TaxTMI 
TaxTMI 
2015 (6) TMI 959
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....ion of AEB personal loans and other retail lending products. 3) Support for marketing and promotion of products, scheme etc. of AEB. 3. The assessee had filed its return of income declaring loss of Rs. 6,62,96,780/-. The AO noticed that assessee had undertaken International transactions with its associated enterprise to the tune of Rs. 7,03,224/-. Therefore, in accordance with the provisions of section 92CA of the Income Tax Act, the International transaction entered into by the assessee with the associate enterprise was referred to the Transfer Pricing Officer (in short "TPO") for determining the arm's length price. The TPO passed the order u/s 92CA(3) on 7th October, 2010 making an upward adjustment of Rs. 3,42,63,209/- to the income of the assessee, being the difference between arms length price and the price charged by the assessee. The AO passed the draft assessment order after considering the assessee's submissions and made the addition of Rs. 3,42,63,209/- to the income of the assessee. The assessee filed objections before Dispute Resolution Panel (in short "DRP") and the DRP issued directions u/s 144C(5) on 2nd August, 2011 confirming the TPO's action. 4. Being agg....
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....ve erred in accepting functionally dissimilar company namely Sundaram Finance Distribution Limited as functionally comparable to the Appellant. 5.5 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by selecting certain companies earning super normal power as comparable to the Appellant. 5.6That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer pricing regulations. OECD guidelines on transfer pricing and judicial precedence. 6.That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 per cent range as the Appellant has the right to exercise this option under the pre-amended second proviso to sec. 92C(2) of the Act. 6.1That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erre....
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....gation with follow-up. 3. Remote control reviews with focus on protection of company assets and adherence to policies and procedures. 4. TID review and analysis. 5. Initiatives such as 6 Sigma, BCP coordination and adherence to GFES policies. The fee for the above services is payable to the AESIL as under: i. The Fees payable by AEII to AESIL for the services shall be arrived at by taking into account the total cost incurred by AESIL for providing the services plus a mark up of 15.09%. ii. The fees shall be payable on a quarterly basis by inward remittance into India of the amount of the fees. iii. The fees shall be payable within 30 days from the completion of the period to which the fees relate. iv. AESIL shall provide AEII with a detailed breakup of the total cost incurred by AESIL and further furnish all such clarification as may be required by AEII in this connection." 8. The TPO noticed that assessee had applied TNMM method for determining arm's length price in regard to provision of the marketing services to Amex India in respect of credit cards and personal loans. He noted that the profitability of the com....
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....not reliable or correct due to following defects: - 1. "As per Rule 10B(4), it is mandatory to the use the current financial year data i.e. the financial year in which the international transactions took place. (F.Y. 2006-07). But the taxpayer excluded the current year's data in most of the comparable cases. 2. Some companies though qualify all the filters applied by the tax payer based on the data pertaining to the F.Y. 2006-07, they have not been selected. 3. The assessee has himself in a way rejected its transfer pricing study and has rejected its own comparables during the present proceedings." 11. In view of these defects the TPO rejected the assessee's first objection that its TP Study should be accepted. 12. The second objection of assessee was that the companies identified by TPO were functionally different. In this regard TPO observed that assessee had not been able to demonstrate any functional differences in the companies selected by him and the assessee company. He pointed out that the company selected by him, as noticed in para 7 of his order, were the companies which were deriving income from commission like the assessee. He further observed that under ....
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....ards to exclusion of loss making comparables and comparables-disclosing abnormal high profit under the Income Tax Act, 1961 and Income Tax Rule 1962. The OECD in Revision of Chapter I-III as published on 22.07.2010 has made reference to extreme results. For sake of ready reference, the relevant Para is extracted below. 3.63 Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the....
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....n this issue in the ensuing pargraphs: Hon'ble ITAT in case of E-gain Communication (P) Ltd. vs. Income Tax Officer, Ward 1(4), Pune [2008] 23 SOT 385 (PUNE), has examined the issue of selection of certain companies disclosing abnormally high profit margin for the comparability analysis. Hon'ble ITAT relying on para 1.47 of OECD TP guideline has held that it was necessary for the TPO to examine whether these entities have been taken rightly as comparable. The relevant guideline of the OECD is reproduced as under: "1.47 Whether the application of one or more methods produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may results from figures of the comparable data that require adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm's length range". Contrary to the above, Hon'ble ITAT in case of Philips Software Centre (P) Ltd. vs. ACIT, Circle 12(2) [2008] 26 SOT 226 (BANG), has held that a compa....
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....onus. He relied on the decision of ITAT, Delhi Bench in the case of Vedaris Technology 2010-TII-10-ITAT-DEL-TP, wherein it was held that no risk adjustment can be allowed in the absence of computation. 19. The TPO examined the margins of the comparables computed from the annual reports by assessee and found the computation to be correct. He has tabulated the comparables along with their operating margins on operating cost (%) as under: - S.No. Name of the Company Operating margin on operating costs (%) for FY 2006-07 1. Access Global Solutions Ltd. 4.64% 2. Eastern Financiers Limited 9.76% 3. Empire Industries Limited 20.53% 4. Geojit Commodities Ltd. 3.09% 5. ICC International Ltd. 82.92% 6. NYK Line (India) Ltd. 5.03% 7. Priya International Ltd. 13.97% 8. Publicity Society of India Ltd. 12.80% 9. Relic Technologies Ltd. 12.90% 10. Reliance Communications Infrastructure Ltd. 20.85% 11. India Infoline.com Distribution Company Ltd. 0.39% 12. Allianz Securities Ltd. 12.37% 13. Sundaram Finance Distri....
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.....43 lac this year. This is mainly because of higher capital investment made by the textile industry, especially investment in multi head embroidery machines." 22. Ld. Counsel submitted that ICC International was functionally different because of heavy investment in textiles. This should not have been considered as comparable to the assessee. 23. As regards, Sundaram Finance Distribution Ltd., ld. Counsel submitted that merely because assessee had supplied the said comparable, the same could not automatically been considered without properly examining whether the comparable company was functionally same or not. In this regard ld. Counsel relied on the decision of ITAT, Chandigarh Spl. Bench in the case of Deputy Commissioner of Income Tax vs. Quark System Pvt. Ltd., wherein it was held that even if assessee has taken "D" as a comparable in its transfer pricing data, still it was entitled to point out that said enterprise had wrongly been taken as a comparable. He, therefore, submitted that TPO was wrong in not excluding Sundaram Finance Distribution Ltd. (in short "SFDL) mainly on the ground that assessee had provided the said comparable without considering functional dissimil....
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....0-T11-29-ITAT-MUM-TP. 26. Ld. Counsel submitted that companies earning super normal profits had to be excluded from comparables and in support of his contention he relied on Abode Systems India Pvt. Ltd. vs. ACIT. 27. Ld. DR Shri Piyush Jain submitted that Sundaram Finance Distribution Ltd. is in same line of business. He referred to the decision in the case of M/s Symantec Software Solutions Pvt. Ltd. vs. ACIT & DCIT vs. M/s Deloitte Consulting India P. Ltd. and referred to para 15.1 of the said order for the proposition that a comparable selected by assessee is not to be excluded merely on the ground that the same was earning high margin of profit. The said para reads as under: - 15.1 "Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself." 28. Ld. DR further referred to page 186 of paper book, wherein the assessee's transfer pricing report is contained, wherein the assessee has stated as unde....
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....pany Amex IT Ltd., having agreed so it is not correct on the part of the assessee company to raise a new plea appears that the VITL has outsourced the manpower and the cost of outsourcing appears to have been included in the other heads of the expenditure instead of wages-employee cost. Moreover, the intangibles will not materially affect the price or profit earning. By outsourcing the manpower, the VITL would have incurred more cost compared to the assessee company, thus resulting in lesser operating profit. But, having considering the findings of the TPO, we find that the intangibles or outsourcing the manpower will not materially affect the price or profit margin. In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the CIT(A) in confirming the action of the TPO by selecting the VITL as comparable company. The case-law relied on by the ld. Counsel for the assessee is distinguishable on facts. Hence, the ground raised by the assessee on this issue is rejected." He, ....
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....tify the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction or a number of transaction and then to adjust the price to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market. This methodogy is followed in all the methods in the manner prescribed in Rule 10B in respect of various methods. 35. In the present case, we are concerned with transactional net margin method (TNMM) on the adoption of which there is no dispute. In this method the net profit margin realized by the enterprise from an international transaction entered into with associate enterprise is computed in relation to cost incurred or sales affected or assets employed or to be employed by the enterprise or having regard to any other relevant base. In the present case, the operating cost has been adopted as the relevant base in relation to which net profit margin has been determined. The net margin realized by the enterprise, having regard to the operating cost, is required to be adjust....
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....ome from IT enabled services of 'F' recorded by the TPO for the year ending 31.03.2004 are perfectly in order. These figures can be verified from the copy of profit and loss account of this company." 36. In the rules, no where it has been provided that comparables having high or low margins of profits are required to be excluded for determining arithmetic mean of net margins for applying to the operating cost of international transaction entered into by the assessee with the associate enterprise. Therefore, the assessee's contention that since Sundaram Finance Distribution Ltd. and ICC International Ltd. were earning super net profit margins should be excluded is devoid of any merit. It has only to be adjusted for the material differences between business modules as adopted by the assessee vis-a-vis business module adopted by the comparable uncontrolled transactions. If the comparables are performing the same functions then merely on the ground of they being earning super profits, cannot be excluded. Material differences between their business modules, however, are required to be taken care off and duly adjusted. In the case of Sundaram Finance Distribution Ltd., we find that th....
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....as noted earlier, that it had earned super profits during the year because of increase in supply on account of government scheme. We find that TPO has considered the assessee's objection regarding exclusion of high margin comparables in para 8.7 of his order and the DRP in para 7.1. They have merely, inter-alia, observed that comparables cannot be rejected simply because they are loss or high profit making comparables. However, they have not considered that if certain extra ordinary factors materially affected the profit in a particular year then that aspects had to be taken into consideration and due adjustment was required to be made to the net profit margin for brining the comparable on the same platform at which the assessee was performing its functions. 39. Admittedly the assessee's objections in regard to ICC International, as noted earlier, have not been considered by DRP and, therefore, we consider it in the interest of justice that this issue should also be restored to the file of TPO for fresh consideration. 40. In view of above discussion, we proceed to decide the various ground of appeal raised in Part 1 of its ground of appeal. Ground nos. 3 & 4 deals with refere....
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....terpretation/applicability. It is a settled position of law that an amendment which clarifies a provision has retrospective operation. Thus, this ground of objection is also overruled. We decline to interfere with the order of the TPO on this ground." 41. We concur with the findings of DRP and, therefore, we reject the ground no. 6.1 raised by the assessee. 42. Part II : Grounds of appeal read as under: "7. That on the facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in disregarding the acquisition cost of database amounting to Rs. 120,000,000 and valuing the same at Rs. 30,000,000 based on the asstt. order passed for the AY 2002-03. 8.1 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in disallowing the claim of the appellant for depreciation on the acquired business database u/s 32 of the Act. 8.2 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in following the assessment orders passed by the predecessor for asstt. years 2002-03 to 2006-07 that the acquired business database could not be regarded as plant a....
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....ission to raise following additional grounds of appeal: Additional Ground 1: Without prejudice to the other grounds, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in restricting the cost of acquired database to Rs. 30,000,000 instead of Rs. 120,000,000 as confirmed by the ld. TPO. Additional Ground 2: Without prejudice to the other grounds, the Hon'ble DRP and ld. AO has erred in not appreciating that the said database falls under the head of "Intangible asset" and accordingly, depreciation of Rs. 7,119,141 as computed in the Tax Audit Report for the subject year should have been allowed on the same." 2. The ld. counsel for the assessee submitted that assessee is joint venture between TATA Finance Ltd. and American Express International. It is engaged in the business of money changing, foreign exchange and other related services as permitted by the RBI. The assessee had purchased four foreign exchange service locations of American Express-TRS(Legal Entity: AEB India) for a consideration of Rs. 26.77 crores. A sum of Rs. 12 crores was paid towards the business of database. While framing asstt. order in AY 2002-03, AO has taken the value....
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....p; Sd/- JUDICIAL MEMBER VICE-PRESIDENT Dated: 15/05/2012" 45. In view of above observations, the additional ground no. 1 and ground no. 7 raised by the assessee stands allowed. The additional ground no. 2 raised by the assessee also stands allowed as it has been held that the depreciation would be admissible by treating the data base as int....
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....of the judgment of Hon'ble Delhi High Court in the case of Oracle India P. Ltd. (supra), we are of the considered view that the CIT(A) was indeed in error in restricting the value of Acquired Business Database at Rs. 3 crores as against Rs. 12 crores paid by the assessee. To this extent, we vacate the order of the CIT(A). We further find that so far as the question about admissibility of depreciation of Acquired Business Database is concerned, this issue is covered in favour of the assessee by the judgment of Hon'ble Delhi High Court in the case of CIT vs. Hindustan Coca Cola Beverages Pvt. Ltd. (331 ITR 192), wherein, their Lordships, inter-alia, have observed that "It is worth noting, the scope of sec. 32 has been widened by the Finance (No. 2) Act, 1998 whereby depreciation is not allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." In view of these discussions as also bearing in mind the entirety of the case, we are of the considered opinion that the CIT(A) ought to have all....