TaxTMI 
TaxTMI 
2014 (3) TMI 363
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....ables, which are functionally non comparable with the assessee and applied certain arbitrary filters for the purpose of re-determining the ALP of international transactions pertaining to provision of marketing and after sales support services to associated enterprises, which is not in accordance with the provisions of Act read with Rules. 3. That the TPO/ AO has erred in determining the arm's length margin/ price by using data related to the Financial Year 2006-07 (for AY 2007- 08) only, which was not available to the assessee at the time of complying with the TP documentation requirements. 4. That the TPO/ AO has failed to make appropriate adjustments to account for differences in the working capital employed by the Appellant vis-à-vis the comparables. 5. That the TPO/ AO has erred by not making suitable adjustments to account for differences in the risk profile of the assessee vis-à-vis the comparables. 3. Brief facts are: Nortel Networks India Private Limited ("Nortel India"), a wholly owned subsidiary of Nortel Networks Mauritius Limited ("NNML").It's functions involve install, maintain, repair, sell and supply plant, equipment and apparatus for the pu....
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....reliability of the financial data for companies having very small turnover are to be excluded because margins earn by these companies fluctuate to extremes because of the narrow base. Such companies lack competitive strengths, lack operational efficiencies and also lack human resources, which is main strength of the service sector. Therefore, company with a small turnover of Rs. 25 lacs cannot be compared as comparable. Recently ITAT Delhi in the case of HAWORTH India Private Limited (2011-TII-64-ITAT-Del-TP) held that a comparable having a small turnover of (Rs. 18.78 lacs) cannot be considered even if segmental information is available particularly when the main activity is different. This decision also pertains to MSS and squarely applies to the facts of this case." Aggrieved assessee is before us. 5. Ld. Counsel for the assessee Shri Vijay Iyer made following submissions, (i) Low Turnover will not make accounts unreliable - It is submitted that DRP also observed that in service industry Turnover will not have effect on margins of the comparable companies. However, financial data of very small companies are not reliable as it lack competitive strengths, lack operational effic....
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....nover of this comparable is Rs. 13.92 crores. The analysis needs to be carried out on the basis of functional profile and not on an arbitrary or adhoc criteria. From the facts on record and argument advanced before us, it emerges that the functional profile of Capital Trust Limited's consultancy segment is similar to that of Nortel India the same needs to be included in the final comparables for working the ALP. The AO will accordingly apply this comparable while working out the ALP, this ground of assessee is allowed. Comparables for AY 2008-09 6. In TP analysis, the assessee has applied ten comparable companies, their average unadjusted margin was worked out at 6.60% using multiple year data. TPO asked assessee to provide updated analysis using these ten companies, assessee while updating applied only five companies as comparable. TPO accepted all five companies proposed by assessee, however, disagreed with assessee's request to exclude Saket Projects as comparable. Beside TPO carried out fresh analysis and applied five new comparables. a. Before DRP assessee objected to inclusion of Saket Projects Limited and three comparable companies identified by TPO, namely, Choks....
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....lected by the TPO, are not comparable to Nortel India. (v) In fine, assessess's counsel contends that these companies should not be considered as comparables for following reasons : (a) Choksi Laboratories Limited: This company is a commercial testing and analysis laboratory based in Indore, Madhya Pradesh. The Company is engaged in analysing (for clients or as a regulatory requirement) food and agricultural products, cement and building materials, chemicals, drugs and paints. Other services rendered by the Company are calibration services, consultancy and pollution control. (b) Rites Limited: The company provides pre-project planning services in the fields of engineering design, construction and project management for railway tracks and electrifications together with traffic and software consultancy assignments to Malaysia Railways. Hence, the nature of services provided by Rites Limited are highly technical and complicated and requires a pool of technically competent and qualified personnel possessing the required skills and vast experience for efficiently rendering such services. (c) WAPCOS: WAPCOS renders consultancy services relating to water, power and infrastructure ....
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....industry. Reliance is placed on following ITAT decisions: - ITAT Pune Bench in the case of E-Gain Communication Pvt. Ltd. 118 ITD 243 (Pune), while reviewing the comparability analysis of some companies, held as under: "A cursory look at the chart in the assessment order of 20 compatibles would reveal that the margin of profit shown by Thirdware Solutions Ltd. and WTI Advanced Technology is extraordinary at 67.65 per cent and 54.72 per cent respectively. Therefore, it was necessary for the tax authorities to examine whether these entities have rightly been taken as comparables for application of Most Appropriate Method. ......." - ITAT Chandigarh Special Bench in the case of Quark Systems Private Limited (132 TTJ 1) while reviewing the comparability analysis of super profit companies, held as under: ".....Even if the taxpayer or its counsel had taken Datamatics as comparable in its IP audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and Datamatics. The case of Datamatics is like that of "Imercius Technologies" representing extreme positions. If Imercio....
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.... companies like EIL, Rites, Wapsos and TCE are engineering companies which provide end to end solutions and therefore they cannot be compared with assessees who provide marketing support services to the parent company. They were held to be functionally not comparable with thee engineering companies. 11.1. Following the orders of coordinate benches of ITAT in the cases of M/s MCI Com India P. Ltd.; M/s Verizon India P. Ltd. (supra); Estel in ITA no.584/Banglore/06and our own decision in case of Actis Advisers Pvt. Ltd. ITA No. 6390/Del/2012, we hold that Choksi, Rites and WAPCOS being functionally different cannot be applied as appropriate comparable to the assessee. Therefore, they are to be excluded from TP adjustment while determining the ALP. 11.2. On issue of exclusion of Saket Projects Ltd, we are of the view that specific characteristics of services provided, assets employed, risk assumed i.e. the FAR of the comparable is decisive and inclusion or exclusion of comparables. The higher or lower rate of profit is nowhere prescribed as the determinative factor in this behalf. Only if the higher or lower profit rate results on account of effect of factors given in Rule 10B(2)rea....
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....s' reported financial data is required to be adjusted for certain differences. Detailed working has been provided to the TPO vide submission dated 21 September 2010 and was also placed on record before DRP. Reliance in this regard is placed on the following findings of the below menionted decisions Demag Cranes and Components India (P.) Ltd. v. Dy. CIT [2012] 17 taxmann.com 190/49 SOT 610 (Pune - Trib.) "working capital is a factor which influences the price in the open market and therefore the net profit margin of the business segment of the assessee which is targeted by the TPO/AO/DRP. Hence, in principle, it was held that the TPO/AO/DRP failed to entertain the objections of the assessee on the 'working capital' adjustments issue." Capgemini India (P.)Ltd. v. Asstt.CIT [2013] taxmann.com 5 (Mum.) "Working capital adjustments are required as these do impact the profitability of the companies. A company with substantial working capital cannot be compared with one which has low level of working capital. The average of opening and closing level of working capital can be compared for the purpose of making adjustment. This would give a representative level of working c....
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....owing issues. a. That the AO has erred in re-computing the total estimated revenue under the BSNL project thereby enhancing the revenue to be recognized during the subject year. b. That the AO has erred in re-computing the total estimated cost under the BSNL project, thereby arriving at a higher percentage of completion under BSNL project up to the end of the subject year and enhancing the revenue to be recognized during the subject year. 11.10. Both the parties agreed that facts and issues involved with regard to computation of revenue to be recognized under the BSNL project in AYs 2007-08 and 2008-09 are similar to the facts and issues involved in AY 2006-07. ITAT vide its order dated March 2, 2012, for AY 2006-07 in assessee's own case has set aside this issue of BSNL revenue and remanded it back to the file of the AO for re-adjudication. 11.11. Ld. counsel for assessee further stated that the matter for AY 2006-07 has not yet been re-adjudicated by the AO. Since the relevant details submitted by the assessee have been overlooked by the AO and DRP in these years and the earlier years revenue recognition has important bearing on the years in question. After hearing both t....
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....de by DRP direction and without prejudice also submitted the reasons for revision of the return. AO however overstepped the binding direction and passed the final assessment order in which the claims/ adjustment of expenses in revised return were added back. 12.2. The learned counsel for the assessee referred to the provisions and made following contentions in this regard: (i) Section 144(7) provides that the DRP may, before issuing any directions: - Make such further enquiry, as it thinks fit; or - Cause any further enquiry to be made by any income-tax authority and report the results of the same to it. (ii) As per the above provisions, the DRP may before issuing the directions, either make enquiry at its own end or direct the AO to make further enquiry and report the results of the same to the DRP, which shall thereafter be incorporated in the directions issued by the DRP. However, once the directions have been issued by the DRP, the assessing officer has no powers, whatsoever, to conduct any further scrutiny/ seek clarifications from the assessee. Where the DRP seeks to make any enhancement, it can be made in the directions u/s 144C(5) and the DRP cannot direct the AO to ma....
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....)(i) of the Act, for some reasons, assessee could not make such claim in the original return of income. Law provides a right to assessee to file a revised return on discovery of such mistake or omission, thus assessee made a lawful claim of expenses of Rs. 25,596,609/-. AO offered no adverse comment in the draft order which indicates that the claim was proper. Hon'ble Delhi High court in the case of SMCC Construction (320 ITR 534) held that even if there was no claim in the return of the year in which the expenditure was incurred by the assessee, the deduction can be claimed in view of the provisions of Section 40(a)(i) in the year in which the tax has been deducted at source and paid to the government account. Accordingly, on merits also the claim of impugned adjustment of expense in revised return is allowable, consequently on both counts we allow this ground of the assessee. 16. Claim of 'Warranty Expense' for AY 2008-09 is agitated by the assessee in following terms: a. That the learned AO/Hon'ble DRP ought to have allowed deduction for warranty provision reversed/utilized during the subject AY amounting to INR 239,217,774 on the basis that the deduction for p....
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....paid to KPMG/ BSR & Co relatable to AY 2008-09: 20.1. Brief facts of this issue are that legal fee expense of INR 2,838,772 (to BSR & Co./KPMG) was booked as year-end provision by the assessee on the basis of estimate provided, the same was reversed at the beginning of the subsequent financial year. The actual expense was thereafter booked during a later year on the basis of invoice received from BSR & Co/KPMG and tax was duly deducted and deposited at the time of booking of the actual expense. The AO disallowed the said provision under section 40(a)(ia) on account of non-deduction of tax on the basis that the liability had crystallized during the year and as per section 194J, the assessee was required to deduct the tax. 21. The learned counsel for the assessee submitted that requisite tax has already been deducted and deposited at the time of booking of actual expenses on receipt of the invoice. Hence, there is no default at the assessee's end and no disallowance is warranted in such a case. It is a trite law that there cannot be a double levy of taxes on same income. Since the assessee duly deducted and deposited TDS on the basis of invoice received from BSR & Co./KPMG, any....