TaxTMI 
TaxTMI 
2011 (3) TMI 560
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....nces 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 the learned TPO/AO in rejecting the data used by the appell....
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....6. 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 courier company operating within the Indian territory and its functions includ....
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.... 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 13,700 Total Cost Related 434,761 414,543 435,270 Cost Unrelated 579,480 579,480 579,480 Operating Profit 10,191 30,3....
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....oss 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 Assessing Officer on adopting the 'ALP' determined by the TPO and assessing the income accordingly, the assessee preferred an appeal before the CIT(A). 4.2 Before the CIT(A), the assessee had also raised a ground of appeal relating ....
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....ere 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 guidelines. From a plain reading of the clause D of the agreement, the CIT(A) observed that in the network cost allocation systems, the activities of a TNT group are classified as either "invoicer" or "partner" related and for each consignment that....
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.... 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 rendered and it cannot be considered to fall under the category of reimbursement even if such payments are equivalent to cost. 6. The next ground of appeal raised by the assessee before the CIT(A) was against the order of TPO/AO in rej....
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....ccordingly 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 as dividend, investment income, interest income, lease rental, profit on sale of assets etc. However, from a perusal of the margin computation furnished by the assessee in respect of three of the comparables namely M/s Elbee Services Ltd., Patel On-b....
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....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 and expenses in computing the profits of the comparable companies and also that the CIT(A) and TPO did not provide the benefit of Arm's Length range of + or - 5%, while making the adjustments. 8. As regards ground no.1, we find that it is general in....
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....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, the assessee had used the financial information of the comparable companies for a prior period of 2 years i.e. FY: 2000-01 and the FY: 1999-2000 which is also in accordance with the proviso to Rule 10B(4). He submitted that the use of multiple year data generally cap....
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....ar 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 had raised no objection to the same, when the nature of services are the same and the risk involved are also the same. We do not see any reason as to how the assessee can raise such an objection during the relevant assessment year. This ground of appeal is accordingly reje....
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....IT 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 companies vis-a-vis the assessee, and the AO has to appreciate the adjustment as required to make these changes and accordingly to compute the margins. 12.5 He submitted that to improve the reliability of the results, the comparable companies data are required to be adjusted for these differences, because the adjustments ensure that absolute levels of the relevant balance sheet items are norma....
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....e 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 said adjustments. He submitted that after modification of the agreement on 01-01-2002, the assessee was to make the payment with a mark up as was charged by the affiliates. The assessee therefore, prayed that reimbursement of expenses between 01-01-2001 to 31-12-2001 should not be required to be excluded both from the operating costs as well as operating income while computing the operating profit at the net marg....