TaxTMI 
TaxTMI 
2013 (1) TMI 45
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....143(2) of the Act. A reference under section 92CA(1) of the Act was made by the Assessing Officer to the Transfer Pricing Officer (TPO) in respect of the following international transactions entered into by the assessee with it's A.Es. Nature of International Transactions Value Rs. Call Centre Services 66,00,46,029 Import of Capital Equipment 45,43,167 Reimbursement of Expenses 1,78,60,545 Cross Charge of Expenses 33,56,693 Total : 68,58,06,434 The TPO passed an order under section 92C r.w.s. 92CA(1) of the Act dt.15.12.2006 making an upward adjustment of Rs. 15,23,42,536 to the international transactions of the assessee in respect to call centre services. 2.2 After receipt of the order of the TPO under section 92CA(1) r.w.s. 92C of the Act, the Assessing Officer completed the assessment by an order under section 143(3) of the Act on 28.12.2006 determining the income of the assessee at Rs. 15,40,92,002. In the order of assessment, the Assessing Officer made the following additions/disallowances : (i) Exclusion of telecommunication charges incurred in foreign exchange from 'export turnover' but not from 'total turnover&....
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....ria postulated by the learned TPO. Ground 3 : Applicability of multiple year data - The learned CIT (Appeals) ought to have accepted the use of multiple year data for computing the final margin of the comparable. - The learned CIT (Appeals) ought to have accepted the fact that current year data were not available in the public domain to calculate the margins of comparable companies. Ground 4 : Adjustments for various risks - The learned CIT (Appeals) has erred in concluding that the business risk is borne by the appellant and therefore did not warrant a market risk adjustment. Ground 5 : Safe harbour - The learned CIT (Appeals) should have allowed the benefit of safe harbor provisions of / - 5% as set out under the proviso to section 92C(2) of the Income Tax Act, 1961. Ground 6 : Parent Company Loss - The learned CIT (Appeals) ought to have appreciated the fact that the parent company of the appellant has incurred loss during the year and the assessee cannot be expected to earn margins beyond the global profit of the group as a whole." 4. Before proceeding to deal with ....
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....) Companies providing ITES were considered. 5.5 Accordingly, the following 8 comparables were identified by the TPO as the final set of comparable companies. S. No. Name of the comparable Operating Revenue Operating cost (OC) Operating Profit (OP) OP/OC 1. Nucleus Netsoft & G.S. India Ltd. 1.66 1.94 0.28 16.81 % 2. Vishal Information Technologies Ltd. 9.37 13.88 4.51 48.13 % 3. Wipro BPO Ltd. 322.3 430.31 108.01 33.51 % 4. Tricom India Ltd 6.34 9.24 2.90 45.74 % 5. Fortune Infotech Ltd 8.08 11.38 3.30 40.84 % 6. Sparco Telesystems & Solutions Ltd. 10.32 15.44 4.57 40.10 % 7. Ultramarine Pigments Ltd. 6.18 10.99 3.91 63.27 % 8. Allsec Technologies Ltd. 24.10 24.94 0.83 3.44 % Arithmatical Mean 36.49% 5.6 As per the calculation above, the TPO arrived at the arithmetical mean margin of 36.45% on cost. After considering the objections raised by the assessee, the TPO used the above 8 companies as the final comparables with the arithmetical mean PLI of 34.49%, after allowing 2% deduction towards w....
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....nsaction was actually entered into) is a mandatory requirement of law in the comparability analysis to be undertaken as as per Indian T.P. Regulations. It is only the proviso to Rule 10B(4) that makes an exception in allowing the use of data of the two preceding years, if and only, if it is established that the data reveals facts which could have an influence on the determination of transfer price. The mandatory requirement of law for the use of data of the current financial year cannot be dispensed with even if the relevant data was not available to the assessee in the public data base at the time of preparation of the T.P. Report. Non-availability of information in the public data base can at best be relevant to explain the discharge of the assessee's obligation of maintaining the prescribed documentation under section 92D(i) of the Act r.w. Rule 10D of the IT Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92C (1) and 92C(2) of the Act. 8.4 As it is mandatory requirement of law to utili....
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....preparation of statutory transfer pricing study/documentation. Safe Harbour 9.1 In the ground No.5 on Safe Harbour - the assessee has sought the benefit of + / - 5% as set out under the proviso to section 92C(2) of the Act citing several judicial decisions in support of this proposition. Prior to the amendment made by Finance (No.2) Act, 2009 and the Finance Act, 2012, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the Arithmetical Mean (AM) or at the option of the assessee, a price which may vary from the A.M. by an amount not exceeding 5% of such A.M. Thus, the ALP was + / - 5% of such A.M. Thus, the ALP was + / - 5% from the A.M. This issue is more of an academic nature and case laws cited by the assessee are not applicable to the facts of the case, as the IT Act, 1961 has been amended with retrospective effect from 1.4.2002 by the introduction of a clarificatory amendment in which the section 92C (2A) was inserted, which as per the Finance Act, 2012 reads as follows : "(2A) Where the first proviso to sub-section (2) as it stood before its amendment by Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of internat....
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....hering thereto, the assessee has rendered into T.P. Study unreliable. In this view of the matter, we are of the opinion that the TPO was right in rejecting the T.P. Study submitted by the assessee. 12. Ground No.1 : Adjustment to arms length margin 12.1 The ground raised by the assessee that the learned CIT (Appeals) erred in upholding the adjustments made by the TPO in respect of rendering call centre services to its AE is general in nature and therefore no adjudication is called for thereon. Related Party Transactions 13. In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO's setting a limit of 25% on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15% of sales/revenue. In support of this proposition, the learned counsel for the asses....
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....e a turnover of Rs. 1 to Rs. 200 Crores only should be taken into account for consideration for the purpose of making T.P. Study." In these circumstances, the learned counsel for the assessee pleaded that Wipro BPO Ltd., one of the comparables taken by the TPO and having a turnover of Rs. 322.3 Crores be excluded as it falls outside the range ofRs.1 Crore to Rs. 200 Crores laid down in the cited case. 14.2 Per Contra, the learned Departmental Representative supported the orders of the authorities below. 14.3 We have heard both parties, carefully considered the submissions made, judicial decision relied on and the material on record. The Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra) held that only companies within the turnover range of Rs. 1 Crore to Rs. 200 Crores should be taken into consideration for the T.P. Study. We are of the considered view that the cited case squarely applies to the assessee's case as the turnover of the assessee being approximately Rs. 66 Crores falls within the range of Rs. 1 Crore to Rs. 200 Crores. Therefore, respectfully following the decision of the co-ordinate bench of this Tribunal in the case of Genisys ....
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....ed out any provisions in the Act or Rules or OECD guidelines which imposes any prohibition in taking comparables with intangibles so long as there is functional similarity of comparables vis-à-vis the tested party. The learned Departmental Representative argued that Brands can give business but not profits. The learned Departmental Representative pointed out the assessee itself does not have any consistent stand in the matter as in its own T.P. Study the assessee has taken companies like Tata Share Registry and Max Health - which had their own intangibles. The learned Departmental Representative submitted that the arguments put forth by the assessee shifted to suite its own purpose. In these circumstances, the learned Departmental Representative contended that the findings of the learned CIT (Appeals) be upheld. 15.3.1 We have heard both parties and have carefully perused and considered the submissions made, details filed and material on record. It is a well accepted principle that only those companies which are on similar standards need to be considered for comparability. In this context, a co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (In....
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....osing web site extracts detailing the intangibles developed by this company. On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of the opinion that this comparable company has developed unique software from which it would derive substantial benefits/advantages when compared with the assessee which is undertaking pure call centre services. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot be taken as a comparable for the assessee and accordingly direct the Assessing Officer/TPO to exclude it from the list of comparables in this case. 16. Parent Company Losses 16.1 In the ground raised at S. No. 6, the assessee argued that the parent company is under losses and thus there is no situation where profits are shifted outside India. 16.2 The learned Departmental Representative supported the orders of authorities below. 16.3 Both parti....
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.... "Where a non-resident person carries on business with a resident and owing to the close connection between them the course of the business is so arranged that the business produces either no profits or less than the ordinary profits to the resident, the subject of the charge under section 42(2) of the Act in the business of the resident and not of the non-resident, and what the court has to decide is not whether the non-resident made profits in his dealing with the resident but whether, having regard to the course of dealings between the non-resident and resident, it can be said of the non-resident that he carried on business with the resident; and for that purpose it is immaterial that the business was carried on in such a manner that no profit could accrue to the non-resident therefrom." 16.6 As per a plain reading of the language of the provisions of section 92 of the Act, it is clear that the income arising from an international transaction shall be computed having regard to the arms length price. Similar transactions carried on between unrelated parties were to be seen to come to a conclusion whether the profits earned by the assessee is justified. Thus, the argum....
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....introducing the Transfer Pricing provisions in the Act. However, the relevant T.P. provisions do not require the TPO to establish such a motive independently and distinct from the determination of ALP. As per law, the TPO is required to examine and find out whether the assessee's international transactions are at arm's length or not. Law warrants an adjustment to the assessee's income if the international transactions are not at arm's length. The mechanism for determining the ALP is provided in the Act and the relevant rules framed in this regard. To sum up, the assessee's argument that it has not shifted profits out of India based on the reasoning that the AE is under losses is rejected. 17. Individual Companies for Comparability 17.1 Having held that there was no infirmity in the action of the TPO in rejecting the TP Study of the assessee and having decided the principles as discussed in the preceding paragraphs, we now proceed to examine the individual companies chosen as comparables. As mentioned earlier, the assessee had selected a list of 7 companies in the TP Study. During the transfer pricing audit proceedings, the assessee updated the comparabilit....
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....sue of excluding VITL as a comparable squarely applies. This decision was followed by the decision of the co-ordinate bench of this Tribunal in the case of Netlinx India (P.) Ltd in ITA No.454/Bang/2011 dt.19.10.2012] wherein it was held that Vishal Information Technologies Ltd cannot be considered as a comparable. We, therefore, respectfully following the decision of the Mumbai Tribunal in the case of Maersk Global Service Centre (India) (P.) Ltd. case (supra) direct the Assessing Officer/TPO to exclude Vishal Information Technologies Ltd. from the list of comparables. Wipro BPO Ltd. 17.4 As per the details on record, the turnover/Revenue of Wipro BPO Ltd. in the period relevant to Assessment Year 2004-05 is Rs. 322 Crores. Further, this company having the influence of "Wipro" brand may be seen as having its unique intangibles. Following the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra), we have already held that companies whose turnover is outside the range of Rs. 1 Crore to Rs. 200 Crores are to be excluded from the set of comparables and accordingly direct the Assessing Officer/TPO to exclude Wipro ....
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....ught not to be taken as a comparable citing a catena of decisions and the OECD guidelines. We have carefully considered the submissions made seeking the exclusion of this company as a comparable for the reason that it has high profits of 63.27% and that it has various segmental apart from ITES and that there were a catena of decisions in support of the assessee's proposition. A similar matter of 'Super Profits' was considered by a co-ordinate bench of this Tribunal in the case of Netlinx India (P.) Ltd. case (supra) to which both of us were a party. In that order, it was held that the word 'super' is a superlative word which denotes something extraordinary and noted that in all the cases/decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high. In the case of Exxon Mobil Company India (P.) Ltd. v. Dy. CIT [2011] 46 SOT 294 (URO), the ITAT, Mumbai held that : "A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making uni....
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....lo Health Street Ltd. (iii) MCS Ltd (iv) Tata Share Registry. 18.2 Ace Software Ltd. The learned counsel for the assessee contended that the company is engaged in CAD/CAM services, which are in the nature of ITES and therefore it ought to be accepted as a comparable. The TPO on examination of the annual report noted that it had an agreement with Apex Data Services Inc. USA on buyback of 100% of its production. The TPO rejected this company as a comparable for the reason that it supplies 100% of its services to a single enterprise. It is an A E as per the provisions of section 92B of the Act and thus its transactions with the A E are controlled transactions. We have perused and considered the submissions made and are in agreement with the finding of the TPO that since the entire services of the company are rendered to a single enterprise, it becomes an AE and as such all its transactions assume the character of controlled transactions. We, therefore, held that the TPO was correct in rejecting this as a comparable company. Apollo Health Street Ltd. 18.3 The TPO had rejected this company as a comparable for the reason that it had related party transact....
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....pective parties to the transactions operate are different. (b) Geographical locations (domestic and export) are different. (c) Size of the markets (domestic and export) to which companies cater to are different. (d) Cost of labour and capital in the markets (domestic and export) are different. (e) Overall economic development and level of competition is different. (f) Government incentives like tax incentives etc are available only for exporters. (g) As the pricing for services differs in the domestic market vis-à-vis the export market, the level of competition, size of the market etc are different in the domestic and export sectors. In view of the facts of the matter as discussed above, we uphold the action of the TPO in rejecting these two companies as comparables or the assessee on the ground of both functional dis-similarity and also for failing the export filter. Allsec Technologies Ltd. 18.5 Both the assessee and the TPO agree that this company is to be considered as a comparable. The assessee, however, has disputed the computation of the margin taken by the TPO. The TPO while examining the concerned detail....
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....omparability. During the proceedings, on being specifically asked, the learned counsel for the assessee stated that this ground was not raised before the TPO and CIT (Appeals) but prayed that the same be admitted for adjudication as it was a legal issue. 19.3 The learned Departmental Representative submitted that he has, prima facie, no objection to admission of this additional ground. He, however, pointed out that the additional ground raised was very general, put in a bland manner, was not clear or specific and appeared to be an afterthought after the CIT (Appeals) has confirmed the adjustments made by the TPO. The learned Departmental Representative submitted that the assessee has not explained as to why this claim of depreciation is being submitted now; why it is necessary to accept the same; why this claim was not raised earlier; computation of quantum, etc. In the absence of these details, such an additional ground would have no meaning and not being maintainable ought to be dismissed summarily. 19.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmental Representative. Whether an adjustment towards ....