TaxTMI 
TaxTMI 
TaxTMI 
2015 (10) TMI 2625
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....0,590/-. 3. During the course of assessment proceedings, the AO noted that the assessee has shown income from support services of Rs. 10,52,92,835/- and other income of Rs. 49,89,078/- on which a net profit of Rs. 65,01,060/- has been disclosed. The AO noted that the assessee has entered into the following international transactions with its Associated Enterprises the details of which are as under : Sr. No. Nature of the Associated Enterprises Amount (Rs.) 1 Schlumberger Technology Corporation, USA 7,51,09,169 2 Etudes ET Productions Schlumberger, France 2,81,49,402 3 WesternGeco AS, Norway 5,27,936 4 Schlumberger Vector SA, France 15,06,328 TOTAL 10,52,92,835 4. Since the international transactions were below Rs. 15 crores the case was not referred to the TPO. However, the AO examined the case of the assessee from transfer pricing angle. From the TP study report submitted by the assessee, the AO noted that the assessee has selected TNMM as the most appropriate method to benchmark its international transactions. The assessee has considered 5 companies as comparables by considering Weighted Average Margins of 3 years data for the F.Yrs. 2006-07 to ....
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....eas the PLI working of the comparable companies finally selected by him comes to 29.02%. Similarly, the PLI working after considering the working capital adjustment of the comparables selected by him comes to 24.33%. The companies selected by the AO at para 7 of the order is as under : Sr. No. Name of the comparable company PLI% (OP/OC) PLI% (OP/OC) after considering working capital adjustment Remarks 1 CG-VAK Software and Exports Ltd. 3.84 -0.44 As per assessee's working 2 Cosmic Global Ltd. 50.70 50.70 The assessee may provide capital working adjustment in this case 3 Informed Technologies India Ltd. 22.95 21.95 As per assessee's working 4 Vishal Information Technologies Ltd. 38.61 25.13 As per assessee's working Average 29.02 24.33 7. Based on the above, the AO proposed to make addition of Rs. 1,94,30,492/- on account of TP adjustment the details of which are as under : Operating Cost 10,47,85,247 Arms Length Mean Margin (OP/OC) 24.33% Arms Length Price (ALP) of the international transaction (@124. 33% of operating cost) [A] 13,02,54,631 Price charged (operating revenue of the assessee) [B] 11,08,24,139 A....
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....as functionally different. However, the assessee has not at all discussed in any of the submissions made as to how the company has become functionally comparable. According to the AO companies having different financial year data (other than march 2009) or data of the comparable companies not falling within the relevant financial year, i.e. 01-04-2008 to 31-03-2009 should not have been considered because only contemporary data should be considered. According to the AO if a tested party ends its accounting year by March, then taking companies whose accounting year ends with March will be more appropriate comparable and their selection will lead to proper comparability. Thus considering the overall circumstances the AO held that this company cannot be considered as a comparable. 13. The assessee objected for inclusion of Cosmic Global Ltd. as a comparable mainly on the ground that it is a super normal profit making company. It was submitted that the assessee has considered Cosmic Global Ltd. as comparable company for F.Y. 2006-07 and F.Y. 2007-08 in its TP study report for benchmarking its international transaction. However, while preparing the TP report for F.Y. 2008-09 the data fo....
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.... Sr. No. Name of the comparable company PLI = (OP/OC)% after considering working capital adjustment 1. CG-VAK Software and Exports Ltd -0.44 2. Cosmic Global Ltd 43.75 3. Informed Technologies India Ltd 21.95 4. Microgenetics Systems Ltd. -0.77 5. Vishal Information Technologies Ltd 25.13 AVERAGE (89.62/5) 17.92 16. After considering the arithmetic mean of the profit level indicators of comparables as the arms length margin, the AO made an adjustment of Rs. 1,27,15,040/- to the total income of the assessee, the details of which are as under : (Amount in Rs.) Operating Cost 10,47,65,247 Arms Length Mean margin (OP/OC) 17.92% Arms Length Price (ALP) of the International Transaction @117.92% of operating cost) [A] 12,35,39,179 Price charged (operating revenue of the assessee [B] 11,08,24,139 Adjustment over operating income [A- B] (Shortfall being adjustment u/s.92C(3) 1,27,15,040 17. The assessee challenged the draft assessment order before the DRP but without any success. The AO thereafter passed the order u/s.143(3) r.w.s.144C(13) on 27-10-2012 making an upward T.P. adjustment of Rs. 1,27,15,040/-. 18. Aggrieved with....
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....etermination of the arm's length price of the Appellant's international transaction of provision of technical support services. 6. The Ld. AO has erred in levying interest under Section 234A and Section 234B of the Act. The Appellant prays for deletion of interest levied by the Ld. AO under Section 234A and Section 234B of the Act. The above grounds are without prejudice to each other The Appellant craves leave to add, alter, vary, omit, substitute or amend one or more of the above grounds at any time before or at the time of proceedings so as to enable the Hon'ble Tribunal members to decide these according to the law." 19. The Ld. Counsel for the assessee strongly challenged the order of the AO and DRP. Referring to page 98 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the notes forming part of the accounts of the assessee company for the year ended 31-03-2009 according to which the nature of operation of the Indian Branch office has been mentioned as rendering of support services to its Associated Enterprises outside India. Referring to page 105 of the paper book she submitted that the assessee company was established a....
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.... of the decision of the Special Bench of the Tribunal in the case of Maersk Global Centres India Pvt. Ltd. Vs. ACIT reported in 43 taxmann.com 100 (Mumbai) (SB). She submitted that in case Cosmic Global Ltd. is still to be considered, then its profits need to be averaged out by using multiple year data. The Ld. Counsel for the assessee further submitted that Cosmic Global Ltd. has paid translation charges to third parties which indicates outsourcing of work. The assessee however does not outsource the work rather it receives outsourced work. Thus, effectively Cosmic Global Ltd. and the assessee are on the opposite sides of the value chain. 24. Referring to the Synopsis chart the Ld. Counsel for the assessee submitted that the proportion of outsourcing cost of Cosmic Global Ltd. is 40.70%. Similarly, the proportion of employee cost of Cosmic Global Ltd. is 21.32% whereas the proportion of employee cost of the assessee is 53.15%. Therefore, functionally also, Cosmic Global Ltd. is incomparable to the assessee. She submitted that companies with low employee cost to sales ratio outsourcing substantial portion of work has to be rejected. For the above proposition she relied on the foll....
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....fact is also involved in file conversion, content modification, test editing etc. as part of its back office support services. This is similar to data conversion which is a key activity of Cepha Imaging Pvt. Ltd. She submitted that if the correct computation is made by excluding the debtors and creditors, then the RPT to sale in case of Cepha Imaging Pvt. Ltd. comes to 17.72%. Referring to the various decisions she submitted that TNMM requires broad comparability and therefore Cepha Imaging Pvt. Ltd. should be considered as comparable. 29. Referring to the following decisions she submitted that TNMM requires broad comparability since Allsec Technologies Ltd. is functionally comparable and is not a persistent loss making company, therefore, the same should be included : "1. GE India Technology Centre (P) Lt. Vs. DCIT - ITA No.789/Bang/2010 & ITA Nos. 487 & 925/Bang/2011 order dated 31- 12-2012 2. ACIT Vs. Schafhorst Marketing Co. Ltd. - ITA No.1960/Mum/2007 order dated 12-08-2011" 30. So far as Allsec Technologies Ltd. is concerned she submitted that the AO rejected the same as comparable on the ground that the assessee rejected Allsec Technologies Ltd. in its TP study report.....
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....f the accounting period would provide an appropriate comparable. 34. Referring to the following decisions, she submitted that different accounting year does not warrant rejection of comparable : "1. Pentair Water India Pvt. Ltd. Vs. ACIT - ITA No.2/PNJ/2013 order dated 17-04-2014 2. Maersk Global Service Centres India Pvt. Ltd. Vs. DCIT - ITA No.2594/Mum/2014 order dated 16-01-2015" 35. So far as ground of appeal No.4 is concerned the Ld. Counsel for the assessee submitted that the same relates to risk adjustment. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Watson Global Ltd. Vs. DCIT reported in 54 taxmann.com 88 (215 of the legal compilation) she submitted that risk adjustment has been allowed. Referring to para 9.5 of the appeal memo at page 20 she drew the attention of the Bench to the following table according to which the risk adjustment should be 6.96%. Particulars Ref. % Average prime lending rate during F.Y. 2008-09 (A) 12.96% Average bank rate during F.Y. 2008-09 (B) 6.00% Difference between the prime lending rate and bank rate (C=A-B) 6.96% Risk Adjustment (D) 6.96% 35.1 Referring to the decision in the case ....
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....o the assessee. The assessee cannot be permitted to take different stand at different time before Revenue authorities. 42. As regards the risk adjustment is concerned she submitted that this issue was never before the AO. There is no finding by the AO on this issue. For the first time, the assessee took the ground before the DRP who rejected the same on the ground that assessee has not discharged its initial onus to file the requisite information in this regard. 43. Referring to the decision of Mumbai Bench of the Tribunal in the case of Wills Processing Service India Pvt. Ltd. Vs. DCIT reported in 30 taxmann.com 350 she submitted that the Tribunal in the said decision has held that risk adjustment and working capital adjustment can be made only on the basis of proper data and accurate calculations and not on adhoc basis. 44. The Ld. Counsel for the assessee in her rejoinder submitted that the assessee has prepared TP report on the basis of data available at the relevant time. Only when TPO asked to change the TP report on the basis of single year data and applying turnover filter that the assessee prepared the TP study report. She accordingly submitted that the grounds raised b....
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....survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit Maersk Global Service Centres (India)Private Limited reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit ....
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....ofit in the F.Y. 2008-09 as compared to 2 preceding and 2 succeeding years we are of the considered opinion that Cosmic Global Ltd. cannot be considered as a comparable and has to be excluded from the list of comparables. 51. Even otherwise also, we find merit in the submission of the Ld. Counsel for the assessee that Cosmic Global Ltd. and the assessee are in opposite sides of the value chain. From the details furnished by the assessee, we find the employee cost of Cosmic Global Ltd. is Rs. 1,57,11,463/- on a turnover of Rs. 7,37,02,584/- and thus the employee cost to turnover ratio comes to 21.32%. In the case of the assessee as against the total employee cost of Rs. 5,86,15,132/- the turnover is Rs. 11,02,81,913/- and the ratio of employee cost to turnover comes to 53.15%. Further, Cosmic Global Ltd. has paid translation charges of Rs. 3,00,25,306/- to third parties which is to the tune of 40.74% of its turnover which indicates outsourcing of work. Therefore, we find merit in the submission of the Ld. Counsel for the asessee that functionally Cosmic Global Ltd. is incomparable to the assessee. The various decisions relied on by the Ld. Counsel for the assessee to the propositio....
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....lude Cosmic Global Ltd. from the list of comparables. Ground of appeal No.2 is accordingly allowed. 53. So far as ground of appeal No.3 is concerned the grievance of the assessee is regarding rejection of certain companies which according to the assessee are comparable. 54. Coming to Cepha Imaging Pvt. Ltd. we find the AO rejected the same from the list of comparables on the ground that the Related Party Transactions is more than 25% of sales. For the above proposition, the AO has considered the debtors and the creditors for computing the RPT to sales, the details of which are as under : Particulars Amt. in Rs. Sales 96,01,016/- Income 20,41,849/- Expenses 1,39,54,466/- Interest 1,62,333/- Debtors 51,71,358/- Creditors 92,56,026/- Total 4,01,87,048/- 55. According to the assessee, if the debtors, creditors and interest expenses are excluded the RPT to sales comes to 17.72%, the details of which are as under : Particulars Amt. in Rs. Sales 96,01,016/- Income 20,41,849/- Expenses 1,39,54,466/- Interest NIL Debtors NIL Creditors NIL Total 2,55,97,331/- 56. From the order of the DRP we find the DRP is silent on the issue of RPT to sal....
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....le if their economically relevant attributes and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. However, in reality, two transactions are seldom completely alike. To be comparable does not mean that the two transactions are necessarily identical, but that either none of the differences between them could materially affect the arm's length price or, where such material differences exist, then reasonably accurate adjustments can be made to eliminate their effect. It is important to note that the type and attributes of the comparables available in a given situation typically determine the most appropriate transfer pricing method. In general, closely comparable products/services are required if the comparable uncontrolled price ("CUP") method is used for arms' length pricing; the resale price, cost-plus methods generally require a lesser degree of products or services comparability and may be appropriate if functional comparables are available. The TNMM requires only broad functional and product/services comparability. In many instances, it will be possible to use 'imperfect' comparables, e.g., comparables from anoth....
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.... telemarketing, monitoring quality of calls and other call centres, customer centre, HR and payroll process and therefore it is functionally dissimilar. 64. It is the case of the Ld. Counsel for the assessee that TNMM requires a broad functional level and Allsec Technologies Ltd. being functionally comparable and being not a persistent loss making company should not have been rejected. It is also the case of the Ld. Counsel for the assessee that during the year there was no amalgamation and the reference to abnormal increase in employee and general administration costs is not borne out from the annual report of Allsec Technologies Ltd. for A.Y. 2008-09. We do not find any merit in the above submissions made by the Ld. Counsel for the assessee. First of all, the assessee itself has rejected Allsec Technologies Ltd. in its TP study. As observed by the Ld. DRP the company is engaged in the business of data verification, processing of orders received on telephone calls, telemarketing, monitoring of quality of calls and other call centres, customer services, HR and payroll process. Therefore, the functions carried out by Allsec Technologies Ltd. are different from that of the functions....
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....e assessee for the first time took a stand before the DRP who also rejected the contention of the assessee on the ground that assessee has not produced complete analysis and complete spectrum of risk faced on the business entity. It has not carried out FAR on comparable and in the TP report during the proceedings has merely enumerated few reasons. Therefore, in absence of risk analysis of each comparable with the risk matrix of the assessee, the DRP held that no difference in risk profile by assessee and comparable can be made on account of risk. It is the submission of the Ld. Counsel for the assessee that assessee's business model is cost plus nature wherein there is no possibility of incurring losses. This has also been accepted by the AO. However, the comparables are normal risk bearing entities. Further, the observation of the DRP that assessee should provide a detailed risk analysis of each comparable is both onerous and impractical since the data belongs to third parties and beyond the control of the assessee. According to the Ld. Counsel, the assessee can be expected to conduct the TP study based on information available in public domain. Further, it is also the submission ....