TaxTMI 
TaxTMI 
2016 (8) TMI 1162
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.... assessment year, he observed that the assessee company has entered into the following international transactions with its AE : Sr.No. Nature of Transaction Amount (Rs.) Method used 1 Provision of BPO Services 3,88,38,097 TNMM 3. From the TP study report submitted by the assessee and details/explanation submitted during the course of assessment proceedings, the AO noted that certain facts relating to the international transactions undertaken by the assessee and their benchmarking done does not comply to the Transfer Pricing Regulations of India. He, therefore, issued a show cause notice to the assessee asking him to justify the TP study. From the details furnished by the assessee, he observed that the assessee has selected the following 8 companies as comparable on the basis of the search conducted in the public database, i.e. Prowess and Capitaline. The PLI (operating profit to operating cost ratio) of the comparables considering data for A.Y. 2008-09 are as under : Sr.No. Company Name OP/OC(%) 1 Capricorn Systems Global Solutions Ltd. 1.83 2 Cat Technologies Ltd. 34.87 3 Infinite Data Systems Pvt. Ltd. 29.51....
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....r noted that the following pertinent defects have been found in the TP analysis carried on by the assessee which are as under : "1. Some of the assessee's comparables do not stand scrutiny of FAR analysis. 2. Some companies though qualify all the filters applied by the tax payer based on the data pertaining to the F.Y. 2007-08, they have not been selected. 3. The assessee selected companies having predominant domestic operations though the assessee is mainly an export oriented IT enabled service provider." In view of the above, he held that the ALP determined by the assessee is not reliable and correct. He, therefore, invoked the provisions of section 92C(3)(c). 7. From the various details furnished by the assessee, the AO noted that the operating revenue, operating expenses and operating profit of the assessee can be computed as under : Amount (Rs.) Sales 43773517 Forex gain 2696077 Operating income 46469594 Total cost 58964581 Less : Interest 135821 Operating Cost(OC) 58828760 Operating Profit (OP) -12359166 OP/OC (%) -21.01 8. He further observed that the assessee had....
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....ofit and also because of rejection of certain loss making companies as comparables. It was argued that if the contention of the assessee on these 2 issues are accepted, then the various other grounds raised by the assessee before the CIT(A) may not be necessary because the assessee will be falling within the safe harbour range of +/-5%. It was submitted that it had incorrectly applied the filter of loss making companies resulting in exclusion of companies with losses as comparable. The TPO also accepted this filter as applied by the assessee and excluded loss making companies from the list of the comparable companies. However, it realized later that filter of loss making companies is not appropriate in the facts of its case. It was submitted that the assessee has incurred significant loss due to certain unprecedented and extraordinary events like ESOP issue, buyback of shares and fall in GDR issue. It was submitted that above extraordinary cost, if ignored, then the company would make significant operating profit. It was accordingly argued that it would not be appropriate to reject the companies with operating loss. Therefore, the filter applied by the assessee as well as the TPO t....
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....ch in its opinion are extra-ordinary items. I find that the Appellant has not proved correctness of the expenditure before the learned TPO. The learned TPO in para 6.4 of his order has recorded his finding that the Appellant has neither produced any documentary evidence to substantiate claim nor has made any such comment in the tax audit report in Form 3CD. The Appellant has not challenged this finding in any of the Grounds of Appeal filed before me nor has it filed additional evidence in support of expenditure in the appellate proceedings. When expenditure itself is not proved on facts, discussion on its extra-ordinary nature is Irrelevant. When the fact of expenditure is not established, it cannot be presumed to have been expended for the purpose of business or for that matter, as an operating expenditure. In these circumstances, I confirm the decision of the learned TPO to deny self-adjustment on account of extra-ordinary expenses. With the result, the Appellant will be a loss making company. 2.1.6 As far as comparability of loss making company is concerned, according to. me, it would be inappropriate to compare the same with profit making companies. It is fundamental t....
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....Operating Profit margin of (+) 22.05% computed by the appellant in its Transfer Pricing Study Report after making certain adjustments. 2.1] The Ld. CIT(A) erred in rejecting all the adjustments made by the appellant while computing the operating cost as well as operating profit without giving any concrete or rational justification for rejecting the same. 2.2] The Ld. CIT(A) failed to appreciate that the finance raising cost, prior period items written off and extra ordinary items were to be excluded while determining the operating profit and operating cost while determining the ALP of the international transactions entered into by the appellant company. 3] The CIT(A) has failed to grant the working capital adjustment in respect of comparable companies selected by the Ld. TPO. 4] The assessee submits that it shall be allowed the credit for all the lawful prepaid taxes like advances tax and Tax Deducted at Source, which the appellant was eligible to claim. 5] The assessee submits that no interest is leviable u/s. 234A of the Act, as return of income was furnished within the time limit prescribed u/s. 139(1) of the act and that no interest ....
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....e not at all comparable with the assessee company. So far as Coral Hubs Ltd. is concerned, he submitted that the employee cost is the main item of expenditure in the line of business carried out by the assessee company. However, in the case of Coral Hubs Ltd. the employee cost is hardly 3% which is evident from page 206 of the paper book. He submitted that the turnover of Coral Hubs Ltd. has increased from Rs. 38.07 crores to Rs. 61.73 crores while its employee cost has increased marginally from Rs. 1.11 crores to Rs. 1.22 crores in the financial year ending 31-03-2008 and 31-03-2009 respectively. Further, the related party transactions in this company is more than 25%. Referring to the decision of the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd., Vs. DCIT reported in (2015) 55 taxmann.com 386 he submitted that the Tribunal in the said decision, after considering the nature of business carried out has held that Coral Hubs Ltd. is to be rejected as a comparable. 16. So far as selection of Cross Domain Solutions Ltd. as a comparable is concerned, he submitted that this company is engaged in high skilled IT services which cannot be....
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....er, the notes forming part of accounts for the year ended 31-03-2009, copy of which is placed at pages 213 and 214 of the paper book (page 75 and 76 of the annual audited accounts) show that the related party transactions are more than 25%, the details of which are given as under : 9. Related party Transactions Name of the Party Country holding As at 31-03-2009 As at 31-03-2008 Basiz Fund Service Pvt. Ltd. India 86.84% 86.92% Tutis Digital Publishing Pvt. Ltd. India 79.37% - Digital Content Solutions Ltd. UK 100% - We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the low employee cost and high related party transactions Coral Hubs Ltd. should be excluded from the comparables. 20. We find the Pune Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) has held that Coral Hubs Ltd. (Formerly known as Vishal Information Technology Ltd.) cannot be included as comparable. The relevant observation of the Tribunal at Para 24 to 26 read as under : "24. The next objection of the assessee is with regard to the inclusion of Coral ....
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....case said comparables were not included in the TP study, the margins shown by the assessee would be at arm's length. The first comparable referred to by the learned Authorized Representative for the assessee was M/s. Vishal Information Technologies Ltd. The said company was providing IT enabled services and was also engaged in other diversified activities. Further, it has outsourced its services to third party vendor and acted as intermediary between the final customer and the vendor. The assessee on the other hand was engaged in the running of a call centre and was providing technical support to its AEs. We find that the Tribunal in assessee's own case relating to assessment year 2006-07 in ITA No.1346/PN/2010 and in assessment year 2007-08 in ITA No.1605/PN/2011 had excluded the said comparables observing as under: "30. The next point raised by the assessee is against the inclusion of Vishal Information Technologies Ltd., appearing at Item (10) in the Tabulation in para 25 as a comparable case. The TPO has discussed the issue in para 6.9.6. of the order. As per the TPO, the said concern is functionally comparable to the IT-Enabled services segment of the assessee and for....
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....d concern as sought out to be brought out by the assessee. Considering the aforesaid, we therefore, find that the assessee was justified in ascertaining that the said concern be excluded from the list of comparables for the reasons canvassed. Thus, on this aspect assessee succeeds." 46. The Tribunal in the assessee's own case had held that the said concern was found to be operating in different functional environment and the same was excluded for the purpose of comparability analysis. Following the ratio laid down by the Tribunal in assessee's own case in assessment years 2006-07 and 2007-08 (supra), we uphold the plea of the assessee in excluding the margins of the said concern M/s. Vishal Technologies Ltd." 26. In the context of the aforesaid precedent, no cogent reasoning has been advanced by the Ld. Departmental Representative and therefore, we uphold assessee's plea for exclusion of Coral Hubs Ltd. (formerly known as Vishal Informational Technologies Ltd.) from the final set of comparables." 21. In view of the above discussion, we accept the plea of the Ld. Counsel for the assessee that Coral Hubs Ltd. has to be rejected as comparable. 22. So far as Cro....
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....nal Hyderabad Bench in the case of M/s Market Tools Research Pvt. Ltd. in ITA No.1811/Hyd/2012 has held that this company is providing services which are in the nature of KPO. Further, the company is engaged in providing Niche services as well as developed its own brand 'Exdion' to target the insurance industry in US. The Tribunal followed the findings of the Bangalore Bench in the case of M/s Symphony Marketing Solutions India Pvt. Ltd. in ITA No.1316/Bang/2012 while rejecting the issue of this company in the final set of comparables. Respectfully following the findings of the co-ordinate bench, we uphold the directions of the DRP for the rejection of this company from the final list of comparable." 15. Following the aforesaid precedent, which has been rendered in the context of the same assessment year, we uphold assessee's plea for exclusion of Crossdomain Solutions Ltd. from the final set of comparables. We hold so." 23. Following the decision of the Coordinate Bench of the Tribunal in the case of BNY Mellon International Operations (India) Pvt. Ltd. (Supra) and considering the fact that Cross Domain Solutions Ltd. is engaged in high skilled IT services which cannot....
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....or the assessee drew the attention of the Bench to Annexure-1 containing such expenses which total to Rs. 1,02,17,339/-. He submitted that the assessee had paid an amount of Rs. 10,56,766/- to J.M. Financial Consultants Pvt. Ltd. for Consultancy of buyback issue. Referring to pages 141 to 145 of the paper book the Ld. Counsel for the assessee drew the attention of the Bench to the relevant agreement with JM Financials Consultants Pvt. Ltd. and the invoices raised by them. He submitted that an amount of Rs. 45,00,300/- has been paid to Edelweiss Capital Ltd. for consultancy of GDR issue. Referring to pages 154 to 158 of the paper he drew the attention of the Bench to the letter received from the above company and the invoices raised by them. He submitted that the expenditure on GDR issue or buyback of shares is not relevant to providing of BPO services to these AEs. All these expenses have no connection to the providing of services to the AEs and therefore these expenses should be considered as non-operating expenses while determining the operating margin of the assessee. 28. As regards the observation of the CIT(A) that no details were submitted by the assessee he submitted that....
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....minated and the cost incurred, which was capitalized in the books till earlier year, was debited to the profit and loss account. Referring to page 140 of the paper book he drew the attention of the Bench to the total expenditure at Rs. 68,35,875/-. He submitted that till earlier year these expenses were treated as capital work in progress and the same is evident from the schedule of fixed assets given at page 11 of the paper book. He submitted that instead of capitalizing in the book the assessee in this year has debited the said expenditure to the profit and loss account since the project on which these employees are working did not materialise. Referring to page 100 of the paper book he submitted that relevant details were submitted to the CIT(A). Referring to pages 187 to 189 of the paper book he submitted that all these details were given to the AO. 32. The Ld. Counsel for the assessee submitted that all the above 4 expenses are non operating expenditure and has no relation to providing of services to the AEs. Since these expenses are not operating in nature, therefore, these are to be excluded while determining the operating margin of the assessee company. For the above pro....
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....see. We have also considered the various decisions cited before us. We find the assessee in the instant case is engaged in providing ITES enabled services and is a 100% EOU and is entitled for deduction u/s.10B in respect of its profits. The assessee filed its return of income declaring loss of Rs. 2,68,14,081/-. The assessee is into providing BPO services to its AEs to the tune of Rs. 3,88,38,097/- and has adopted TNMM for determining the Arms Length Price. The assessee had considered its operating margin at 22.05% by adjusting the following expenses while computing the operating margin : Sr. No. Name of Expenditure Amount (Rs.) 1 Expenses in relation to raising of finance and buyback 1,02,17,339/- 2 Rejected Service Tax refund claim expensed out 11,25,502/- 3 Salary expenses of accounting and MIS process 19,35,527/- 4 Salary expenses of Software Team 68,35,875/- 36. The AO in the assessment order held that the above adjustments made by the assessee as non operating expenditure is not justified since according to him these are neither extraordinary nor non-operating. Further, the AO held that the assessee has not given full....
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.... we find because of termination of certain projects by the customers, the assessee, on the hope of getting some alternate projects retained its employees assigned to those projects. Since no new projects were received, the salary cost of these employees amounting to Rs. 19,35,527/- was claimed as extraordinary item. Since the assessee had to retain employees who are assigned to certain projects which are terminated, therefore, in our opinion, salary cost of these employees has rightly been considered by the assessee as extraordinary item. As regarding the expenses of software team is concerned, we find the assessee during this year has debited such expenditure to the profit and loss account instead of capitalizing the same in the book as was done in earlier years. Since the projects in which the employees were working were terminated and the assessee was capitalizing the cost incurred in the book till earlier year has debited such expenses to the profit and loss account during this year, therefore, this in our opinion is also an extraordinary item. 40. We find in the case of Marebeni India Pvt. Ltd. (Supra) the assessee company had paid compensation for closure of its India unit....
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....he assessee's claim that it was an independent decision, taken without consulting the associated enterprise, to close down the Indian offices. The Tribunal further agreed that the stand taken by the revenue authorities that the closure of the Indian branches would correspondingly reduce the costs of the associated enterprise and therefore, it would be relevant item for consideration in the matter of arriving at the appropriate ALP. The Tribunal opined that transfer pricing is not an exact science and it is difficult to arrive at the ALP with any amount of certainty or definiteness; an element of guess work was always a part of the process. The Tribunal agreed with the assessee that the compensation received on account of closure of the Indian units may be a regular phenomenon but held that by closing down certain branches in India the assessee had actually reduced the costs of associated enterprise. It is according to the Tribunal meant that the closure of the branches had direct link with the international transaction. For these reasons the Tribunal held that the revenue was right in upholding that the costs of closure are not to be excluded from computing the operating expens....
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.... the circumstances under which the decision to close the offices was taken. He also assumed that the relevance of the closure of the Indian units and the payment of compensation both would hinge upon as to whose decision it was to close down the Indian units. He held that the decision was taken at the behest of the associated enterprises and therefore, for transfer-pricing purposes the assessee must be compensated by them and accordingly the costs of closure are not to be excluded for computing the operating expenses. The decision of the CIT(Appeals) was endorsed by the Tribunal which noted that since MCJ was paying the assessee on the basis of cost plus 10 percent, the a closure of the Indian units would automatically reduce the costs of the associated enterprise and therefore, would be a relevant issue for inclusion in the operating costs. In arriving at such a decision, it seems to us that the revenue authorities and the Tribunal failed to keep in mind that even according to the assessing officer, the assessee was being compensated for its agency and market support service by way of handling commission and fixed service fee. It seems rather remote that considering the nature of ....
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.... adjustment on account of working capital should be provided. Although this ground was raised before the CIT(A) he has not adjudicated the issue. We find the Pune Bench of the Tribunal in the case of Ariston Thermo India Ltd. reported in 36 taxmann.com 501 at para 19-21 of the order has observed as under : "19. In our considered opinion, the issue whether or not working capital requirements can constitute an item of difference so as to require an adjustment in the profit margin arising in comparable uncontrolled transactions while benchmarking the international transaction of the tested party, is no longer res-integra and has been subject matter of adjudication by the Tribunal in quite a few precedents. Of course, the adjustments permissible have to be within the parameters provided in rule 10B(1)(e)(iii) of the Rules. We may observe that adjustment on the aspect of working capital difference between the tested party and the comparable uncontrolled entities/transactions is permissible only where the requirements of rule 10B(1)(e)(iii) r.w. rule 10B(3) of the Rules are satisfied. In this background, the learned counsel for the assessee stated that since assessee's plea has ....
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....ed by the assessee for selecting the comparables can be tested on FAR and there is likely to be some difference. Merely because some loss making companies are there those cannot be straightly rejected as com parables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. Transfer Pricing adjustment is not a law in strict sense though base on certain legal principles but it is arithmetic and while making the plus minus, the balance is required to be maintained. The OECD Guidelines, while providing guidance on the application of the transactional net margin method, states as follows: "It is also important to take into account a range of results when using the transactional net margin method. The use of the range in this context could help reduce the effects of differences in the business characteristics of associated enterprises and any independent enterprises engaged in comparable uncontrolled transactions, because the range would permit results that would occur under a variety of commercial and financial condition." 14. We find that in respect of the selection of the comparables, the Tribunal has taken the con....