TaxTMI 
TaxTMI 
2011 (3) TMI 560
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....t. 2.1 Based on the facts and circumstances of the case, there was neither necessity nor expediency for such reference as there was no attempt on the part of the appellant to willfully understate the value of its international transaction. 2.2 Further, the learned CIT(A) has erred in not appreciating the fact that no opportunity was provided by the learned AO to the appellant before referring the transfer pricing issues to the learned TPO. 3. The learned CIT(A) erred in confirming that the Assessing Officer was justified in relying on the order of the TPO as he was in consensus with the order. The appellant prays that the same is in violation of principles of natural justice as the AO has not independently applied his judgment to the order of the TPO with due cognizance to the appellant's various rebuttals and has mechanically accepted the conclusions stated in the TPO's order. 4. The learned CIT(A) has erred, in law and in facts, in confirming the order of the TPO/AO by holding that the international transaction of the appellant is not at arm's length. 5. The learned CIT(A) has erred, in law, and in facts, in confirming the approach of th....
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....tion 143(1) on 14.7.2003 and the assessee was issued a refund of Rs.9,11,106. The case was selected for scrutiny as per the guidelines issued by CBDT and a notice under section 143(2) was issued on 20.10.2003. During the assessment proceedings under section 143(3), the Assessing Officer observed that the assessee has paid a sum of Rs.43,46,72,000 to its holding Co., G D Express World Wide, Netherlands towards cost recharges. Since the transaction was international transaction and involved transfer pricing, a reference was made under section 92CA to the Transfer Pricing Officer (in short TPO), Bangalore after getting the approval of the CIT for determining Arms' Length Price ( in short 'ALP') in relation to the above international transaction. The TPO vide order dt.15.3.2005 determined the 'ALP'. The order of the TPO, in brief is as follows; 2.1 The assessee is a wholly owned subsidiary of GD Express Worldwide NV, Netherlands which is ultimately controlled by TPG NV (in short 'TPG'), Netherlands. The operating subsidiaries of TPG provide express, Logistic and mail services and it includes door to door delivery of documents, parcels and freight services. The assessee is a c....
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....e shared by the group. (iii) TNT India uses the trade marks, process, know how, technical data software, operating/quality standards etc developed/owned by TPG or TPG Group companies. (iv) Risk including market risk, product liability risk, credit risk, man power risk, foreign currency risk, legal and statutory risk, political risk are shared. (v) For arriving at the Arm's Length Price (ALP) the assessee has adopted the Transactional Net Margin Method (TNMM) with operating profit/sale as Profit Level Indicator (PLI) as the most appropriate method. (vi) From the data base, tax payer has identified four courier company as comparable and arithmetical mean of their PLI comes to 3% where as tax payer's PLI comes to 1% which lies within the 5% margin. (vii) The data used pertains to 2000-01 & 2001-02 and hence not contemporaneous. But however, use of prior year data is permissible under Rule 10B(4). The tax payer has calculated 'ALP' in the following manner. Particulars Actual Based on Arm's Length Profit Margin +/- 5% Range Service Income 1,010,642 1,010,642 1,010,642 Other Operating income 13,700 13,700 ....
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....d the prices of services rendered based on past performance of the comparable enterprises, the objection of the assessee is not tenable. 4. As regards the second objection, he held that for comparable analysis, the profit and loss of the tax payer company as well as the comparable enterprises was calculated in the same manner excluding the same items of income and expenditure, therefore there is no need to make any further adjustments as the comparison was made between the likes. He accordingly made adjustment under section 92CA by computing the 'ALP' at Rs.39,40,07,000 and observed that the price paid by the TNT-India exceeds +5% range and cost of services received from AE debited to profit and loss account has to be adjusted. Accordingly, he made adjustment of Rs.4,07,54,000. 4.1 The Assessing Officer considered the order of the TPO and computed the income of the assessee having regard to the 'ALP' determined by the TPO. The total income was computed at Rs.5,19,18,370 and after setting off brought forward losses of earlier assessment years 1996-97, 1997-98 and 1998-99, the balance amount was NIL and the tax payable was also NIL. Aggrieved by the order of the A....
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....es effect from 1.4.2001 to 31.12.2001. However, she observed that what is extraordinary is the complete absence of any mention of a methodology or a formula or a basis for allocating such costs for purposes of reimbursement by GDEW and that there is no way of ascertaining whether there was any accuracy in the methodology for appropriating costs allegedly incurred by the appellant or that what the appellant was charging GDEW on account of line haul, delivery and clearance was purely costs incurred and did not contain any element of mark-up and on examining the transport recharge agreement between the assessee and the TNT Group, it was ascertained that it was in order to comply with the transfer pricing mechanism set out in the cost allocation and recharge report by M/s. KPMG for provision of TNT Network Services that this agreement was entered into and that the underlying objective of the TNT Group's Network Cost Allocation Systems as laid down in the Transport Recharge Agreement was basically to ensure that all inter-company transfer of services and cost allocations related to or in connection with the provision of network services, adhere to the 'ALP' as outlined in the OECD guide....
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....n entity of a foreign group company based on the portion of services it receives in relation to the total costs of that company in providing such services under the Service Agreement constituted consideration for availing services on the basis of allocation determinable on a proportional percentage of budget turnover weighted by growth rate and market maturity of the group company availing the services and any increase or short fall in the actual turnover would proportionately increase or decrease the portion of cost to be absorbed by the group company which avails services from the foreign company and it was further held that even assuming that the fees charged by the Singapore company to the applicant and similarly situated group companies is equivalent to the expenses incurred by it in providing the services and there is no profit element, it would then be a case of quid pro quo for the services fees and not of reimbursement of expenses and that the applicant was liable to deduct tax at source under section 195 from the payments made towards such service charges. Thus the CIT(A) held that the payment made by the group companies to other companies is in consideration of services ....
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.... latest by the due date of filing of the income-tax return and this requirement does not override the provisions of Rule10B(4) of the Rules regarding mandatory use of current financial year data for conducting comparability of data analysis. She accordingly held that the TPO was well within his powers to admit fresh available data by using contemporaneous data and not non-contemporaneous data used by the assessee. 7. The next ground of appeal raised by the assessee before the CIT(A) was against the order of TPO in adopting the PBIT/sales as the profit level indicator (PLI) instead of operating profit/sales adopted by the assessee. It was contended that while adopting the PLI as PBIT/sales the TPO should have excluded non-operating income and expenses in comparing the profits of the assessee with those of the comparable companies based on the wrong assumptions that the comparison of PBIT/sales of the assessee as well as the comparables was on like basis and therefore, there was no need to make any further adjustments to the PBIT of comparable companies and in arriving at the margin. The assessee had excluded certain types of income which are non-operating in nature, such a....
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.... cases where the variations were substantial and exceeded the permissible tolerance bank of plus or minus 5%. She observed that the contents of the Circular were brought under the statute by the Finance Act, 2002 by amending the proviso to sec.92(2) of the IT Act with retrospective effect from 01-04-2002 to provide for the tolerance band. But, this proviso does not give any scope for the standard deduction i.e if ALP falls outside the tolerance band, the TP adjustment would have to be made for the difference between the ALP determined by the AO based on the arithmetical mean of the prices and the price shown by the assessee. She then upheld the order of the TPO as regards this issue. 7.3 Aggrieved by the order of the CIT(A), the assessee is in appeal before us. Though, the assessee has raised as many as thirteen grounds in its appeal memo, we find that all the grounds revolves around the main grievance of the assessee i.e that the international transaction of the assessee was at Arm's Length and that multiple year data should have been considered for determining the ALP as done by the assessee and that the CIT(A) and the TPO have erred in including non-operating income an....
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.... international transactions should be accepted without further scrutiny. 9.1. Learned DR on the other hand, supported the order of the CIT(A) and submitted that this issue is covered by the decision of the Special Bench of the ITAT in the case of M/s Aztec Software & Technology Ltd., Vs ACIT (2007) 107 ITD 141(Bang.). 9.3 Having gone through the material and the decision of the Special Bench of ITAT in the case cited supra, we find that the Tribunal has held that the AO is not required to demonstrate the existence of the circumstances set out in clauses (a) to (d) of sec.92C(3) before referring the case of the assessee to the TPO for determining the ALP under sec.92CA(1). In view of the same, we did not see any reason to interfere with the orders of the CIT(A) on these issues and the grounds of appeal nos.4 & 5 are rejected. 10. As regards grounds no.6 & 7, learned counsel for the assessee submitted that in determining the ALP of the international transaction entered into by the assessee, the data pertaining to FY: 2001-01 of the comparable companies was not available at the time of complying with the requirement of maintaining the documents and therefore, th....
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.... the fluctuation caused by business/economic/product life cycle would in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of use of multiple year data, except placing reliance upon the OECD guidelines and also the proviso to Rule 10B(4) of the IT Act, we do not see any reason to interfere with the order of CIT(A). The OECD guidelines are not of binding nature and even the provisions to Rule 10B(4) only provides that any subsequent year data cannot be considered. As rightly held by the CIT(A), the contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless, it is proved otherwise. These grounds are also accordingly rejected. 11. As regards ground no.8, that the assessee has not been given an opportunity for inclusion of a new company for determining the ALP is concerned, we find that this is not acceptable because, the CIT(A) has clearly observed that M/s Gati Ltd., which is the comparable taken by the CIT(A), was the comparable taken in subsequent financial year and the assessee ha....
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.... 105,958,000 Operating profit/Ope rating revenue(%) 050% 1.91% 2.51% -0.58% 4.20% 12.3 The learned counsel for the assessee further pointed out that the CIT(A)/TPO have considered the PBIT/sales as the profit level indicator and contended that the PBIT excludes interest component and hence no adjustment for non-operating items is warranted. But according to him, the PBIT only excludes the interest expenses and does not exclude non-operating incomes or certain non-operating expenses like loss on sale of assets, donations etc., which form part of expenses which is considered for arriving at PBIT value. In support of his contention, learned counsel for the assessee placed reliance upon the decisions of the Tribunal in the case of M/s Mentor Graphics (P) Ltd., Vs DCIT (2007) 109 ITD 101 and also in the case of M/s Sony India Pvt.Ltd., Vs DCIT (114 ITD 448) (Del.) wherein a reference was made to use the operating profit for computing the net margin of comparable companies. 12.4 In addition to the above, the learned counsel for the assessee also submitted that there exists differences in the accounts receivables and account payables of comparable compani....
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....he likes and on the equitable grounds of the indicators of the comparison and therefore, only the income derived from the operation of the said activity are to be considered. Similarly, the working capital adjustments also have to be considered while arriving at the operating net margins. In view of the same, we deem it fit and proper to remand to the file of the AO/TPO to re-work out the operating margins of the comparables of the assessee and to make the adjustments of the transfer pricing accordingly. This ground is allowed for statistical purposes. 14. As regards ground no.10, the learned counsel for the assessee submitted that the transport re-charge agreement was entered into by the assessee with M/s TNT Express on 01-04-2001. The same was modified on 01-01-2002 and the change in the agreement was brought about due to the change in the transfer pricing mechanism of M/s TNT Group for usage of the work. He submitted that pursuant to an amended agreement dated 31-12- 2001 the payments was not marked up and the assessee reimbursed the actual cost for the professional services therefore, this cost has no impact on taxable income and hence, should not be considered in making the....