TaxTMI 
TaxTMI 
2013 (10) TMI 591
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....ssee with the Associate Enterprises(AE). 3. The assessee is a foreign company and has international transactions with the AEs are reported. The Assessing Officer made reference to the TPO u/s.92CA(1) of the Act. As per the Transfer Pricing study report filed by the assessee in form No.3CEB, assessee has totally reported 8 categories of the transactions. So far as the purchase of the goods, assessee has purchased the goods from CTTL India to the extent of Rs.54,02,60,392/-. It was noticed by the TPO that the corresponding figures of sales by CTTL India to the assessee as reported in their audit report was of Rs.53,92,87,518/-, which resulting into a difference of Rs.9,72,874/-. The assessee contended that it is only a reporting error. The TPO observed that if it was the case of error, the assessee could have revised its audit report in form No.3CEB by giving the corrected figures. The TPO also observed that the Auditor who is required to prepare the audit report is to verify the transactions and prepare the audit report. As observed by the TPO, certain items of purchases has been erroneously debited in the books of account of the assessee for which the value of international tran....
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....ssessee nor has taken any pains to verify the correctness of the assessee's claim. The assessee has filed the Paper book in which the revised copy of the audit report is also filed. In our opinion, the difference in the figure cannot be treated only on the surmises and presumption basis for making the adjustment u/s.92CA(3) of the Act. Moreover, we also find that it is purely a purchase transaction and assessee has no PE in India. Otherwise also in our opinion, there is no tax implication even though there is a difference. We accordingly allow the respective ground taken by the assessee and delete the addition. 6. The next grievance of the assessee is in respect of adjustment of Rs.6,33,761/- made to the value of the international transactions rendering Information Technology Enabled Services (ITES). The main grievance of the assessee is that the comparative analysis in the form of Transfer Pricing study report has been rejected by the TPO as well as the DRP without appreciating that the comparables which are shown by the assessee for bench marking are in compliance with test of FAR. In respect of this adjustment for the purpose of the benchmarking, i.e., for ITES, assessee adop....
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....es Ltd. 28.61% 3 C S Software Enterprises Ltd. 18.78% 4 Fortune Infotech Ltd. 13.12% 5 Genesys International Corporation Ltd. (Consolidated Segmental) -0.11% 6 Kirloskar Computer Services Ltd. (Segmental) -25.15% 7 Mercury Outsourcing Management Ltd. 40.24% 8 Nucleus Netsoft and GIS(India) Ltd. N.A. 9 Pentasoft Technologies Ltd. (Segmental) 2.46% 10 Spanco Telesystems and Solutions Ltd. (Segmental) 19.13% 11 Transworks Information Services Ltd. 24.01% 12 Tricom India Ltd. 51.86% 13 Vishal Information Technologies Ltd. 48.03% 14 Wipro BPO Solutions Ltd. N.A. Arithmetic Mean 12.37% 8. The Assessing Officer proceeded to exclude the following comparables adopted by the assessee for the benchmarking purposes: 1. Kirloskar Computer Services Ltd. 2. Mercury Outsourcing Management Ltd. 3. Pentasoft Technologies Ltd. 4. Nucleus Netsoft and GIS (India) Ltd. 5. Wipro BPO Solutions Ltd. 8.1. The TPO gave the following reasons for exclu....
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....r its business is continuing or not, is not known. The assessee company is a cost protected entity and therefore, cannot incur losses. In view of the facts as aforesaid, the company is found to be not comparable for the reason of its extraordinary losses, which could only be for the reasons of certain extraordinary factors and cannot be compared with an entity like that of the assessee, which is cost protected. (c) Pentasoft Technology Ltd. This company is into Engineering services - CAD/CAM/CAE projects, enterprise division and is into education and training as well. It is seen from the details given in the data bases that it has revenues of Rs.7.73 crores from products and services, Rs.5.67 crores from projects and Rs.2.73 crores from education and training. Therefore, it could be seen that during the year under consideration, the revenues are from the aforesaid areas. It appears from the details given in Attachment 3 of the Transfer Pricing Report that the engineering services segment of this company has been considered to be comparable in this case. However, for the perio....
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....at these companies continue to operate, indicates that they anticipate earning profits in future, and that it is only inherent risk in the market which is driving such companies to a loss. It has further been contended, that in the event it is proposed to eliminate the loss making companies, then even higher than the normal profit making companies need to be eliminated as comparables, to normalise the results. The assessee has relied on the observations of Hon'ble ITAT Delhi in the case of Mentor Graphics (P) Ltd. vs. DCIT (112 TTJ 408), and further in the case of M/s. Sony India (P) Ltd. vs. DCIT, and has contended that the companies, that have incurred losses but have not incurred losses persistently over a period of several years, should not be rejected. (b) Kirloskar Computer Services Limited (Korloskar): In this regard, it has been submitted that the functions of CTT India branch inherently involved data processing and accordingly, the functions of Kirloskar consisting of data processing would be comparable to the functions of CTT India branch. That for the purposes of TNMM, it is not necessary that the company must have ....
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.... years can be used in addition to the data for the year in which international transaction has been entered into. It cannot be interpreted to mean that even if the data for the year in which the international transaction has been entered into, is not available, then too the data for the two years prior to the F.Y. can be used. The contention of the assessee that the data should be contemporaneous and data available at the time of analysis when the international transaction has been entered into only should be used is not acceptable in view of the Rule 10B (4) reproduced above. What the rule provides is use of the data relating to the financial year in -which the international transaction has been entered into and does not say anything about contemporaneous of data or anything of the sort that such data should be available at the time of transaction/analysis. Assessee's conclusion is based on the Rule 10D (4) of I.T. Rules, 1962. Rule 10 D (4) only puts an obligation on the assessee that the information and documents which an assessee is required to maintain "should, as far as possible, be contemporaneous and should exist latest by the specified date refe....
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....o which that information reasonably could have been available to the taxpayer at the time transfer pricing was established." Para 5.10 of the OECD Guidelines: "Tax administrations further should not require taxpayers to produce documents that are not in the actual possession or control of the taxpayer or otherwise reasonably available, eg. information that cannot be legally obtained, or that is not actually available to the taxpayer because it is confidential to the taxpayer's competitor or because it is unpublished and cannot be obtained by normal enquiry or market data." The OECD guidelines at Para 5.9 and 5.10 are in respect of the kind of data which should be asked by Tax Administrator. From the guidelines, it can be seen that it is clearly mentioned there that the relevant document that are reasonably likely to contain the relevant information and which is otherwise available in public domain can be called for by the Tax Administrator. The aforesaid guidelines of the OECD do not suggest that the analysis cannot be conducted based on the information which is currently available in the public domain as has been contended....
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....ional transaction? And how are they supposed to be addressed by taking multiple year data? These aspects have not been detailed with facts and figures. Therefore it is nowhere demonstrated that data pertaining to two years prior to the financial year 2005-06 have any influence on the determination of transfer prices in relation to the transactions being compared. Further reliance is placed on the ITAT decision in case of Ranbaxy Laboratories Ltd. v. Addl. CIT, Range 15, New Delhi (ITA No.2146 Delhi of 2007, A.Y.2004-05) and Mentor Graphics (Noida) Pvt. Ltd. v. Dy. Commissioner of Income Tax (ITA No. 1969/D/2006 A.Y.2002-03) on the observations pertaining to the use of data relating to the financial year in which the international transaction has been entered into. Accordingly the assessee's contention about use of multiple year data is not found to be acceptable. [2.2.2] Assessee in its submission has quoted from Para 1.49, 1.50 and 3.44 of the OECD Guidelines in support of use of multiple year data. For the sake of clarity the portion quoted in the reply of the assessee are reproduced as under: "Para 1.49 of the OECD Guidelines: ....
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....of IT enabled services and as such does not involve any business or product cycle. Further the guidelines only stipulate the examination of the data of the multiple years data to arrive at the validity of the comparable to be used and not the use of the multiple years data in arriving at the transfer price of the international transaction. Para 3.44 stipulates that multiple year data should be used for both the tested party and the comparables to the extent their net margins are being compared to take into account the effects on profits of products life cycles and short term economic condition. But in the analysis conducted by the assessee it canvasses to take multiple year data only in respect of the comparables and for the company only the data for the current year has only been considered which goes against the guidelines of OECD at Para 3.44. Accordingly the contention of the assessee in respect of use of multiple year data for the comparables is not found to be acceptable. [2.2.3] In respect of the submission of the assessee of Para 1.482-l(f)(iii) of US Treasury Regulations and The Australian Tax office Taxation Ruling 97/20 (Chapter 1; Part G), it is stated that there is ....
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....face; that typically, a GIS is used for handling maps of one kind or the other. GIS technology provides excellent support for Land use planning projects, Ecological and hydrological investigations, Environmental assessments, Watershed assessments, Wellhead protection programs, Water quality monitoring and assessment programs, Water resource development projects, Design and construction of water system infrastructure, Public outreach and education programs etc. The CTT UK basically provides services in respect of global Planning, Database Support, Product management, supply chain management, Information technology services, Finance and marketing to its AE. Thus the functions of the CTT UK and the services involving GIS can hardly be compared. Accordingly this company is found to functionally different then the IT enabled services provided by the CTT UK-India Branch to CTT UK. Further while deciding the comparability of the comparable, then the same has to arrived at by resorting to FAR analysis. Functional similarity could be only one aspect of the comparability analysis. What further needs to be seen is the comparability on the basis of assets and risks. The assessee for the pro....
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....ompany Kirloskar is found to functionally dissimilar to the assessee and further its risk perception is not found to be comparable to that of the assessee, Kirloskar is not found to comparable with the assessee. (c) Mercury Outsourcing Management Limited : In respect of this company the facts given in the show cause notice have not been disputed by the assessee. The company is into losses from the FY 2004-05 to even the years subsequent to the year under consideration. An attempt was made to locate the data or the details of this company for the subsequent years to see whether the company was in any ways into operations or not, but no subsequent data has been found in the data bases. For the year under consideration, against the turnover of Rs. 45.33 lakhs, this company has incurred a net loss of Rs. 30.52 lakhs. Further, for the immediate preceding year, the turnover of the company was Rs. 60.95 lakhs against which the loss incurred was of Rs. 35.7 lakhs. Thus, it could be seen that the company is into substantial loss and further, whether its business is continuing or not, is not known. The assessee company is a cost protect....
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....e it is considered suitable and justified to allow the working capita! adjustment to the assessee and further no adjustment is considered necessary for the so called systematic risks. It may be mentioned here the computation of the working capital adjustment as given by the assessee and enclosed as attachment 4 of its submission dated 05.10.2009 is found to be acceptable. The computation of the working capital adjustment in respect of the comparables proposed in the show cause notice is given in Annexure-I of this order forming part of the order. After the working capital adjustment the adjusted PLI of the set of comparables is as under: Sr. No. Company Operating Margin on operating cost Ratio Adjusted Operating Margin on operating cost Ratio 1 Ace Software Exports Ltd. 7.92% 7.56% 2 Allsec Technologies Ltd 28.61% 26.61% 3 C S Software Enterprises Ltd. 18.78% 13.92% 4 Fortune Infotech Ltd. 13.12% 10.06% 5 Spanco Telesystems and Solutions Ltd. (Segmental) 19.13% 15.17% 6 Transworks Information Services Ltd. 24.01% 22.21% 7 Tricom India L....
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....oth profit making as well as loss making companies as comparables as long as they satisfy the comparability criteria as specified under the Rules. He submits that without prejudice to above submissions that loss making companies should not be eliminated, in the event it is proposed to eliminate such companies, then even higher than normal profit making companies need to be eliminated as comparables, to 'normalize' the results (refer Para 39 below for the detailed submission in this regard). Further, if the argument that CTT India branch being a risk mitigated entity cannot be compared with the companies incurring losses (since they bear risk) is to be accepted, then it may be noted that no risk mitigated company would be uncontrolled and thereby, no company would be comparable to the assessee. 12.3. As regards the contention of the TPO that loss making companies cannot be compared with a risk mitigated entity i.e. CTT India branch. The Ld. Counsel places his reliance on the following judicial precedents: i) Sony India (P) Limited Vs. DCIT [118 TTJ (Del) 865] ii) M/s.Teva India Pvt Ltd vs DCIT [57 DTR(Mumbai)(Trib)212] &n....
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....lly mentioned BPO services to include CAD/CAM services and accordingly, it is submitted that the engineering services of Pentasoft categorized under 'Projects' segment for FY 2005-06 is ITeS and therefore comparable to the services rendered by CTT India branch. 13. We have also heard the Ld. DR. We find force in the argument of the Ld. Counsel. We find that the data base adopted by the assessee for selecting the comparables can be tested on FAR and there is likely to be some difference. Merely because some loss making companies are there those cannot be straightly rejected as comparables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. Transfer Pricing adjustment is not a law in strict sense though base on certain legal principles but it is arithmetic and while making the plus minus, the balance is required to be maintained. The OECD Guidelines, while providing guidance on the application of the transactional net margin method, states as follows: "It is also important to take into account a range of results when using the transactional net margin method. The use of the range in this context ....