TaxTMI 
TaxTMI 
2009 (10) TMI 591
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....sed company by the name of Quark Systems SARL, Switzerland (QSSS). If is a captive unit working exclusively for its parent company. On 1 April 2001 the assessee entered into a service contract with its parent company which inter alia provided that the assessee will render following technical services to the parent company. 3.1.1 Advisory services in relation to business systems and processes, data processing data integration, system integration, system upgradation, system planning, installation and other modification, network services, add-on systems, off site and on site projects, telecom and electronic communication, facilities management, evaluation, programming, software and system implementations, software development and software services; 3.1.2. Feasibility study for the projects from time to time, including market survey, and preparation of project reports, 3.1.3 Explore for adaptation the requisite local technology, expertise and skill. 3.1.4 Assist in the manufacture, development and modification of Software according to the required standards and technology; 3 1.5 Assist in research and development. 3.1.6 Advise proper marketing, selling and distributio....
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....independent companies PROWESS contains financial date of over 81 largely publicly trading companies. The data is collected form annual / quarterly results, government reports and other sources. This is one of the most reliable and correct database to search the comparable independent companies. What ever-financial information, this database has reveal, we have incorporated in our transfer pricing study and furnished to Your Honour. Further, we have furnished that this company was incorporated in the year 2002. There, the question with regard to data for the year 2001 does not arise. Further data relating to 2002 to 2003 is not available There could be the possibility that the company might not have commenced any activities. The available data is only for the year 2004 and this is complete, reliable and sufficient and has already been provided to your Honour. In the light of the above, your Honour will find that the financials relating to this company are sufficient. Further your Honour cannot ignore comparable independent companies on the ground that the data for the prior year are not made available. 6. While no dispute was raised on the other comparables, the aforesaid c....
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.... so granted by the CIT(A) with reference to 5% relaxation in terms of provisions of section 92C(2) of the Act. Both the parties are now in appeal before us. 9. In addition to the above two issues, one more issue is raised for our consideration. This is raised by the assessee as an additional ground of appeal. It is assessee's contention that one of the independent comparable which has been included by the assessee as also by the TPO, has been wrongly included in the comparable for more reasons than one. Firstly according to the assessee, in the case of Data Matrix Technologies Lid. out of total sales of Rs 54.85 crores, its transactions with the associated concern amount to Rs. 17.15 crores which works out to 31.27% of the total sales made by the Datamatics Technologies Ltd. The assessee submits as is the accepted transfer pricing practice in terms of O.E.C.D. guidelines, as also sanction by law in india. such transactions with the associated parties cannot be considered as uncontrolled transactions. It is also submitted that there is an arithmetical error on account of which operating expenses of Rs 579 crores were not taken info account white aggregating total expenditure as a....
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....rm's length price". The learned representative has agreed that the matter needs to be reconsidered by the Assessing Officer in the light of the amendment in law, we are not addressing ourselves on this issue Ld counsel for the assessee, however, invited our attention to the fact that the amendment cannot be viewed as retrospective as it is effective from 1st October 2009. Since the matter is being remanded to the file of the Assessing Officer for adjudication de-novo we need not address ourselves to this issue to save and except for observing that assessee is at liberty to raise all such contentions as he deems fit including above contention before the Assessing Officer and direct the Assessing Officer to deal with the contentions of the assessee by way of a speaking order after giving due and fair opportunity of hearing to the assessee and in accordance with law. We leave it there. 13. In the result, as far as the appeal filed by the Revenue is concerned, the same is allowed for statistical purposes in the terms indicated above. 14. "That takes us to the appeal filed by the assessee. As we have mooted earlier in this order the main issue agitated by the assessee is that the ....
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.... by way of long term loans, on a conceptual note it does not make a difference in as much as both the items i.e. equity capital and long term loans are part of the capital. Learned counsel then invited our attention to the reason of low turn over of M/s Imercius Technologies India Pvt Ltd on account of which the comparable was rejected. Learned counsel pointed out that no doubt the turn over of the assessee company is 13.6 crores whereas the turn over of M/s Imercius Technologies India Pvt Ltd is Rs 1.46 crores The mere fact that the turn over of M/s Imercius Technologies India Pvt Ltd is low does not render it incomparable. He submitted that a turn over filter of- Rs One crore was applied to the entities included in the Prowess database in response to a question from the Bench he admitted that no filter was applied to the higher turn over. In other words according to the ld counsel for the assessee of Companies engaged in the similar business as the assessee were included in the comparable as long as their turn over was more than Rs. 1 crores. In response to a question from the Bench, ld counsel for the assessee admitted that no filter were applied on the basis of assess based of ....
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....ble included in the computation of mean profits to comparables units is of Data Matrix Technologies Ltd it was pointed out that Company details including the balance sheet of the said comparable was before the learned Commissioner and that the net profit to cost ratio interest in the said case was as high as 138%. Learned counsel submitted that when a high loss making unit is to be ignored for the purpose of comparable to be taken into account for computation of mean profit, on the same logic, the company showing in such high profit as 138% Of operating profit to cost should also be excluded. It was submitted that as evident from financial statement of the said company and the disclosure made therein by way of notes to accounts, Data Matrix Technologiies Ltd had huge transactions with the associated enterprises. It was the case of the assessee that on account of these intra associated enterprises transactions, the comparability of Data Matrix Technologies Ltd is also vitiated in law. Learned counsel did admit that Datamatics Technologies Ltd was included in transfer pricing study given by the assessee himself but according to him it cannot be open to the Revenue authorities to blow....
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....tments should be given on account of low risk profile of the assessee company. 20. On the strength of those submissions, learned counsel urges us to hold that M/s Imercius Technologies India Pvt Ltd should be included as a comparable for the purpose of computing mean profit so as to arrive at arm's length price and also to direct that Datarnatics Technologies Ltd is to be excluded form the list of comparables for the said purpose. In addition to these two prayers, learned counsel also seeks adjustments to the profits to tested parties mainly on account of low risk. 21. Shri S.D. Kapila, learned Special counsel for the assessee vehemently opposes the admission of the additional ground regarding excluding of Datamatics Technologies Ltd at this stage. He submits that Datamatics Technologies Ltd was included in the list of comparable given by the assessee himself, therefore, there is no good reason for the assessee to back out from the same. In all fairness, he did accept that the computation of operating profits of Datamatics Technologies Ltd is indeed vitiated in as much as operating profits of 5.79 cores have not been taken into account to arrive at correct figure of operating....
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....s it would amount to revisiting entire transfer pricing study, and that the remand should be confined to the question as to whether or not a particular comparable can be taken into account or not. 22. As regards the exclusion of M/s Imercius Technologies India Pvt Ltd from the list of comparable, Shri Kapila invited our attention to the Director's report in the case of M/s Irnercius Technologies India Pvt Ltd which categorically states that M/s Imercius Technologies India Pvt Ltd is in the business of rendering telemarketing services which is neither an Information Technology nor in an Information Technology Enable Services. He submits that the telemarketing services is an entirely different service in approach and it cannot be compared with a high technical driven service like one being done by the tested party. Learned counsel submits that the activities undertaken by the assessee are not even functionally similar with this comparable. It is submitted that no FAR is conducted at any stage nor is it successfully demonstrated that the activities of the assessee are the same, or even materially similar, to this comparable. Learned counsel submits that for this short reason alone,....
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....lusion in the compatibles. The functions performed by the assessee are, as noted in paragraph 3 above, are in the nature of sales and support services for the parent company, whereas the functions performed by Imercius, as evident from the directors report of the said company - which is part of the records, are in the nature of telemarketing services. Sales support and technical services are inherently of different character and scope than telemarketing services. In telemarketing, fluctuation of profits is very high as the gains are contingent upon the results obtained. The earnings of a telemarketing company are usually a percentage of the sales generated. As against this, in sales and technical support provided by the assessee before us, the gains are not dependent on the business results generated by the services rendered inasmuch as the profits of the assessee are dependant on the services actually rendered by the assessee and are not contingent upon the business results generated by such services. A plain function of service rendered by the Immercus would show that if these functions are not compatible with that of the assessee nor these functions belong to the genus to which ....
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.... will indeed be gross mis-carriage-of justice, if we allow these mistakes to be perpetuated. We further add that all the data, to which reference has been made by Shri Aggarwal is available in the balance sheet of Datamatics and is part of record available in public domain it will not be correct to have lope-sighted view and make selection of such figure as would serve one's purpose. Every detail in the process for determination of fair arms length price, as is relevant, has to be considered so that a fair view is adopted. Relevant provisions of Transfer Pricing: 28. At this stage, we deem it necessary to refer to the relevant Indian Regulations on Transfer Pricing and to some case laws. 29 Under Rule 10B of Income-tax Rules, provision is made for various methods for determination of arms length price. Clause (e) of this rule relates to the step required to be taken where Transactional Net Margin Method (TNMM) is applied Sub-clause (i) of the said sub-rule is as under : "10B. Determination of arm's length price under section 92C (1) (a) x x x x x (b) x x x x x (c) (d) (e) transactional net margin method, by which - (i) the net profit margin realized by....
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....at appellate stage. Besides, Revenue authorities, including TPO were required to apply statutory provisions and consider for purposes of comparison functions, assets and risks (turnover), profit and technology employed by the tested party and other enterprises taken as comparable Statutory duty is cast on them to undertake above exercise. This has not been done in this case. We would only say that prima facie, as per the material, to which reference has been drawn by Shri Agarwal, Datamatics does not appear to be comparable. Even if the taxpayer or its counsel had taken Datamatics as comparable in its I P audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercius Technologies, has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover. Besides differences in assets and other characteristics referred to ....
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....n profits. We do not see any force in this contention. Whether the respondent is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot he estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law." 34 In the case of CIT vs. V.M.R.P.Firm, Muar (SC) 56 ITR 67,the following observations of their Lordship of Supreme Court are as under: "The decision in Amarendra Narayan Roy Vs CIT AIR 1954 Cal 271 has no bearing on the question raised before us. There the concessional scheme tempted the assessee to disclose voluntarily ail his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present....