AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (1) TMI 45
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....2CA(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' while computing deduction under section 10A Rs. 64,34,198 (ii) Exclusi....
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....f 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 the above grounds of appeal, the approach of the TPO vis-à-vis that of the assessee in its Transfer Pricing Study submitted before the TPO is briefly summarized as under. 5.1 The assessee's approach : The ....
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.... 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 working capital adjustment. Based on the above, arithmetical mean margin, the arms length price of the call centre services rendered by the assessee was arrived at Rs. 81,23,88,565 as against the price shown at Rs. 66,00,46,029 resulting in a transfer pricing adjustment of Rs. 15,23,42,536. 6. We have heard both parties, carefully perused and considered the order of the TPO under section 92CA of the Act, the order of....
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....f 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 utilize data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its report on the T.P. Study. Further, we are also of the view that the TPO rightly rejected the us....
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.... 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 international transactions from an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso." 9.2 The new section 92C(2A) mandates that if the arithmetical mean price falls beyond + / - 5% from the price charged in th....
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....n. 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 assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. v. Dy. CIT [2008] 114 ITD 448. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - ".........We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15% of total revenue. Within the above limit, transactions cannot be held to be significant to influenc....
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....rd 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 Integrating Systems (India) (P.) Ltd. (supra), we direct the Assessing Officer/TPO that only those companies having a turnover of Rs. 1 Crore to Rs. 200 Crores be taken as comparable companies and to consequently exclude Wipro BPO Ltd. which has a turnover of Rs. 322 Crores in the relevant period. 15. Comparables Companies Owning Intangiables 15.1 In Ground No. 1, the assessee has contended that the learned CIT (Appeals) erred in accepting comparable companies owning intangibles as proposed by the TPO. The learned counsel for ....
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....ch 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 (India) (P.) Ltd. (supra) has reiterated that all the comparables have to be compared on similar standards. Therefore, companies which possess their own unique software intangibles cannot be compared with the assessee, as the former would derive significant advantage from unique software compared with the assessee, which is performing call centre services for it's A.E. in the USA. 15.3.2 In the case of M/s. Wipro BPO Ltd., this comparable is under consideration for exclusion as a comparable, in this case for this Assessment Year 2004-....
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.... 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 parties have been heard and the submissions made considered. In respect of the issue of parent company losses, it is to be stated that clearly the assessee is compared as if it is a separate entity. When a separate entity deals with its customers, it would not see whether such dealing would result into profit or loss for him. While dealing at arm's length, the parties to the transaction would not see the impact of the same on the profitability of others. What is important is the arms length nature of such transactions and the profit that could have resulted....
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....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 arguments that the profits earned by the assessee is justified because the parent company is under losses is against the principle of arms length price. To sum up, the assessee's arguments that it has not shifted profits outside India based on the loss incurred by the parent company is not acceptable. 16.7 The learned counsel for the assessee argued that T.P. regulations is not a deeming provision but a fact working provision and the entire exercise of T.P. Audit is to prevent shifting of profits out of the country by manipulating international transactions. It is contended that the bas....
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....;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 comparability analysis based on current year's data and submitted a list of seven comparable companies. The TPO considered the updated set of comparables submitted by the assessee and come up with a final set of eight comparable companies, which are as under : 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 16.87 % 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 6.3....
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....ny 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 BPO Ltd from the list/set of comparable companies for the assessee's case in Assessment Year 2004-05. Tricom India Ltd. 17.5 This comparable has already been considered and dealt with by us in para 15.3.3 of this order (supra) wherein we have directed the Assessing Officer/TPO to exclude it from the list of comparables for the assessee's case in Assessment Year 2004-05. Fortune Infotech Ltd. 17.6 This comparable has also been considered and dealt with by us in para 15.3.4 of this order (supra) wherein we have directed the Assessing Officer/TPO to exclude it from the list of comparables for the assessee's case for Assessment Year 2004-05. Spanco Telesystems & Solutions Ltd. 17.7 The assessee's main contention was that this compan....
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....ected 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 unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that the comparable has incurred loss or made abnormal profits." Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean ....
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.... 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 transactions in excess of 40% of its turnover. The learned counsel for the assessee submitted before us that as per the annual report of this company for F.Y. 2003-04, there are no related party transactions at all and therefore this company should be accepted as a comparable. We have perused and considered the material on record. It is seen that the TPO in her order has mentioned 'related party transactions amounting to more than 40% of turnover' as the reason for rejection as a comparable. From a perusal of its annual report for F.Y. 2003-04 though it does not appear to have any related party transactions, it is seen that out of its total revenues of Rs. 12.2 Crores, only Rs. 6.50 Crores i.e. about 54% of its revenue was received from ITES. This shows that significant Revenue earning of about 46% is not from IT enabl....
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....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 details, noted that two items of abnormal expenditure, namely, connectivity cost and data base cost, amounting to more than 60% of the revenue cannot be treated as regular operating costs and hence averaged the costs incurred on these items for the earlier years for comparability. The assessee contends that these are normal reasonable expenses and were incurred as the company was in an expansion mode which has been misconstrued as extraordinary expenses and therefore the adjustments made by the TPO are not called for. We have considered the material on record. We find that the TPO in her order has not explained as to why these expenses cannot be taken as regular operating expenses for comparability or the basis for making the adjustments worked out by averaging the costs on the basis of the previous two years. We, therefore, direct the Assessing Officer/TPO to examine the issue, based o....
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....ve 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 depreciation is warranted or not may be, issue of principle. But whether the principle needs to be applied to a particular case or not would depend on the peculiar facts of that case. It cannot be anybody's case that an adjustment has to be necessarily granted whenever and wherever there is difference in depreciation between the tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case entails such an adjustment has to be examined in the light of the particular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the view of the learned Departmental Representative that this claim is only an afterthought, pursuant to the learned ....