AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 382
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....that, in any event, the total adjustment made to the transfer price of the appellant should be restricted to the overall income earned by the AE from third parties. 5. On factual aspects, the contention of the assessee is that the assessee should be granted an adjustment, as claimed, in respect of the higher employee costs as the capacity of the assessee is underutilized which is reflected in the employee cost as percentage of revenues being substantially higher compared to the employee costs of comparable companies. Finally, so far as comparables selected by the TPO are concerned, the grievance of the assessee is that (a) Crossdomain Solutions Ltd (b) Maple eSolutions (c) Vishal Information Tech Ltd have been wrongly selected as comparables inasmuch as these comparables are functionally not comparable to the assessee. 6. We will take up the preliminary legal issues first. 7. In order to adjudicate on these issues, it is essential to take a look at the relevant material facts, and developments leading to this appeal before us. The assessee is engaged in the business of providing information technology enabled services in the areas of insurance claim processing, mortgage loan pro....
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....contended by the assessee that since the assessee group, as a whole, was incurring the loss, no arm's length price adjustment was required at all. It was pointed out that revenue earned from the third party was much less than overall operating costs incurred by the assessee and its AEs abroad. The TPO was of the view that this argument proceeds on the fallacious assumption that the AE cannot incur losses on standalone basis, and when he does incur such losses, the assessee must share the same. He also referred to the Tribunal decision in the case of Gharda Chemicals Vs DCIT [(2010) 35 SOT 406 (Mum)], and rejected this line of reasoning. When this action of the assessee was challenged before the Dispute Resolution Panel, the DRP also confirmed this action in principle. However, as regards the plea of the assessee that "further, the learned TPO and the learned AO have erred in law and on facts by not considering the fact that adjustments, if any, should be restricted to the price received by Fortune USA from its ultimate customers", the DRP did direct the TPO to "restrict the quantum of adjustment to the amount actually received by the AE from the third parties". Accordingly, even th....
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....se, and this question cannot be decided in vacuum or in an abstract or theoretical terms. It has be considered in the light of the facts of that case, in the light of availability of necessary inputs for various alternative options and in the light of other relevant factors. If in one case the Tribunal has held that even one comparable is good enough for determining the arm's length price on the basis of one of the prescribed methods, and that method is most appropriate method in a given situation, it cannot be inferred that irrespective of the method employed and de-hors the peculiarities of a fact situation, a single comparable is good enough for all the methods of determining arm's price, so as to be treated as most appropriate method for that purpose. In an indirect method like TNMM, a reasonable number of comparables is an important factor to ensure that the results are truly representative of the segment to which the tested party belongs. The situation with regard to direct methods like CUP, as long as transactions are established to be bonafide, could be slightly different. There are no yardsticks of universal application. However, the mandate of Section 92C(1), read with ru....
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....s assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method [Emphasis, by underlining, supplied by us] 11. The scheme of the transfer pricing legislation in India is thus unambiguous. There is no dispute that the selection of 'most appropriate method' is not in the unfettered discretion of the assessee and it is something which can always be subject matter of adjudication at the assessment as well as appellate stage. The TPO has a right, as indeed duty, to examine whether a particular method adopted by the assessee is indeed most appropriate method of determining arm's length price on the ....
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....E, but, given our above conclusions, that aspect of the matter is wholly academic. 12. The second legal proposition advanced by the learned counsel is that the total adjustment made to the arm's length price of the appellant should be restricted to the overall income earned by the AE from third parties. As we deal with this contention, we must bear in mind the situation before us is that the AE has sold the service to the independent enterprise at a price lower than the ALP worked out by the TPO. It is for this reason that the ALP adjustment, on the facts of this case, has been restricted to the difference between the price at which the AE has sold the service to the independent enterprise and the price at which the assessee has sold the service to the AE. When the same service, without any value addition, is sold between independent parties (i.e. the AE and the end customer) at a price, such a transaction is the best indicator of its arm's length price. The assessee, however, is not content with this. He contends that since the AE has incurred certain expenses to earn this revenue, the expenses so incurred by the AE should also be reduced from the revenue, so realized by the AE, ....
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....l revenue earned by both A and B. Under such circumstances, entity B will have to pay the additional amount from its internal sources which in addition to being a highly absurd proposition, may also lead to the bankruptcy of B since this cannot be sustained over a period of time. In view of the above discussions, the contention of appellant is found to be acceptable, especially with reference to the object and scheme of transfer pricing regulation which govern the international transaction undertaken by an assessee with its associated enterprise and not when transactions take place between assessee and independent clients. " It is further submitted by the Appellant that Fortune USA undertakes the business development and the marketing functions for and on behalf of the Appellant. It is also responsible for maintaining the relationship with the end customers in order to procure regular business. In this regard, the Appellant submits that if Fortune USA i.e. the AE incurs such expenditure on behalf of the Appellant, the AE should be adequately remunerated for the same. Since, the group has not been able to make profit out of the transaction, in a worst case scenario all the rev....
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....merit acceptance. The intent and purpose of these provisions is not to ensure that there is no diminution in the tax liability of Indian enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the AE should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. If goods worth Rs. 100, which are sold for Rs. 125 to unrelated parties are sold to the AE at Rs. 105, there is reduction of income to the extent of Rs. 20 in the hands of Indian enterprise. If the Indian enterprise had charged the same price from its AE as that from the unrelated parties, its profit would have been Rs. 25 instead of Rs. 5 by way of a sale to AE. How much tax is paid by the foreign AE is not relevant in the determination of correct tax liability in the hands of the Indian enterprise. What is material is that the rightful tax payable in India should not suffer due to the adjustment of price for goods or services between the related enterprises. The contention of the learned Authorised Representative that the entire exercise of determining ALP of the transactions between the two enterprises is useless as the price c....
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.... the arm's length price in respect of the transactions entered into by the assessee with its associated enterprise.....". The matter was carried in appeal before the Hon'ble Delhi High Court, by the Commissioner, but without any success. Hon'ble Delhi High Court, in the judgment reported as Global Vantedge Pvt Ltd [(2013) 354 ITR 21 (Del)], observed that, "In the present case, we find that the Tribunal had examined the findings of the Commissioner of Income Tax (Appeals) in detail and had given an opportunity to the departmental representative to controvert or rebut the findings and conclusions arrived at by the CIT (Appeals). However, despite that opportunity, it is recorded in the order, a portion whereof was extracted above, that the departmental representative had not been able to controvert those findings and point to any material to enable the Tribunal to take a view other than the view taken by the CIT (Appeals). It is in these circumstances that the Tribunal concurred with the view taken by the CIT (Appeals)............... In these circumstances, we do not find any substantial question of law which arises for our consideration in these appeals." Hon'ble Supreme Court, v....
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....ationships are not linear. There are complex structures involved in many intra AE transactions, and, if we are hold that the ALP adjustments cannot exceed the global profits, it will result in interaction of too many tax jurisdictions, in many a cases with irreconcilable tax laws- particularly with respect to permissible tax manoeuvrings, to come to a logical conclusion in such cases. We are, therefore, not inclined to yield to the suggestion of the learned counsel that, as a principle and universally, the ALP adjustments cannot result in a situation that the profits of the AEs and the ALP adjustments, put together, exceed the global profits of the group as a whole. As regards the reliance placed by the learned counsel on certain observations in the CIT(A)'s order, which have been extensively reproduced and approved by the coordinate bench, we can only say, to borrow the words of Hon'ble Bombay High Court in the case of CIT vs. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], a judicial precedent is only "an authority for what it actually decides and not what may come to follow from some observations which find place therein". That apart, what is being relied upon is not even an....
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....assessee cannot result in a situation that these are in excess of the global profits. These decisions were dealing with a situation in which the DRP had given certain direction and the limited question before the Tribunal was whether these directions have been given proper effect or not. 20. In view of the above discussions, in our considered view, the right course of action will be to remit the matter to the Assessing Officer with a direction to re-examine this aspect of the matter in the light of the decision of Global Vantedge (supra) as analysed by us above. In the absence of necessary information inputs, such as average selling expenses in this line of activity at the relevant point of time, this issue cannot be decided at this stage. In case the assessee can indeed demonstrate that the residual revenues belonging to the assessee, after making appropriate adjustments for the average selling expenses in his line of commercial activity, are less than the transaction value, or within 5% range of the same, the same will have to be accepted as an arm's length price by the Assessing Officer. The functional profile of the AE, as also other related factors such as weightage to this f....
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.... to increase of employee cost and underutilization of capacity". However, the only factual argument on record, in support of this grievance and in the objections filed before the DRP, was that "the percentage of employee cost on total revenue of the assessee was 76% whereas the average employee cost on total revenue of the comparable companies was 36% approximately" and that "as there are material differences between employee costs of Fortune India (AE segment) and that of comparable companies, an adjustment for substantial difference in employee cost is required to be carried out before computing the ALP". In the DRP order, there is no mention about the specific submissions on this issue. There is no specific mention about the underutilization of capacity either. The grievance of the assessee did not find any favour with the DRP either. The assessee is aggrieved and is in appeal before us. 24. We have heard the rival contentions, perused the material on record and duly perused the material on record in the light of the applicable legal position. 25. In our considered view, merely because the employee costs of the assessee are higher, it does, in our considered view, lead to the ....
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....e assessing authority to rectify the mistake by computing the correct adjustment in under utilizing capacity by taking the capacity utilization of the comparable companies at 80 percent instead of 65 percent mentioned in the order of the DRP. 27. As for the case of DCIT Vs Panasonic AVC Networks Pvt Ltd [(2014) 42 taxmann.420 (Del)], relied upon by the assessee, it is not on the issue before us either. It does not deal with a situation in which higher employee cost in percentage terms, by itself, leads to the conclusion that there is an underutilization of capacity. All this decision holds, in the context of underutilization of capacity, is that "Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment". There is no, and cannot be any, quarrel with....