TaxTMI 
TaxTMI 
2012 (12) TMI 1060
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....analysis for 'Provision of Back-Office support service'. 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 comp....
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.... the TPO so far as it relates to taking only current year data; however, the 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 c....
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....bserved that merely 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 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 as....
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....panies are also having transaction with its related parties. Thus, these companies have 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 carri....
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....iew by the concept of taking the inter-quartile range of comparable set. Accordingly, the CIT(A) has recomputed the margin of the comparables after excluding the companies 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....
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....ason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed." 6.1 The coordinate Bench of this Tribunal, in the case of CIT vs M/s B P India Services 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 th....
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....own explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions 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 s....
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....ower profit ratio resulted on account of the effect of the factor given in Rule 10(B)(2) r.w.r (3), such case was deserves omission from the comparable list and therefore, even higher profit rate archived due to the factor other than those given in the rule, such case would continue to find 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 accoun....
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....he companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies 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, the....
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....el Indicator (PLI). The assessee has selected 16 comparables and computed weighted mean by using three years data of the comparables at 13.79%. The TPO has rejected ten comparables; 4 on the ground of persistent loss and six on the ground that the data for the current year i.e. the financial year 2003-04 were not available on the database. 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 ....
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.... taken, only if, such data reveals the facts which could have influenced the determination of transfer pricing. When the assessee wants to consider previous year's data, then the burden is on the assessee to demonstrate that the previous year's data contained certain facts which would influence the determination of transfer pricing. In the case on hand, no such evidence is laid by the assessee. A general argument is made that, taking more than one year data, would give a better comparable. The rule does not provide for general submissions. In the absence 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 Offi....
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.... for the work only. Once the same was held to be at arms length, it was nor fair and proper to disallow it under general provisions and that too without calling for any evidence or bringing any adverse material on record. The action of the Assessing Officer is arbitrary. However as the charge had crystallised in the FY 2003-04 relevant to Assessment Year 2004-05, the matter has been dealt at length and decided in appellants favour in that year on merits." 9.3 It is observed by the CIT(A) that the charges has crystallised for the FY 2003-04 relevant to AY 2004-05 and 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 accou....
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....me-tax v. Phalton Sugar Works Ltd. -162 ITR 622 8.1. In the decision of the Gujarat High Court in 213 ITR, it has been held on page 531 as under: "Having considered the material on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are 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 t....