AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 477
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....57/-made by the Assessing officer on the basis of adjustment computed by the TPO u/s 92CA(3) of the Income tax Act, 1961. 2. On the facts and in the circumstances of the case, the CIT (A) has erred in law and on facts as he has failed to appreciated the fact that when the com parables were making average profit @ 13.56% then the assessee would have earned the same profit in international transactions?" 3. The brief facts of the case are that the appellant is a private limited company and is engaged in providing IT Enabled Services (ITES) e.g. voice/web based contact and front office services (hereinafter referred as business process outsourcing (BPO) services). For the relevant previous year, the return of income of the appellant was filed declaring loss of Rs. 12,85,57,867/-. The appellant had during the relevant previous year entered into the international transaction of provision of information technology enabled services, amounting to Rs. 13,06,79,399/- with the various associated enterprises. For application of TNMM, the appellant was considered to be the tested party and operating profit/total cost was taken as the profit level indicator (PLI). The operating results of the ....
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....onsidered being at arm's length. 7. On noting of above transactions, the A.O. made reference to transfer pricing officer. The Transfer Pricing Officer (TPO), however, in his order held that the arm's length operating profit to the total cost ratio in the above business being 13.56%, viz., average operating profit / cost margin of 8 companies was considered as comparable by the TPO. The TPO accordingly, in the order passed under section 92CA(3) of the Act, determined adjustment of Rs. 17,03,05,993 to the arm's length price of' 'international transactions' of provision of business process outsourcing services applying TNMM, as under: Calculation of arm's length price Amount Total operating cost Rs. 33,40,42,401 Arm's length margin 13.56% Profit which the appellant would have earned Rs. 33,40,42,401 13.56% Rs. 4,52,96,150 Less: Operating loss posted by the appellant Rs. (-)12,50,09,843 Difference Rs.17,03,05,993 8. The TPO held in this regards as follows: "6.0 In the transfer pricing approach the assessee has used data for five financial years out of which data of three years is on actual basis and for two years on projected basi....
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....d Services, therefore, to pass the benefit of any such functional difference between the assessee and the comparables the approach of the assessee for the year under reference is not disturbed being the start up phase. The eight comparables adopted by the assessee for Transactional Net Margin Method are accepted for year under consideration only for the specific reasons mentioned above." 9. The A.O. based on the report of TPO made addition of Rs. 17,03,05,993/- on account of transfer pricing adjustment. Aggrieved by the said order appeal was filed before Ld. CIT(A). However, Ld. cia accepted the plea of assessee company that Transfer Pricing Adjustment should be actually restricted to the amount actually retained by associated enterprises. 10. It was submitted that from the gross revenue received from the end customers in respect of various contracts, the associated enterprise retained in aggregate only a sum' of Rs. 1,19,60,457 at their end the balance amount has been passed on to the appellant, as follows: Associated Enterprises Gross Billing to End- Customer Amount Retained by AE Amount INR Net amount remitted to HCL-BPO HCL-AMERICA 71,073,269 15,507,867 43....
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....come of the appellant has to be restricted to Rs. 1, 19,60,457- being the amount retained by the associated enterprises." 13. Aggrieved with this order, the Revenue had come up in the present appeal. Ld. D.R. placed reliance on the order of Ld. CIT(A) and had prayed for quashing of CIT(A)'s order on this issue. On the other hand, Ld. Sr., Counsel submitted that the appellant could not have expected to receive from the customers of the AEs of the appellant, anything more than the amount paid by some customer to the AE, if the appellant were to be obtain the contracts for services from the customers directly, i.e., without the involvement of the AEs of the appellant. Thus, at the most the consideration received by the appellant from the AEs may be replaced by the consideration received by the AEs from its customers, for the services provided by the appellant; the price charged by AEs to the customers being the CUP. Reliance is placed in this regard on the decision of the Hon'ble Delhi High Court in the case of Sony India P. Ltd. vs. CBDT (Delhi) ; 288 ITR 52 has at pages 61-62, observed as under: "The concept of transfer pricing leading to tax avoidance has been acknowledged in....
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....of the Tribunal, held in paragraph 40 of the order that "the approach of the TPO arid the tax authorities in essence imputes notional adjustment / income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. " ..... 18. Reliance in this regard is also placed on the recent decision of Delhi Bench of the Tribunal in the case of Hyper Quality India Pvt. Ltd. vs. ACIT (ITA No. 5630/0ell2011 ), wherein, it has been held as under: "7. Ld. TPO erred in evaluating FAR (Functions performed, Assets. employed and Risk assumed) analysis which has been summarily confirmed by DRP. To support its case, assessee furnished split financials of the appellant and its AE. Whereas the appellant has been .able to earn profit in India its counterpart the AE has continuously sustained losses. There being no element of profit in the hands of the AE, there is no case of shifting of profits, practicable or probable. Invoking a higher ALP on the appellant is only anticipatory and complete ignorance of fact. The facts and figures produced before the Ld. TPO establish that there is no commercial profit available in the hands of the ....
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....record. Ld. CIT(A) had followed the ratio laid down in the case of Global Ventedge P. Ltd. (supra) (in I.T.A. No. 1432 & 2321 / Del/2009 and 116/Del/2011). This decision was affirmed by both Hon'ble High Court and Hon'ble Supreme Court and his ratio was followed in subsequent decisions as submitted earlier and, therefore, the order of Ld. CIT(A) on this issue is reasonable and we do not find any reason to interfere with this finding of Ld. CIT(A) and hence, the grounds of appeal filed by revenue are dismissed. Accordingly, appeal filed by revenue is dismissed. I.T.A.No. 3547/Del/2010: 22. Now, we deal with the appeal filed by assessee in I.T.A. No. 3547/Del/2010. The assessee has raised following grounds of appeal: "1. That the learned Commissioner of Income-tax (Appeals) erred both on facts and also in law in confirming the addition to the tune of Rs.l,19,60,457/- which the learned Transfer Pricing Officer ("TPO") has made in the case of the appellant for the impugned assessment year. 2. That the learned Commissioner of Income-tax (Appeals) erred both on facts and in law in failing to appreciate the fact that the approach which the appellant had adopted by taking a wei....
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....bmitted that operating profit/ loss of the appellant for the relevant previous year are required to be adjusted to exclude items of abnormal cost / short fall in revenue (owing to lower rate paid to the appellant as start up) to determine the normal profit that could have been earned by the appellant for the purpose of benchmarking with other companies which are not in start-up stage. 25. In case adjustment of the extra-ordinary expenses and considering the average expenses that would have been incurred in the normal operations, the operating profit margin of the appellant works out to 15% as follows: Particulars- Total Optimum Excess / Deficit - Direct / Indirect 18,26,67,573 Infinet Acquisition 1,69,17,261 WIP 94,47,723 Total Sales 20,90,32,557 22,77,90,205 (1,87,57,647) Salary 13,38,59,483 10,45,16,279 2,93,43,204 64% 50% 14% Dep 4,42,53,507 2,29,93,581 2,12,59,926 21% 11% 10% OAG 15,13,90,147 8,49,41,671 6,64,48,476 72% 41% 32% Finance Charges 7,68,060 7,68,060 - 0% 0% 0% Misc. Exp. W /0 37,71,203 37,71,203 - 2% 2% 0% Total Cost 33,40,42,4....
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....levant documents in comparable units for the necessary analysis. The appeal of the assessee is allowed for statistical purposes in the aforesaid terms." 30. Reliance in this regard is placed on the decision of Pune Bench of the Tribunal in the case of Amdocs Business Services Pvt. Ltd. vs. DCIT (ITA No. 14212/PN/11), wherein, the Tribunal allowed economic adjustment on account of under capacity utilization holding that the appellant was in start up phase during the assessment year consideration. The relevant extract of the decision is reproduced as under: "9. The next major point made out by the appellant is that this being the first full year of operation, the assessee had incurred certain expenditure which are start-up costs and cannot be fully recovered in the instant year itself, and such an expenditure has abnormally affected the profit margin. It is also canvassed that due to the start-up year the capacity utilization was not satisfactory, whereas its profitability has been bench marked against comparables which are established entities -and have been set up over the years. The plea setup by the assessee for economic adjustments on account of under capacity utilization and ....
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.... difference in the facts of the appellant's case and that of the comparable cases in terms of capacity utilization as well as in other terms. Appropriate adjustments thus were required to be made to eliminate such differences" 33. Further, the Hon'ble Pune Bench of the of Tribunal in the case of Brintons Carpers Asia Pvt. Ltd. vs. ACIT ITA. No. 1296/PN/10) while allowing* adjustment for idle capacity caused due to labour unrest/strike and relying upon the above observation of the Mumbai Tribunal held as follows: "15. From the above, it is clear the AO has authority vide clause (iii) above to make the adjustments. Such adjustments are necessary only to remove or minimize the differences in the comparable or anomaly in' the said comparable. -Such adjustments are authenticated by the OECD guidelines too. In this regard, we have perused the important findings of the Tribunal in the case of the Fiat India P Ltd (supra) placed at page 191 of the paper book. For the sake completeness, the same is reproduced as under. .......as regards the adjustments made by the appellant to work out its operating margin for comparing the same with the profit margin of comparable cases, it....
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..... Dupont India Pvt. Ltd. vs. DCIT (ITA No 5336/0/2010), the Hon'ble Delhi Bench of the Tribunal, while allowing the adjustment for capacity utilization held that ; "It is a matter of fact that fixed costs remain the same even when there is under utilization of capacity. Therefore, the case of the appellant and the comparable cases have to be examined in respect of capacity utilization so as to make the controlled and uncontrolled transactions comparable." Also, the Hon'ble Delhi Bench of the Tribunal in the case of ITO vs. CRM Services India Pvt. Ltd upheld the claim of the appellant towards adjustment of idle capacity: "8.1 This bring us to the alternative argument that the appellant is entitled to get adjustment in respect of capacity under-utilization. No objection has been raised by the Id. GIT, DR in this matter. As a matter of fact, he has fairly accepted the proposition that adjustment in this regard is-required to be made. At the same time, it is a/so held that suitable adjustment has to be made to such PLI in respect of idle capacity." 35. Further, the Hon'ble Bangalore bench of the Tribunal in the case of Genisys Integrating Systems (India) Pvt. Ltd vs. ....