TaxTMI 
TaxTMI 
2013 (10) TMI 591
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.... 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 transactions has been increased to the extent of R....
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....tness 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 adopted TNM Method as most appropriate method and operatin....
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.... 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 excluding the above comparables which were otherwise adopted by the assessee for the benchmarking purposes: (a) Kirloskar Computer Services Ltd. The company is into data processing, software consultancy and in other fields. During the year under consideration, a major client withdrew from the s....
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....th 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 period ended on 31/3/2006, there is no separate segmental reporting in case of this company for engineering services segment. Moreover, the engineering services segment even if the data was available, is way different compared to the functions which are performed by the assessee in rendering services to its Headquarter. In view of the facts as aforesaid, the ....
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....malise 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 exactly same functions, but even companies with similar functions qualify as comparables, that for the reasons given against the exclusion of loss making companies under Genesys, are applicable here also, and therefore, Kirloskar cannot be rejected merely because it has incurred losses. Further, Kirloskar Computer Services Ltd. has operating profits in F.Y. 2003-04 and therefore, it cannot be ca....
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....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 referred to in clause (iv) of section 92F. But this is not indicative or suggestive of the fact that the data to be used for the analysis/benchmarking of international transaction should necessarily exist at the time of undertaking the transaction/ analysis conducted by the assessee for its benchmarking and that even if the data for the relevant period is available at the time of conducting analysis by the depart....
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.... 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 by the assessee. [2.1.4] In view of the facts of the case and discussion as above the contention of the assessee in respect of use of financial information of the comparables pertaining to F.Y. 2005-06 which was not available at the time of preparing the documentation report is not found to be acceptable and is accordingly rejected. [2.2] Use of multiple year data : [2.2.1] In the show cause notice, for the purposes of....
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....atories 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: "In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both - the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price" Para 1.50 of the OECD Guidelines : &nbs....
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.... 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 no ambiguity in the Indian law so far use of data for the purposes of comparability and analysis of transfer price is concerned, accordingly the stipulations in the US Treasury Regulations or the Australian Tax Office are not found to be relevant at all. Further even these stipulation of US treasury Regulations and Australian Tax Office also provide for the same principle of the use of multiple year data to take in to account effect of business cycles ....
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....e 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 provisioning of IT enabled services is a company which is a risk mitigated company and is cost protected and accordingly in this mode of business cannot incur losses. Therefore a company which is into losses would definitely have different risk perception which could earn profit in one year and the losses in the other year. Such company with differing risk perception would not be comparable to the assessee company which is risk mitigated and cost protected. Accordingly....
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....e 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 protected entity and therefore, cannot incur losses. Therefore such company with differing risk perception and for the reasons of its substantial/extraordinary losses and further the fact whether it is continuing its business in the subsequent years is not ascertainable and accordingly such a company would not be comparable to the assessee company which is risk mitigated and cost protected. Accordingly Mercury is not found to comparable with the assessee. ....
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....tice 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 Ltd. 51.86% 46.12% 8 Vishal Information Technologies Ltd. 48.03% 39.49% Average operating profit over operating cost of comparable companies 26.43% 22.64% Considering the adjusted PLIs of the set of comparables the working of the adjustment is given here in under: The value of the international transaction = Rs.84,70,726/- The total operating cost relating to the international transaction = Rs.74,64,794/- Difference between the arithmetic mean of the PLIs of the comparables and that of the company = 22.64 - 14.15% = 8.49%....
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....e 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] iii) M/s.Tecnimount ICB Pvt Ltd Vs ACIT (ITANo.7098/Mum./2010) iv) Cowi India Private Limited vs Asst CIT (1TA No. 5052/Del/2010) v) DCIT vs Monsanto Holdings Pvt. Ltd. (ITA No.ITANo.3423/MUM/2008 vi) ACIT vs Frost & Sullivan (I) Pvt Ltd. (ITA No. :2073/Mum/2010) 12.4. In respect of rejection of assessee's comparable, Ld. Counsel explain how these comparables comply tests of FAR, key points of arguments are as under: (a) Kirloskar Computer Services Ltd. &n....