TaxTMI 
TaxTMI 
2012 (6) TMI 478
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....Associated Enterprises of more than 5 crores, AO made a reference to TPO for determining Arm's Length Price (ALP). 3. The TPO has stated that assessee adopted the following methodology for determining ALP in respect of IT enabled services. ♦ The assessee has adopted TNMM . ♦ Profit level indicator is the net operating margin on operating cost (OP/OC) ♦ The assessee is the tested party. ♦ 14 companies were identified as comparables in Indian database with the mean of the comparables at 9.59%, by using Indian database The assessee's operating margin (to operating cost) is at 19.73% for the ITES, as against arithmetic mean of 14 comparables at 9.59% . 4. TPO has stated that for IT services, assessee adopted for determining ALP by following methodology. ♦ The assessee has adopted TNMM. ♦ Profit level indicator is the net operating margin on operating cost (OP/OC) ♦ The assessee is the tested party. ♦ 22 companies were identified as comparables in Indian database with the mean of the comparables at 10.24%. The assessee's operating margin for IT ....
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.... Consulting Ltd. (Seg.) 29.58% 8 Caliber Point Business Solutions Ltd. 21.26% 9 Cosmic Global Ltd. * 12.40% 10 Datamatics Financial Services Ltd. (Seg.) 5.07% 11 Eclerx Services Ltd. 90.43% 12 Flextronics Software Systems Ltd. (Seg.) 14.54% 13 Genesys International Corporation Ltd. 13.35% 14 H C L Comnet Systems & Services Ltd. (Seg.) 44.99% 15 I C R A Techno Analytics Ltd. (Seg.) 12.24% 16 Informed Technologies India Ltd. 35.56% 17 Infosys B P O Ltd. 28.78% 18 IServices India Pvt. Ltd. 50.27% 19 Maple Esolutions Ltd.* 34.05% 20 Mold-Tek Technologies Ltd. 113.49% 21 R Systems International Ltd. (Seg.) 20.18% 22 Spanco Ltd. (Seg.) 25.81% 23 Triton Corp Ltd. 34.93% 24 Vishal Information Technologies Ltd. 51.19% 25 Wipro Ltd. (Seg.) 29.70% Arithmetic Mean 30.75% 7. It is relevant to state that in the above list given by department, 3 comparables are common to assessee's remaining 8 comparables, the names of which are above at S. No. 2,9 and 19. The assessee vide its objection letter dt. 10th Septe....
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....ce and adjusted (+/-5%) mean price. 8. However, TPO did not agree with the contention of assessee and reasons given by him are as under: "(i) These 25 comparable companies for ITES segment also includes 3 comparable companies selected by the assessee itself, which are selected on the basis of similar functions performed by the assessee, Therefore, the objection of the assessee regarding inclusion of functionally incomparable companies is not tenable. (ii) Claim of the assessee such as use of multiple year data, working capital adjustment, risk adjustment, etc. are not acceptable. The data adopted by the assessee to arrive at the mean is old data and pertains to earlier years also, which is not correct. Under Rule 10B(4) of the Income tax Rules, 1962, the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be data relating to the financial year in which the international transaction has been entered into. Hence, the data of F.Y. 2006-07 alone have to be used. (iii) The assessee vide letter dated 10.09.2010, explained the working capital adjustment, which is in line with the OECD transfer ....
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....0 Department Arithmetic Mean 27.84 10. In view of above, TPO recommended upward adjustment of ALP of assessee's international transaction to its AEs by adopting arithmetic means of 27.84% which comes to Rs. 9,29,93,817/- of IT Enabled Services. 11. The AO prepared draft assessment order dt. 8th October, 2010 recommending upward adjustment of ALP of Rs. 9,29,93,817/- to DRP u/s. 144C(2) of I.T. Act. 12. The assessee filed its objection before DRP which are summarized in para-4 as under: In the proceedings before us, following main grounds were inter-alia taken: ♦ TPO did not allow working capital adjustment despite the fact that Hon'ble Dispute Resolution Panel in A.Y.2006-07 had directed to allow working capital adjustment. ♦ TPO erroneously considered that the IT support services were similar to the back support services and accordingly aggregated the two segments to benchmark together. ♦ TPO did not consider the assessee's submission rejecting the alleged comparables and providing margin computation of alleged comparables from the Annual Report. - The TPO did not follow syst....
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....vant details of comparables (more than 10 in No. in the present cases) is required and it requires an exhaustive exercise to be done before giving working capital adjustment. Therefore, AO did not give any working capital adjustment to assessee while making the assessment order. Being aggrieved, assessee filed this appeal before us on the following grounds: "Addition to total income Rs. 9,29,93,817 1. On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') under directions issued by the Hon'ble Dispute Resolution Panel ('DRP'), erred in making an addition of Rs. 9,29,93,817 to the Appellant's total income based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). The learned AO disregarded the directions of the Hon'ble DRP to give working capital adjustment 2. On the facts and in the circumstances of the case and in law, the learned AO erred in relying on Section 92CA(4) of the Act and further erred in making incomplete reference to Section 144C( 13) of the Act and confirmed the adjustment made....
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....er. Incorrect selection of comparables by the learned TPO 7. On the facts and in the circumstances of the case and in law, the learned TPO erred and the Hon'ble DRP further erred in upholding I confirming the action of TPO in selection of the companies which are either not comparable or are having controlled transactions despite the detail submissions filed by the Appellant. Risk adjustment disallowed 8. On the facts and in the circumstances of the case and in law, the learned TPO / AO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO / AO in not allowing risk adjustment in accordance with the provisions of Rule 10B of the Rules to account for difference between international transactions and the alleged comparable uncontrolled transactions selected by the learned TPO / AO. Disregard of multiple year data contention 9. On the facts and in the circumstances of the case and in law, the learned TPO / AO erred and the Hon'ble DRP further erred in upholding/confirming the action of the learned TPO / AO in rejecting the without prejudice contention of the Appellant to compute t....
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....he case and in law, the Hon'ble DRP erred in issuing the direction which is not in pursuant to Section 144C(8) of the Act. Issue of inappropriate directions by the Hon'ble DRP has caused immense hardship on the Appellant. The Hon'ble DRP ought not to have issued any direction to the learned AO for any further enquiry before allowing the working capital adjustment to the Appellant, as the said workings along with relevant details were made available to the learned TPO during the transfer pricing assessment proceeding and to the learned AO and Hon'ble DRP during the DRP proceedings. The Hon'ble DRP ought to have conducted enquiry, if any pursuant to Section 144C(7) of the Act before issuing any directions. Lesser credit for Tax Deducted at source ('TDS') has been granted 15. On the facts and in the circumstances of the case and in law, the learned AO has erred in not providing credit for TDS to the extent of Rs. 211,532 while computing the Income-tax demand of the Appellant. The Appellant prays to cancel the additional demand raised on account of grant of lesser credit of TDS. Initiation of penalty proceedings ....
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....segment as it requires only low end skills and tools. It was also contended that data of ATL for financial year 2006-07 was also not available on the date when assessee company carried out its TP study analysis in a contemporaneous manner. The latest financial data was available only upto financial year 2004-05. Ld. AR relying on decision of ITAT Delhi Bench in the case of Vedaris Technology (P) Ltd. v. Asstt. CIT [2011] 44 SOT 316 submitted that when two companies are performing totally different functions, it is not a valid comparable case. He submitted that because of that the Tribunal while considering assessee's case for assessment year 2005-06 rejected the company namely Vishal Information Technologies Ltd. as comparable. He submitted that ATL is not validly considered for comparing the transactions of assessee. (ii) Ld. AR in respect of company mentioned at S. No.9 i.e. M/s. Bodhtree Consulting Ltd. (BCL) referred P-40 of paper book and submitted that this company is engaged in software development. Therefore, it is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies, which is....
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.... Ltd. v. Dy. CIT [2007] 109 ITD 101/18 SOT 76 (Delhi) and the case of ITAT, Pune Bench in the case of E-Gain Communications (P.) Ltd. v. ITO [2009] 118 ITD 243/[2008] 23 SOT 385 (Pune), submitted that companies which make abnormal profits should be rejected from set of comparables. Ld. AR submitted that in view of above, this company Mold-tek should not be considered as comparable. (v) Ld. AR then referred company mentioned at S. No. 28 namely M/s.Triton Corpn. Ltd. (Triton) and submitted that it is engaged in trading of IT peripherals, providing of call centre services and support services. Ld. AR referred page-43 of Paper Book and submitted that this company is not functionally comparable, as segmental information in respect of IT enabled services is not available on a stand alone basis. He submitted that this company could not be considered as comparable with assessee-company. (vi) Ld. AR then referred company mentioned at S. No. 29 namely M/s. Vishal Information Technologies Ltd. (Vishal). He submitted that ITAT in assessee's own case for assessment year 2005-06 noticed from its annual account that this company outsourced a considerable portion of its business whereas....
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....TPO in its study adopted the data for financial year 2006-07 and whereas assessee in its study analysis comparability of uncontrolled transaction with international transactions by using 3 years comparable data to minimize the impact of abnormal factors and thus TPO ignored proviso to Rule 10B(4) to recalculate margin at 30.75% for benchmarking the back office support services provided by assessee. Ld. AR further submitted that DRP by following order of its predecessor for assessment year 2006-07 directed the AO to work out the working capital adjustment but AO while making the assessment finally, disregarded the direction of DRP to give working capital adjustment after calling for relevant details from assessee. He submitted that if working capital adjustment had been given by AO, adjusted net cost plus margin comes to 23.38% as against 27.84% adopted by him and 20.17% by assessee. Ld. AR submitted that AO has to pass an order in conformity with order of DRP. Therefore AO was not justified to reject working capital adjustment and he has wrongly stated that no details were furnished by assessee; whereas assessee gave all requisite details to give working capital adjustment. 22. ....
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.... further submitted that he has no objection if the matter is restored to AO to rectify mistake to work out actual margin of all 30 comparable companies as considered by TPO in his TP study and after correcting said mistake, requisite upward adjustment should be confirmed. Ld. DR submitted that even there after arithmetical mean of ALP margin is 26.5% as against 20.17% considered by assessee and therefore difference is more than 5%. He submitted that assessee is not entitled to the benefit of proviso to Sec. 92C(2) of 5% adjustment and referred decision of Hyderabad Bench in the case of ADP(P) Ltd. v. Dy. CIT [2011] 45 SOT 172/10 taxmann.com 160. 26. Ld. AR in his rejoinder submitted that even if there is variation exceeding 5% of such arithmetic mean, assessee has an option to claim relief at 5% with reference to arithmetic mean irrespective of range of actual variation between margin disclosed by assessee and the average mean margin so calculated and referred the decision of ITAT in the case of Emersons Process Management India (P.) Ltd. v Addl. CIT [2011] 13 taxmann.com 149/47 SOT 157 (Mum.)(URO) Diageo India (P.) Ltd v. Dy. CIT [2011] 47 SOT 252/13 taxmann.com 62 (Mum.), Capg....
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....elevant details of comparables to give working capital adjustment is required and it also requires an exhaustive exercise before giving working capital adjustment. 28. During the course of hearing before us, as mentioned herein above, Ld. AR disputed functionality, assets and risk of 7 companies as not comparable out of 30 comparable cases considered by TPO to arrive at arithmetic means of 27.84% with the assessee company. Ld. AR submitted that actual margin of all 30 comparable companies considered by TPO is 26.5% as per their annual reports. He submitted that copies of annual reports of all these 30 set of comparable companies are placed in the paper book at pages 179 to 371. Ld. DR did not dispute said contention of assessee and submitted that this could be verified by AO while giving effect to order of ITAT. 29. During the course of hearing, Ld. AR also submitted that if AO had complied with direction of DRP to give working capital adjustment, arithmetic mean at ALP comes to 23.38% as against net margin of assessee at 20.17%. We observe that DRP while giving direction to AO to pass assessment order specifically directed to work out the working capital adjustment but AO ha....