored the issue to the file of TPO to verify Assessee's claim and correctly compute the working capital adjustment.(H) Setting off of brought forward losses and unabsorbed depreciation before giving effect to deduction u/s 10A:1. Assessee contended that deduction u/s 10A should be computed without considering losses of other units, supported by the judgment of the Hon'ble High Court of Karnataka in the case of CIT v. Yokogawa India Ltd.2. The Tribunal followed the decision of the Hon'ble Karnataka High Court and directed the AO to rework the computation of income, holding that deduction u/s 10A has to be computed prior to setting off losses of other industrial units.Conclusion:The appeal of Assessee was partly allowed for statistical purposes, with directions to the AO/TPO to exclude certain comparables, consider segmental profits, and rework the addition and computation of income accordingly.