TaxTMI 
TaxTMI 
2017 (6) TMI 722
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 7,21,92,932/- on account of transfer pricing adjustment is wholly without any basis and is not supported by any material and is liable to be deleted. 2. For that further and in any event, the sum of Rs. 2,92,51,866/- received and a sum of Rs. 2,47,63,804 spent for and on account of reimbursement of expense actually incurred for and on behalf of the Associated Enterprise (AE) which had no relationship with the appellant' business with the said AE could not be taken into consideration for the transfer pricing adjustment. 3. For that further and in any event, the order of assessment and the order of the Dispute Resolution Panel ('DRP') erroneously and wrongfully rejected and/or ignored the contention of the appellant in making the transfer pricing adjustment a to - ignoring the dome tic ale while taking into consideration the entire expenditure; ignoring low profit making companies; considering non-comparable companies having altogether different function, assets & risk profile, involved in fraud and money laundering, restructuring and having fluctuating margin; not considering multiple year data; not allowing appropriate adjustments relating to marketing expenditu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tor (PLI) used by the assessee for determination of the ALP was Operating profit / Total Cost (OP / TC), where Operating profit = Total Operating Income (-) Total Operating Expenses. The Operating Income did not include Interest Income & Dividend Income. The Operating Expense did not include Interest Payments and the other Financial Charges. 5.1. For the above determination of the Arm's Length price, the assessee used two databases: Prowess and Capita line. Using the two databases, 22 comparable companies and their financial results were selected by the assessee to compute ALP of transaction relating to BPO services. The data used as seen below in Table 1 were for three Financial Years i.e. FY, 2004-05 and 2006-0. The mean of the PLI for all companies for the three FYs was computed at 12.51%. The results as furnished by the assessee are reproduced below in Table 1. SI No. Name of Company 200405 2005- 06 2006- 07 Weighted Average 1 Allsec Technologies Ltd. 25-97 29.06 27.93 27.89 2 Ask Me Info Hubs Ltd. -13.98 4.67 0 -1.75 3 B 2 K Corp. Pvt. Ltd. -12 -25.03 NA -18.89 4 B N R Udyog Ltd. 16.33 24.14....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stment of 12.51 less 11.61 = 0.90% is to be made. The assessee in its discussion had taken absolute adjustment of 5% instead of 5% of mean. b) It is seen that three years data have been taken for the comparison. IT Act mandates use of same F Y data. Previous two year data can be used if such data reveals the facts which could have an influence on the determination of the transfer prices in relation to the transactions being compared. In the absence of any submission please explain why data only for FY 2006-07 be not considered for comparison of PLIs. The new mean will be 22.09 and will require an adjustment of 10.48%. Please explain as to why this adjustment be not done. 7. The assessee replied on 21.9.2010 that with regard to 5% variation, the benefit of the variation / reduction of absolute 5% from the arithmetic mean should be given while determining ALP and not 5% of the arithmetic mean. With regard to the second objection for usage of multiple year data, the assessee submitted that there was lack of sufficient data for the FY 2006-07 at the time of performing the search in data base. Since Rule 10C(2)(c ) states that 'the availability, coverage and reliability of data ne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ach comparable should have been computed and then its mean should have been taken. But the result will be unchanged even if mean of PLI is taken to arrive at mean ALP. * Mean of PLI of comparables computed by assessee = 12.51%. Hence OP/TC for the tested party would be 12.51% to compute mean of ALP. Thus ALP = 31,09,36,578 * ( 1 + 0.1251) = Rs*34,98,34,744/-. The transaction undertaken by assessee was at Rs. 34,70,28,935/-. The above calculation is just to verify whether the method of calculation would have any bearing on the ALP determination. On the basis of the above calculation, it is seen that the difference between the two APs arrived have a difference. b) Regarding the second issue of use of multiple year data, the contentions of assessee are not accepted for following reasons: (i) The assessee submitted that there was lack of sufficient data for FY 200607 at the time of performing the search in the data base. What is the lack of data is a very general term. Analysis has to be done on basis of what is available. What is not available cannot determine the due procedure prescribed by Act and Rules. The Act and Rules are the deciding factors. If law lays down the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....6-07 select the comparables. Assessee has extended this to apply to even those cases where data is not available. The intent of Act is not so. It is not so that there is no data available since assessee himself has taken many comparables where data for F Y 2006-07 is available. What the Act merely requires is that assessee should restrict to data which is available. The selection of previous year data can be used in separate set of circumstances which is mentioned under Rule 10B. Non availability of data not the basis of deviating from prescribed procedures in Act and Rules. (v) Assessee had submitted that use of multiple year data ensured that the outcome for relevant year would not be not unduly influenced by abnormal factors as one year data may be distorted by differences in economic or market conditions, features and operation of enterprise. But as stated earlier, the onus of how this statement was applicable in present case was on the assessee. The assessee did not discharge that onus. It did not bring out how one year data was distorted by the differences in economic or market conditions, features and operation of enterprise. (vi) It was stated by the assessee that par....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ALP would be Rs. 31,09,36,578 * (1+0.2209) = Rs. 37,96,22,468/-. Variation of +/-5% of this mean of ALP would be Rs. 1,89,81,123. 40. Thus the allowable range of ALP, which can be chosen by assessee, would be from Rs. 36,06,41,344.60 to Rs. 39,86,03,591.40. The transaction undertaken by assessee is at Rs. 34,70,28,935/- which is not within the range as arrived at above, i.e., from Rs. 36,06,41.344.60 to Rs. 39,86,03,591.40. Allowing the above 5 % variation benefit to assessee, the upward adjustment required to be made to the transaction would be Rs. 1,36,12,409.60 (36,06,41,344.60 - 34,70,28,935). The revenue of the assessee for FY 2006-07 would be Rs. 36,06,41,344.60 instead of Rs. 34,70,28,935/-. 10. The assessee preferred objections before the Hon'ble DRP which agreed to the view of the ld. TPO that only contemporaneous data for FY 2006-07 should be adopted by the assessee for the comparables instead of multiple year data chosen by the assessee. Before the ld. DRP, the assessee submitted the audited financials of the 13 comparables which data was not available before the ld. TPO and hence not considered thereon. The arithmetic mean was accordingly arrived at 18.94%. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; Business Solutions Ltd. 31.95% Not considered by the TPO 11 M C S Ltd. 16.23% Considered by the TPO 12 Maple Esolutions Ltd. 34.09% Not considered by the TPO 13 Mphasis Ltd.(Seg.) 11.31% Considered by the TPO 14 SpancoTelesystems& Solutions P Ltd. 30.31% Not considered by the TPO 15 T S R Darashaw Ltd. 35.86% Not considered by the TPO 16 Transworks Information Services Ltd. 13.76% Not considered by the TPO 17 Triton Corp. Ltd. 34.52% Considered by the TPO 18 Wipro Limited 29.32% Considered by the TPO Arithmetical Mean 23.62% 10.2. The assessee also sought for appropriate adjustments to be made to the margins of the comparables as required as per Rule 10B(1)(e)(iii) of the Rules on account of differences in the sales and marketing efforts undertaken by the comparable companies. The ld. DRP held that as the tax payer as well as the ld. TPO had considered TNMM as the MAM, these sort of expenses are netted out at net margin level. The ld. DRP observed that the assessee had also not given any details as to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... whether the ld. DRP was justified in exclusion of certain comparables in the facts and circumstances of the case for arriving at the arithmetic mean and comparing the same with the PLI of the assessee while determining the ALP. 11.1. With regard to the first question raised hereinabove, we find that the assessee had entered into three international transactions as below:- SI No. Nature of transaction Amount Received by assessee (Rs.) 1 Sale of Call Manager Phones 76,686/- 2 BPO services provided 31,21,86.866/- 3 Recovery of expenses 2,92,51,866/- But the ld. DRP had considered only the international transaction in respect of BPO Services provided by the assessee in the sum of Rs. 31,21,86,866/- and ignored the recovery of expenses (another international transaction) which was on cost to cost basis and was stated to be included in the total cost of the assessee at Rs. 31,09,36,578/-. We find that the assessee had duly reported this fact before the ld. TPO that the recovery of expenses was on cost to cost basis without any profit element thereon and it did not involve any rendering of service and the ld. TPO had accepted the same in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecision, we hold that the aforesaid 8 comparables having RPT of more than 25% should be excluded for arriving at the arithmetic mean. (ii) Companies not functionally comparable M C S Ltd - Registrar and Share Transfer Agents T S R Darashaw Ltd - Registrar and Share Transfer Agents We find that these companies are engaged in the business of Registrar and Share Transfer activities and hence are functionally not comparable. We find force in the argument of the ld. AR in this regard. We find that the co-ordinate bench of Bangalore Tribunal in the case of 24/7 Customer.Com Pvt Ltd reported in (2013) 140 ITD 344 (Bang Trib) had held that the companies engaged in share transfer activities cannot be equated / compared with companies rendering ITES and hence the same is to be excluded as comparables as they are functionally different. Hence respectfully following the said decision, we hold that the aforesaid 2 comparables having functional dissimilarities should be excluded for arriving at the arithmetic mean. (iii) Companies having irregular business operations Maple Esolutions Ltd Triton Corp Ltd We find that the ld. TPO did not differentiate between voice-based an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions, we hold that the aforesaid comparable having huge brand value should be excluded for arriving at the arithmetic mean. 11.2.1. We find that the assessee had also prayed for inclusion of one comparable viz Ask Me Info Hubs Ltd which has been excluded by the ld. DRP without any cogent reasons. We find that the co-ordinate bench of Delhi Tribunal in the case of Tech Books Electronics Pvt Ltd reported in 176 TTJ 20 (Delhi Trib) for Assessment Year 2007-08 had observed that the ld. TPO refused to acknowledge this company as a comparable by noticing that there was a declining turnover and declining profitability of this company which indicated that it was in a negative phase of economic cycle. The tribunal held that this view point of the ld. TPO is contrary to the factual position stated before him about this company which is as under:- Financial Year Sales Operating Margins 2003-04 Rs. 99,17,965 1.34% 2004-05 Rs. 2,39,63,134 (-) 13.92% 2005-06 Rs. 4,70,65,140 5.05% 2006-07 Rs. 2,97,76,679 0.67% It was observed by the tribunal that from the aforesaid table, it becomes evident that there is no negative phase of this company ei....