TaxTMI 
TaxTMI 
2012 (10) TMI 779
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....the appellant out of the total addition of Rs. 3,71,89,793/- proposed by the Ld. TPO by holding that its international transactions do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP and the Ld. AO has grossly erred in agreeing with and upholding the Ld. TPO's action of: 2.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. 2.2 disregarding the ALP, as determined by the appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; 2.3 disregarding multiple year/prior years' data as used by the appellant in the TP documentation and holding that current year (i.e FY 2005-06) data for comparable companies should be used despite the fact that the same was not necessarily available to the appellant at the time of preparing its TP documentation, and in doing so have grossly erred in; 2.3.1 interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/single year (i.e FY 2005-06) date; and 2.3.2 holding that at the time of creating/maintaining the TP documentation, the appellan....
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....do so) the concerns/issues in regard to the alleged/purported shortcomings/deficiencies in the appellant's claim for a risk adjustment and thereby denying the appellant a reasonable opportunity to study/examine the same and provide its comments/objections thereto; 2.13 denying the benefit of (+/-) 5 percent [as per proviso to section 92C(2) of the Act] available to the appellant; 2.14 disregarding judicial pronouncements in India in undertaking the TP adjustment. 3. the Ld. AO has while passing the final assessment order has grossly erred in not granting the relief of Rs. 71,47,803/- directed by the Ld. DRP vide its directions/order dated December 14, 2011 in the computation of the ALP of the appellant (by directing exclusion of one of the comparable namely, Necleus Netsoft and GIS (India) Limited from the comparable set). 4. the Ld. A O erred on facts and in law in charging interest under sections 234A, 234B and 234D of the Act. 5. the Ld. A O erred on facts and in law in charging interest under section 220 of the Act; 6. the Ld. A O has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for ....
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....nder section 133(6); and also by 2.4.2 not sharing with the appellant, in case of a number of comparables, the information/reply received by the TPO/Assessing Officer u/s 133(6). 2.5 rejecting comparability analysis in the appellant's fresh search and in conducting a fresh comparability analysis based on application of the following additional/revised filters in determining the comparable companies: 2.5.1 exclusion of companies having different financial year ending (i.e. not March 31, 2007); 2.5.2 exclusion of companies with export sales that are less than 25% of their total revenue; 2.5.3 exclusion of companies with diminishing revenues/persistent losses for last three years upto and including FY 2006-07; 2.5.4 retaining companies with related party transaction up to 25% of their sales; and rejecting, in particular, the following filters applied by the appellant in its fresh search; 2.5.5 companies having other operating income (i.e income other than manufacturing and trading income) to sales greater than 50% were accepted; 2.5.6 companies with net worth less than zero were rejected; 2.5.7 companies having research & development costs to sales le....
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....; 5. The Ld. DRP and the Ld. Assessing Officer (following the directions of the Ld. DRP) has erred in facts and in law by arbitrarily disallowing depreciation amounting to Rs. 2,28,821/- on 45% of the opening written down value of the block of computers without any basis and without appreciation that the depreciation claim of the appellant on computers has been duly accepted and allowed by his predecessors in earlier years; 6. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP) erred in law in confirming the disallowance of Rs. 31,42,720/- on account of club entrance fees; 7. The Ld. DRP erred in disregarding the detailed arguments/submissions put forth by the appellant during the course of the DRP/assessment proceedings while passing its direction under section 144C of the Act; 8. That the Ld. A O erred on facts and in law in charging interest under sections 234B and 234D of the Act; 9. The Ld. A O has grossly erred in initiating penalty under section 271(1)(c) of the Act mechanically and without recording any satisfaction for its initiation. 2. There are certain issues and facts which are common in both the years, therefore, before taking up the....
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....s made analysis of the TP Study Report submitted by the assessee in both the assessment years and recommended adjustment in the arm's length price of the international transactions declared by the assessee. He passed the order under sec. 92CA(3) of the Income-tax Act, 1961 on 14th September, 2009 and 26th October 2010 in assessment years 2006-07 and 2007-08 respectively. Learned TPO has recommended an adjustment of Rs.371,89,793 in assessment year 2006-07 and Rs.755,53,984 in assessment year 2007-08. The adjustments recommended by the learned TPO were proposed to be added in the income of the assessee by the learned Assessing Officer in the draft assessment orders. The assessee has filed objections before the learned DRP but failed to convince the learned DRP hence the draft assessment orders were confirmed by the learned DRP, Assessing Officer has passed the assessment order and accordingly an adjustment of Rs.371,89,793 has been made in the income of the assessee in assessment year 2006-07. Dissatisfied with the order of the Assessing Officer, assessee filed an appeal before the ITAT. The ITAT has set aside the assessment order observing that learned DRP has not disposed....
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....ing net profit margin based on cost as PLI. It has adopted operating profit over total cost. Learned TPO has not disputed the selection of TNMM method by the assessee. Thus, there is no dispute in this area. 7. The next area of dispute between the parties could be in respect of selection of single year data or multiple year data. The assessee in assessment year 2006-07 has reported that it has used TNMM as the most appropriate method with OP/TC as PLI (Profit level indicator). It has shown net profit margin at 10.10% on account of its consultancy and advisory services. The assessee has selected 11 comparables in its transfer pricing study report by using Prowess Capital Lines and Nasscom Data Base. It has used multiple year data of 2004, 2005 and 2006. It has applied following filters for eliminating the incomparable: * Companies having financial data available only up to financial year ended March 2004 have been rejected. * Companies having sales less than Rs.1 crore have been rejected. * Companies having a ratio of income from trading activities equal to or more than 25% of total sales have been rejected. * Companies having a ratio of income from manufacturing acti....
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.... analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 11. A bare perusal of this rule would reveal that expression "shall" has been employed in this rule which make it abundantly clear that current year data of an uncontrolled transaction is to be used for the purpose of comparability, while examining the international transactions with associate enterprises. The proviso appended to the section carves out an exception that the data relating to the period of being more than two year prior to such financial year may also be considered, if such data reveals facts which could have an influence on the determination of transfer price in relation to transaction of comparison. Thus the main section used the expression "shall" which make it mandatory to first use the....
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....length price cost plus basis. It was compensated all its costs plus an agreed markup thereon. 13. In order to demonstrate that remuneration received by it in lieu of services are at arm's length price, it was submitted by the assessee that it has earned a net margin of 10.10% which has been worked out by OP/TC. The working has been noticed by the learned TPO as under: Particulars Amount Service Income 281,643,203 Miscellaneous income 431,810 Total 282,075,013 Expenditure Operating and other expenses 256,193,649 Total 256,193,649 Operating Profit 25,881,364 OP/TC 10.10% 14. The assessee has undertaken transfer pricing study and selected 11 comparables whose average profit margin of the years 2004, 2005 and 2006- 07 is 11.45%, therefore, according to the assessee its value of international transaction is at arm's length. The assessee has selected following comparables: S.No. Name of the Company Database 2004 2005 2006 Weighted average 1. Ask me info hubs ltd. Prowess 10.00 -13.98 4.67 -1.10 2. MCS Ltd. Prowess 15.43 3.41 -5.81 6.00 3. CMC Ltd. Segmen....
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....rage profit margin of these 7 comparables comes out to 21.66%. Learned DRP has upheld the determination of arm's length price by taking the profit margin of the comparables at 21.66% as against 24.45% determined by the learned TPO. 17. The learned counsel for the assessee while impugning the assessment order has raised mainly three-fold submissions. In his first fold of contentions, he pointed out that learned TPO did not grant adjustment on account of working capital. He pointed out that if working capital adjustment has been granted to the assessee then the mean profit of the comparable would be 20.62%. Pointing out the importance of working capital, he submitted that an uncontrolled entity will expect to earn a market rate of return on that capital, independent of its operation. Thus, if an uncontrolled entity did not require the use of capital from its own source then such capital can be put to use for earning some other income, different from its operation. The assessee has not put to use the capital of its own resources because all its costs are being born by associate enterprises, therefore, the non-utilization of the essential capital for its day to day working, its prof....
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....require. Considering the stand of the learned TPO in assessment years 2007-08 and 2008-09 where benefit of working capital adjustment was granted to the assessee, we allow this plea of the assessee and set aside the issue to the file of the Assessing Officer with a direction that learned Assessing Officer shall grant working capital adjustments, after considering the computation filed by the assessee before the DRP. In case, it is felt that from that computation, it is difficult to draw conclusion then, learned Assessing Officer may ask the assessee to file fresh working. 19. In the next fold of submissions, learned counsel for the assessee submitted that out of these seven comparables, the two comparables deserve to be excluded, namely, Allsec Technology Ltd. and Maple E-Solution. He did not raise dispute with regard to other comparables. For excluding these two comparables, he pointed out that the companies who had incurred high marketing and advertising expenditure, they are supposed to earn higher income. They are functionally different. Therefore, the result cannot be compared with the result of the assessee. He submitted that the assessee did not incur any kind of advertis....
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.... itself has a wide import and it means an activity carried on continuously and systematically by a person by the application of his labour and skill with a view to earn an income. There are large number of factors which effects the business such as function performed, assets employed and risk assumed. The concept of risk in itself provides various types of risks. Learned TPO in his order on page No. 24 has considered 17 types of risks in a tabular form, namely, market risk, customer's credit risk and foreign exchange risk. The assessee in its TP study report has also accepted that though it is a captive service provider and not exposed with various risks, but, it is not a totally risk free enterprises. The nature of risk in the case of assessee are different. We have made a analysis of the assessee's TP study report as well as the findings recorded by the learned TPO and the DRP. We have extracted the filters applied by the assessee for eliminating the non-comparable companies or adjusting their profit margin, the assessee has not applied the filter i.e. the companies who have incurred expenses of more than 5% of its sales on advertisement and marketing which required to be exclude....
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....but if the ultimate result is of such a nature which demonstrates that such company is not comparable then that company deserves to be excluded e.g. a company may be functionally comparable but if it is showing persistent losses then it is always adviseable to exclude such a company from the list of comparable. Similarly, if the result of a company over a period shows fluctuation disproportionate to other concern, then that would not be an indicator for the profit or loss resulting from the operation of the company rather some extra reasons would be responsible for the losses or the profit. Therefore, such comparable deserves to be excluded. Maple e Solution has shown 100% loss in financial year 2002-03 but all of a sudden shown profit at 37.38% in financial year 2004-05. In financial year 2008-09, it again shown losses and its profit margin is -65.23%. Considering this aspect, we are of the view that this comparable deserves to be excluded from the list of comparables. With the above observations, we set aside the issue to the file of the Assessing Officer for readjudication. Learned Assessing Officer shall give working capital adjustments to the assessee in assessment year 200....
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....ld result a return on such investment in the future. Therefore, their profit margin is on the higher side and they are not comparables. Before us, learned counsel for the assessee pointed out that the comparables identified by the learned TPO who has incurred expenses more than 3% of the sales in the area of marketing and advertisement, they are not comparables because they are functionally different from the assessee. Learned counsel for the assessee further pointed out that profit ratio of the companies who have incurred expenses less than 3% of the sales is 22.26%. The companies which have incurred expenses more than 3% but less than 5% of the sales in the area of marketing and advertisement, their profit ratio is 45.52%. Similarly, the companies which have incurred expenses on advertisement and marketing at 5% to 7% of the sales, the profit ratio is between 67.46%. The learned counsel for the assessee in this way emphasized that out of the total comparables identified by the TPO following comparables deserve tobe excluded. S.No. Name of the Companies % of marketing expenses to sales - F.Y. 2006-07 1. Accentia Technologies Ltd. (Seg) 28.36% 2. Allsec Tech....
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....the operative force of the assessee's contention is that marketing and advertisement activities carried out by the comparable companies result in creation of marketing intangible, which would give return on such investment. In other words, the expenses incurred on advertisement and marketing creates a marketing intangible. Learned TPO rejected this contentions on the ground that such an argument is not based on any substantial analysis. The assessee made reference to WIPRO & Flex Tronic Software System and submitted that these companies have created marketing intangible, therefore, they are earning more profit then any other captive entity. Learned TPO rejected the contention of the assessee on the ground that 95% of the revenue of Infosys is from repeat business. The marketing intangible did not help Infosys to get any better business according to the learned TPO. On an analysis of the learned TPO's order coupled with the contentions of the assessee, we are of the view that learned TPO has rightly observed that in the case of manufacturing or distribution companies marketing expenses over a period of time may create marketing intangible which will helpful to them for getting bette....
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....ly be excluded. The learned counsel for the assessee submitted that the following parties have transactions to sell more than 15% with related parties: Sr. No. Name of the companies RPT percentage to sales- F.Y. 2006-07 1. Asit C Mehta Financial Services Ltd. 15.13% 2. Informed Technologies India Ltd. 15.83% 3. Apex Knowledge Solutions Ltd. 100% 4. HCL Comnet Systems & Services Ltd. 21.52% (Based on RPT% computed by the Learned TPO using data sourced by him u/s 133(6) of the Act) -Refer pg 124 of the Merit Appeal PB 28. The learned counsel for the assessee submitted that in the case of Sony India Pvt. Ltd. rendered in ITA No. 1189/Del/05 & Ors., ITAT has held that an entity can be taken as uncontrolled, if its related party transaction do not exist 10 to 15% of the total revenue. Thus, according to the learned counsel for the assessee, the comparables who have transactions more than 15% with its related party then they deserve to be excluded from the list of comparables. On the other hand, Learned DR opposed the contentions of assessee. He pointed out that in the case of S.T. Micro Electronics Pvt. Ltd. vs. CIT(A) rendered in ITA No. ....
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.... some undue benefit is being extended by a company. These two provisions give an indicator that whenever any issue regarding an interest created in any company is being examined which has influenced over the results of the company then these aspects can be taken as guidance. On the basis of the scheme, one can safely say that an entity can be taken as uncontrolled, if its related party transaction do not exceed 25% of the total revenue. Thus, we do not find any fault in the conclusion of the learned TPO for applying this filter to the extent of 25% transaction with related party of the total revenue. The contentions raised by the learned counsel for the assessee in this regard are rejected. 30. In the next fold of submissions, learned counsel for the assessee submitted that the learned TPO has erred in including certain companies which are having extra-ordinary high turnover as compared to the appellant. The learned counsel for the assessee pointed out following companies; Sr. No. Name of the comparable company Turnover (In crores) 1 HCL Comnet Systems & Services Ltd. (Seg.) 260.19 2 Infosys BPO Limited 649.56 3 Wipro Limited (Seg) 939.78 ....
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....NA* NA* NA* 50.43% 10.92% 59.34% He pointed out that these companies are not comparables because of their high profit ratio. On the other hand, Learned DR submitted that except Maple E Solution, other companies are consistent in their profit ratio. 33. We have heard the rival contentions and gone through the record carefully. As far as Vishal Information Technology is concerned, it is consistent in its result. We have observed in the preceding paragraph that profit and loss are two incidence of the business and merely on account of low profit or loss would not make a functional comparables companies as uncomparable, but if the ultimate result is of such a nature which demonstrates that such companies are not comparable then that company deserves to be excluded. If the result of a company over a period shows fluctuation and such result is disproportionate to other concern then that would be an indication that profit or loss may not be resulting from the operation of the company alone, rather there may be some extra reasons for such losses or profit. Therefore, Vishal Information Technology is consistent in its result and it cannot be excluded from the comparable....
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....l or functional line within IT Enabled Services. They have selected the companies who are in I.T. Services and a comparable cannot be rejected just because it is operating in that very sector in different line. On due consideration of the findings recorded by the learned TPO, we do not find any force in the contentions of the learned counsel for the assessee. 35. The learned counsel for the assessee further submitted that the TPO has included Eclert Services Ltd. which is a knowledge process outsourcing company engaged in the providing data analytics and data process solution to the customers. The Data Analytics Services performed by Eclert Services are functionally different. It is more value added and high end in nature, comparable to the low end back office services provided by the appellant. Learned DR on the other hand relied upon the order of the learned TPO and drew our attention towards page Nos. 81 and 82 of the order. On due consideration of the facts and circumstances, we find that assessee has reiterated its contentions as were raised before the learned TPO. Learned TPO rejected the contentions on the ground that neither the assessee nor he went in to functional line....
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....alysis of all these details, learned TPO considered it as a functionally similar company and we do not find any error in this finding of the learned TPO. The learned counsel for the assessee further raised objection with regard to inclusion of Maple E-solution Ltd. We have already excluded this concern on account of high fluctuation in its results. 37. The next objection raised by the learned counsel for the assessee is with respect to inclusion of I-Services India Pvt. Ltd. The learned counsel for the assessee pointed out that no information were available regarding the functional profile of the company in the annual report, the website of the company or the detailed information provided by the learned TPO collected under sec. 133(6) of the Income-tax Act, 1961. The assessee also submitted that this concern has shown high margin and, therefore, it deserves to be excluded. On the other hand, Learned DR submitted that complete details of this concern were called for by the learned Assessing Officer by exercising his powers under sec. 133(6) of the Act. As per the reply received from the company, it revealed that it is into I.T. Enabled Services. On due consideration of the....