2015 (12) TMI 1811 - AT - Income Tax

Appeals Granted for Margin Verification with Caution on Adjustment Limits.

The Tribunal allowed the appeals for statistical purposes, directing the Assessing Officer to verify the actual margin earned by the associated enterprise ... TP adjustment - actual margin earned by AE - MAM - application of TNMM - HELD THAT:- We take note that as per the chart placed on record AE has charged revenue of ₹ 26.63 crores from the customer, whereas value of ALP as determined by the TPO considering the adjustment in the case of appellant and M/s Interra Information Technologies India (P) Ltd. is ₹ 31.21 crores. Thus total value of ALP exceeds the revenue charged by AE from customer. Moreover it is also noticed that AE has incurred loss of ₹ 4.34 crores and there is no margin retained at the end of AE on value of international transactions. Adjustment in no case can exceed the amount received by the AE from third party. However since the details of AE available on record are only upto 31.3.2007 and not upto 31.3.2008, we restore the matter to the file of the AO since the learned counsel has during the course of hearing stated that appellant company will cooperate and provide all documents to find out the revenue earned by the AE upto 31.3.2008 including production of books of accounts. Accordingly AO is directed to verify the actual margin earned by AE and make an addition, if any considering the principle stated above. The appellant company is directed to produce the entire accounts of AE for verification of its income. Needless to state fair and proper opportunity will be provided by TPO/AO to the appellant company. Ground No. 2.9 is therefore allowed for statistical purposes. Issues Involved:1. Completion of assessment under section 144C/143(3) of the Income-tax Act, 1961.2. Addition of Rs. 3,06,25,340 for the alleged difference in the arm's length price of international transactions.3. Application of additional filters by the Assessing Officer/Transfer Pricing Officer (TPO).4. Use of information obtained under section 133(6) by the Assessing Officer/TPO.5. Consideration of high turnover companies like Infosys Ltd. and Wipro Ltd. as comparables.6. Rejection of certain companies as comparables by the Assessing Officer/TPO.7. Non-allowance of adjustment for low capacity utilization.8. Nature of the appellant's business and its impact on profitability.9. Losses incurred by the associated enterprise.10. Risk adjustment for the appellant operating as a low-risk bearing contract service provider.11. Objections filed by the assessee and the decision of the Dispute Resolution Panel (DRP).12. Verification of the actual margin earned by the associated enterprise (AE).Detailed Analysis:1. Completion of Assessment under Section 144C/143(3):The appellant challenged the assessment completed under section 144C/143(3) of the Income-tax Act, 1961, which resulted in an assessed income of Rs. 3,07,03,338 against the returned income of Rs. 78,048.2. Addition of Rs. 3,06,25,340 for Alleged Difference in Arm's Length Price:The Assessing Officer made an addition of Rs. 3,06,25,340 based on the TPO's order under section 92CA(3) of the Act. The appellant contended that the TPO erred in applying additional filters and relying on non-public information, among other issues.3. Application of Additional Filters:The appellant argued that the TPO applied additional filters such as the percentage of wages to sales, persistent losses, and declining revenue, which should be based on a Functional, Asset, and Risk (FAR) analysis rather than financial results. The TPO's inconsistent approach in eliminating loss-making companies without eliminating high-margin companies was also contested.4. Use of Information Obtained Under Section 133(6):The appellant contended that the TPO relied on information obtained under section 133(6), which was not available in the public domain, and thus should not have been used for comparison purposes.5. Consideration of High Turnover Companies:The TPO included high turnover companies like Infosys Ltd. and Wipro Ltd. as comparables. The appellant argued that these companies should be excluded based on judicial precedents that high turnover companies are not comparable to smaller entities.6. Rejection of Certain Companies as Comparables:The TPO rejected companies like Maars Software International and Compulink Systems Ltd. on the basis that they render onsite services. The appellant contested this rejection, arguing that the selected companies were not functionally comparable.7. Non-Allowance of Adjustment for Low Capacity Utilization:The appellant argued that the TPO did not allow an adjustment for low capacity utilization, which impacted the profitability of the appellant.8. Nature of Business and Profitability:The appellant emphasized that it is engaged in low-end software maintenance services, resulting in low combined profitability with its associated enterprise. The TPO did not appreciate this aspect, leading to an incorrect assessment.9. Losses Incurred by Associated Enterprise:The appellant pointed out that its associated enterprise incurred losses, while the appellant consistently earned profits. This fact was not adequately considered by the TPO.10. Risk Adjustment:The appellant operates as a low-risk bearing contract service provider and argued that an appropriate risk adjustment was warranted, which the TPO failed to consider.11. Objections Filed by the Assessee and DRP Decision:The objections filed by the assessee were substantially rejected by the DRP, except for the exclusion of Celestial Bio Labs as a comparable. The DRP upheld the TPO's adjustments, leading to the appellant's appeal.12. Verification of Actual Margin Earned by AE:The Tribunal noted that the AE charged revenue of Rs. 26.63 crores from the customer, while the ALP determined by the TPO was Rs. 31.21 crores. The Tribunal held that the adjustment cannot exceed the amount received by the AE from third parties. The matter was restored to the AO for verification of the actual margin earned by the AE, with directions to provide fair and proper opportunity to the appellant.Conclusion:The Tribunal allowed the appeals for statistical purposes, directing the AO to verify the actual margin earned by the AE and make any necessary adjustments. The remaining grounds were not adjudicated as they were either not argued or of academic significance. The Tribunal emphasized that the adjustment should not exceed the amount received by the AE from third parties, aligning with judicial precedents.