TaxTMI 
TaxTMI 
2012 (12) TMI 1060
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....3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the Global support service charges amounting to Rs. 38,26,277/- without appreciating the fact that during the assessment proceedings, the assessee had failed to furnish the necessary documents in support of the services rendered." 3 Ground no. 1 is regarding transfer pricing adjustment on account of provisions of technical services. 3.1 The assessee company is an indirect subsidiary of the Exxon Mobil Corporation (EMC) which is a US based corporation. During the year under consideration, the assessee received income on account of application research and technical services from its parent company, which are international transactions as defined u/s 92B of the I T Act. The Assessing Officer made a reference to the TPO for determination of Arm's Length Price (ALP) of the international transaction. The assessee used Transactional Net Margin Method (TNMM) to benchmark its transactions and had calculated operating profit on technical services in respect of this segment at 13.04% and the ratio of OP/TC in respect of comparables provided by the assessee was 12.96%. The assessee took six com....
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....he CIT(A) has further eliminated the comparables on the ground that two of the companies are having high margin. 4.1 The ld DR has referred para 7.6 of the order of the CIT(A) and submitted that the CIT(A) has proceeded on the analogy that if the outliers were to be eliminated, it should be done in a statistical manner, such as by taking the inter-quartile range of the comparables set. The ld DR has submitted that this approach and concept of inter-quartile range, does not find place in the Indian law; but this aspect is in the US law because under the provisions of I T Act, when a mean of the comparable price/ margin is taken as benchmark, then it covers the elimination of outliers, Thus, the ld DR has submitted that the CIT(A) has proceeded on the principle which is contrary to the provisions of law and therefore, the order of the CIT(A) is not sustainable. In support of his contention, he has referred Rule 10(B)(2) and proviso to sec 92C(2) of the Act and submitted that as per Sub. Rule (2) of 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged after considering the various factors namely functions performed, assets employed a....
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....list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should not be excluded. The decisive factors for determining inclusion or exclusion of any case in the list of comparable are the specific characteristics of services provided, assets, employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, cost of labour and capital in the markets etc. Nowhere, the higher or lower profit rate has been prescribed as the determinative factor to make a case incomparable. 4.3 The ld DR has submitted that in the case of MCS Ltd, the comparable which was rejected by the TPO, the revenue of the said company was from the domestic market whereas the assessee's revenue is from the export to AE outside India. Therefore, on the basis of FAR analysis, key conditions, and different market conditions, these companies cannot be considerable as comparable. 4.4 On the other hand, the ld AR of the assessee has submitted that the TPO has made adjustment without giving any show-cause notice to the assessee and therefore, the assessee was not given an opportunity of hearing prior t....
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....to be judged as comparables on the basis of functional analysis because functional profiles is not comparable to the assessee. He has referred page 1032, 1066, 1003, 1044, 1050 to 1053 of the paper book and submitted that in case of Alphageo India P Ltd, the revenue from related parties on job work, contract charge is very high which itself is the ground to eliminate the same from the comparables. The ld AR has submitted that though these companies were selected by the assessee as a comparable; but when the assessee had made out a case for exclusion of the same, then there is no bar for considering the same by the TPO as per the provisions of law. Thus, the ld AR has submitted that the two comparables which were rejected/excluded by the CIT(A) are otherwise incomparable cases as per FAR analysis. In support of his contention, he has relied upon the decision of the Tribunal in the case of DCIT vs Monsanto Holdings P Ltd reported in 134 ITD 189 (Mum). 5 We have considered the rival submissions as well as the relevant material on record. During the year under consideration the assessee has carried out the business activities which are divided in these segments i.e. (i) marketing supp....
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.... i.e. Alphageo (i)Ltd and Vimta Labs Ltd. Thus, the CIT(A) has arrived at the revised mean margin at 14.79% by taking into consideration only two comparables namely Tata Projects Ltd and N G Industries Ltd. 5.3 As regards the issue of taking the current year data instead of multi year data by the assessee, the same is settled at the level of the CIT(A) because the assessee has not challenged the order of the CIT(A) on this issue. 5.4 This is a case where the TPO has rejected two comparables on the ground that they were consistently making losses and the CIT(A) has further eliminated two more comparables on the ground of high profit making companies. Consequently, out of six companies selected by the assessee, the CIT(A) has revised the average mean ratio of comparables from 36.19% calculated by the TPO to 14.79% and hence, deleted the adjustments made by the TPO on this segment. 5.5 The question arises before us is whether the comparables can be selected and rejected merely on the basis of their degree of profitability. From the provisions of Rule 10B, it can not be inferred that simply because loss making companies or high profit margin companies can be excluded from the list o....
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....rvices Pvt ltd in ITA 4425/Mum/2010 vide order dt 23.9.2011 has observed and held in paras 12.2 ato 12.8 as under: "12.2. It is noticed that the TPO worked out mean of profit rate at 20.55% by excluding the cases of Fl and ME. In this calculation of 2O.55%, the other 10 companies also including DT giving profit rate at 75.6% and HT giving profit rate at 68.7% were continued to remain in the list. We are not convinced with the submission advanced on behalf of the assessee that simply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 1OB(1)(e)(ii) clearly refers to 'a comparable uncontrolled transaction or a number of such transactions'. It not only talks of one transaction which is comparable and uncontrolled, but also contemplates a number of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one tr....
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....s operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 12.5. Further sub-rule (3) of rule l0B provides that an uncontrolled transaction shall be comparable to an international transaction if (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit ra....
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....ind place in the list of comparable. 6.3 A similar view has been taken by the Bangalore Benches of the Tribunal in the case of ITO vs N/s Nextlink India P Ltd in ITA No.454/Bangalore/2011 as under: ".................. The word 'super' is a superlative word which denotes that it is something extra ordinary i.e. the profit which is far above what the industry in general is making. In all the cases where these super profit making companies were directed to be excluded, the TPO was comparing the cases like Infosys, Wipro etc., where the turnover was more than 10 times of the assessee and the profit margin was abnormally high. The net profit of Nuclear Netsoft was 40% which cannot be said to be super profit making company. The assessee's contention is that any margin above the assessee's margin has to be ignored cannot be accepted. The net margin of 24% was arrived at after taking into account both 40% and also 2% which is lowest in the relevant industry. 40% profit in the ITES industry cannot be held to be extra ordinary or super profit. In view of the same, we hold that the net margin of Nuclear Netsoft has to be considered. Similarly, the net margin of Transwork Information Servic....
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....ies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the relevant ITES industry. We also find from the material on record that this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company. We, therefore, see no reason why the M/s. Ultra Marine Pigments Ltd should not be considered as a comparable and therefore reject the assessee's grounds seeking its exclusion. This company is, therefore, directed to be retained as a comparable for the assessee for Assessment Year 2004-05. 6.5 Though, the ld AR of the assessee has r....
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....abase. Thus, the TPO computed the mean margin by taking six comparables and using single year data at 22.48%. This mean margin of comparables has been compared with the margin of the assessee recalculated by the TPO by using single year data at 2.56%. Accordingly, the TPO made an adjustment of Rs. 81.31 lacs on this segment. The details of comparables as selected by the assessee out of which ten comparables were rejected by the TPO as given at page 4 of the order of the TPO are as under: Company Name OP/TC assessee's calculation OP/TC as calculated by this office Remarks 1 Ace Software Exports Ltd 13.18% -0.68% 2 C S Software Enterprise Ltd -12.48% 11.34% 3 Datamatics Consultants Ltd 49.06% -17.38% 4 Suprawin Technologies Ltd -23.08% Rejected 5 F I Sofex Ltd -14.08% Rejected 6 Hinduja TMT 112.07% 90.71% 7 Nucleus Netsoft & GIS(India) Ltd -14.03% Rejected 8 MCS Ltd 7.19% Rejected 9 Max Health scribe Ltd 9.57% Rejected 10 Tata Services Ltd 4.07% 12.11% 11 Tulsyan Technologies 5.91% Rejected 12 Weal Infotech 10.16% Rejected ....
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....e of the assessee specifically demonstrating that the data of the prior financial year reveals fact which influence the determination of the transfer price of the transactions being compared, the question of taking into consideration data other than the current year's data does not arise." 8.3 The issue of rejecting certain comparables on the ground of persistent loss making and high profit making by the TPO and CIT(A) respectively is common as in respect of application research and technical services. We have dealt with the issue in the foregoing paragraphs. Accordingly, this issue is set aside to the record of the Assessing Officer for examining and considering the same afresh.. 9 Ground no.3 is regarding disallowance in respect of global support service charges. 9.1 The assessee has debited its P&L Account an amount of Rs. 38,26,277/- as the global service charges payable to M/s Exxon Mobil Asia Pacific Pte Ltd.,(EMCAP) Singapore for services pertaining to the period Jan 2003 to March 2003. It was contended by the assessee before the Assessing Officer that the debit note in respect of that amount was received by the assessee during the financial year ended on 31.3.2004 in pur....
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....the matter has been dealt at length and decided the issue in favour of the assessee in that year on merit. 10 We have heard the ld DR as well as the ld AR and considered the relevant material on record. The ld DR has submitted that the assessee has not furnished any record that the services were actually rendered. On the other hand, the ld AR has referred the order of the CIT(A) for both the AYs 2003-04 and 2004-05 and submitted that when the CIT(A) has considered all the facts and particularly the relevant material filed before the TPO as this issue was referred to the TPO and no adjustment was made on this account by the TPO after examination of the relevant material, then the claim of the assessee cannot be disallowed. He has relied upon the following decisions: i) Saurashtra Cement and Chemical Industries Ltd. v. CIT - 213 ITR 523 ii) CIT v. Tamilnadu Dairy Development Corporation Ltd.250 ITR 273 ii) Commissioner of Income-tax v. Phalton Sugar Works Ltd. -162 ITR 622 10.1 Having considered the rival submissions and careful perusal of the relevant material on record, we note that the Assessing Officer has disallowed the claim of the assessee on the ground of prior period....
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....e maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystallized, which is to be taken into account under the m....