TaxTMI 
TaxTMI 
2014 (9) TMI 258
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.... 2. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding/confirming the action of the Learned Additional Commissioner of Income Tax (Ld. TPO) in not demonstrating that the motive of the Appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which is a prerequisite condition to make any adjustment under the provision of Chapter X of the Act. C. Comparability analysis adopted for determination of arm's length price suffers from inherent defects: 3. On the facts and in the circumstances of the case and in law, the Ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the Ld. TPO in conducting fresh benchmarking analysis substituting the Appellant's analysis with fresh comparability analysis on his own conjectures and surmises, 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in rejecting the following filters applied by the Appellant:  ....
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..... Thus the ld. TPO/CIT(A) failed to conduct the arm's length analysis in accordance with the provisions of Rule 10B of the Income Tax Rules, 1902. 9. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in benchmarking the transactions of the Appellant with companies having significant differences in the functions performed, turnover, research expenses and/or marketing expenses incurred and risk undertaken by the Appellant vis-a-vis the comparable companies. 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in selecting Maple e-Solutions Limited as comparable despite the fact that the data of the company was not available for the full 12 months period. Thus the ld. TPO has adopted inconsistent and selective approach for the selection of the comparable companies. 11. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding confirming the action of the ld. TPO in not rejecting VishaI Information....
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....ises. 17. On the facts and in the circumstances of the case and in law, the ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the TPO in not appreciating the difference in infrastructure cost of the Appellant and the comparables selected and erred in not giving a downward adjustment to the mark-up of comparables on account of difference in infrastructure cost. F. Variation of 5%. from the arithmetic mean: 18. On the facts and in the circumstances of the case and in law. the ld. TPO erred and the Ld. CIT(A) further erred in upholding/confirming the action of the TPO in denying the benefit/reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act. while computing the adjustment to the total income of the Appellant. 3. Before us, the learned AR has not pressed ground Nos. 1, 2, 3, 4, 5, 6, 8, 9, 12, 13, 14, 15, 17 and 18 and argued only in respect of ground Nos. 7, 10, 11 and 16 of the grounds of appeal and accordingly, Ground Nos. 1, 2, 3, 4, 5, 6, 8, 9, 12, 13, 14, 15,17 and 18 are dismissed as not pressed. 4. Ground N....
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....ntity's ability to make profits and losses is contingent upon market conditions. The profits and losses are contingent upon various economic factors and are subject to various influences in a free market economy. In a free market situation, one cannot ever perceive that all players would be making profits, with no one making losses. The rationale behind off-shoring services to India has been to curtail costs in a free global market, as against revenue maximisation. A profit or loss does not have any bearing on the comparability of a company. Accordingly, any company, which is functionally comparable, must be included in the set of comparables, irrespective of its profitability. 7. In view of the above, the AR submitted that in a transfer pricing documentation, for conducting a fair economic analysis, one need to follow a scientific methodology to eliminate companies on standard and economically viable filters. Thus, merely because the company has incurred losses, it should not be eliminated from the set of comparable. However, the CIT(A)/TPO has not taken due cognisance of the above mentioned submissions and rejected companies that fail to pass this filter. 8. He relied o....
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....as held that companies having extraordinarily high profit/loss cannot be considered as comparables. Being so, the companies having extraordinarily high profit or loss are to be excluded as comparables. Accordingly, the Assessing Officer is directed to re-calculate the ALP. This ground is partly allowed. 14. The next ground for our adjudication is ground No. 10 which is as follows: 10. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in upholding/confirming the action of the Ld. TPO in selecting Maple e-Solutions Limited as comparable despite the fact that the data of the company was not available for the full 12 months period. Thus the ld. TPO has adopted inconsistent and selective approach for the selection of the comparable companies. 15. Facts of the issue are that the TPO selected Maple e-solutions Ltd. as one of the new comparable company. The AR contended that Maple was in operation only for a period of 4 months during the FY 2004-05 and, therefore, the same does not qualify the filter adopted by the TPO. However, the CIT(A) did not consider the submission made by the assessee-company. 16. The AR submitted....
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....ne the ALP. The AO considered the financial data of partial period of operation of Maple e-Solutions. We are inclined to allow this ground taken by the assessee as the financial data of Maple e-Solutions cannot be considered as comparable to determine the ALP since it is part period data. This ground of the assessee is allowed. 19. The next ground of our consideration is ground No. 11 which is as under: 11. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in upholding confirming the action of the ld. TPO in not rejecting VishaI Information Technologies Limited (Vishal) in spite of the fact that its salary cost as percentage of the total cost is very abnormal indicating difference in the functional profile of the Appellant and Vishal. Thus the TPO has adopted inconsistent and selective approach for the selection of the comparable companies 20. Brief facts of the issue are that the TPO in his SCN proposed to introduce Vishal Information Technologies Ltd. (Vishal for short) as a comparable in respect of the ITES service being rendered by the assessee company. It was also selected by the assessee company in the TP stud....
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..... Based on the above mentioned facts, the AR submitted that Vishal is not functionally comparable as Vishal is not providing ITES services themselves but rather outsourcing it to another entity, thereby not qualifying as a comparable, due to its peculiar business model. Thus, based on the said analysis, the AR submitted that Vishal should be excluded from the final list of comparables selected by the TPO. The AR relied on the following decisions which squarely covers the ground of the assessee-company: (a) The Tribunal in the case of HSBC Electronic Data Processing (I) (P.) Ltd. v. Asstt. CIT held as under: "11. We have considered contentions of the parties and perused the material on record with regard 10 the aforesaid comparables. There is no dispute to the fact that the employees cost to total turnover of the aforesaid company works out to 1.42% as against the industry average of 30 to 40% and assessee's employees cost to turnover percentage o{ 43.76%. This fact implies that the aforesaid company has outsourced major portion of its work to third party vendors. Therefore, this company cannot be tr....
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....Information Technology cannot be taken as a comparable and direct for excluding the same (or determining the ALP." (d) The Tribunal in the case of Capital IQ Information Systems (India) (P.) Ltd. v. DCIT (International Taxation) [(2013) 32 taxmann.com 21), held as under: "17. After considering the submissions of the learned Authorised Representative for the assessee, we find that the DRP, in the proceedings for the assessment year 2008-09 in assessee's own case, after taking note of the composition of the vendor payments of Coral Hub for the last three years, and the fact that it has also commenced a new line of business of Printing on Demand (POD), wherein it prints upon clients request, concluded as follows- "18.4. In view of this major difference in functionality and the business model, this Panel is of the view that 'Coral Hub' is not a suitable comparable to the taxpayer and hence needs to be dropped from the final list of comparables." In case of Maersk Global service Centre India (P....
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....ng India Limited vs. Addl. CIT [(2013) ITA No. 1624/Hyd/2010; * Symphony Marketing Solutions India Private Limited vs. ITO (2013) IT(TP)A No. 1316/Bang/2012]; * Google India Private Limited vs. DCIT (2013) 29 taxmann.com 412 (Bangalore ITAT); * Nomura Fin Services (India) (P.) Limited vs. ACIT (2013) 33 taxmann.com 4 (Mumbai ITAT); * Stream International Services (P.) Limited vs. ADIT (International Taxation) (2013) 31 taxmann.com 227 (Mumbai ITAT); * 24/7 Customer.Com (P.) Limited vs. DCIT [(2013) 28 taxmann.com 258/ (Bang ITAT); * M/s. HCL EAI Services Ltd., vs. DCIT (IT(TP)A No.1348/Bang/2011) (Bang ITAT); * M/s. Mercedes Benz Research & Development India Pvt. Ltd. vs. DCIT (IT(TP)A No. 1222/Bang/2011) (Bang. ITAT); * ITO vs. M/s. Nextlinx India Pvt. Ltd. (ITA No. 454/Bang/2011) (Bang. ITAT). 24. The DR submitted that the TPO has not adopted any filter with reference to salary cost. Thus, the 5 filters adopted by the TPO are as follows: &nbs....
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....lant and not considering the Profit Before Depreciation and Tax to total cost as Profit Level Indicator for determining the ALP on his own conjectures and surmises. 29. At the outset, the AR submitted that the TPO has himself acknowledged the fact that in case where rate of depreciation has an impact on the profit margin of the assessee company, then the assessee company should be allowed depreciation adjustment or can opt for PLI as PBDIT/TC. In view of the above, the Ld. TPO in his order calculated the revised margin of the assessee company and also the comparables by taking the PLI as PBDIT/TC and concluded that the margin of the Assessee Company even after considering the PLI as PBDIT/TC is lesser than the arithmetic mean of the comparables. The TPO did not consider the fact that the margin of the Assessee Company falls within the +/- 5% range of the arithmetic mean of the comparables. Also, the TPO while passing the rectification petition under section 154 of the Act failed to consider that once the PLI is taken as PBDIT/TC, the (-) 5% range from the arithmetic mean of 33.01% (34.60% less 1.59% working capital adjustment) of comparable companies as computed by the TPO himse....
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....an be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit" used in Rule 10B can be taken to mean commercial profit. ... In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure which must be deducted in all situations. ... Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences. if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the assessee in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. ... Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings. Without considering obvious material differences, the contention of the assessee to take profit without depreciation wa....