AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (9) TMI 113
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.... Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price himself. 3. The CIT(A)/AO erred in rejecting the use of projected operating margins of the Appellant, for the purpose of determining arm's length price for the impugned international transactions ignoring the fact that FY 2007-08 was the first year of operations of the Appellant and the Appellant was in its nascent stage of business cycle facing business exigencies such as high unabsorbed fixed cost of operations. 4. The CIT(A)/AO erred in law by not accepting the quantitative adjustments claimed by the Appellant in accordance with the transfer pricing provisions on account of significant differences in capacity utilization: 4.1 The Appellant had claimed an adjustment for differences in capacity utilization vis-a-vis the comparable companies. The CIT(A) / AO also failed to appreciate and give due cognizance to factual data submitted on the number of years of operations of the comparable companies. 4.2 The Appellant also respectfully submits that an adjustment due to d....
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....nt, amend, vary, withdraw or otherwise modify the ground mentioned herein above at or before the time of hearing." 3. The grievance of the assessee in this appeal relates to the addition on account of arm's length price ignoring the fact that it was the first year of operations of the assessee and without considering the differences in capacity utilization by the assessee and the comparables. 4. Facts of the case in brief are that the assessee is a branch office of Hitachi High Technologies and was engaged in rendering marketing support services & research/development services to its Associated Enterprises (AE). It is responsible for trading operation across Asian countries and also carries out sourcing and trading operation, the branch office was setup in India to undertake the support of marketing pre-sales activities, technical and business information gathering, liaising, to provide after sales service to customers in India and to import & market auto components in India. The assessee entered into an agreement with Hitachi High Technologies, Japan (HHT) to provide market research & development services. The assessee filed its return of income on 30.09.2008 declaring a los....
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....djustment of MSS Segment: Rs.1,13,98,612/- Addit ion on account of cost allocat ion: Rs.20,85,690/-" 8. The TPO also rejected the adjustment sought by the assessee on the basis of capacity utilization and adjustment of cost by ratio of 60%. The AO made the adjustment of Rs. 1,13,98,612/- by observing in paras 10 to 14 of the impugned order which read as under: 10. Subject to above, therefore, the data pertaining to only current year will be used. However in its reply dated 23.12.2010, (page 17), the assessee had now freshly rejected some of the comparables and included some of the earlier rejected comparable (vide letter dated 10.12.2010). The assessee has now come up with a set of 9 comparables and tried to show that the transactions are at arm's length. However, this contention of the assessee is not acceptable, as this is no occasion for doing the analysis again after issue of show cause notice. Secondly, the assessee has already reconsidered comparability analysis given in the TP report vide its letter dated 10.12.2010, whereby it has already rejected 6 comparables out of the 13 comparables taken in the TP report. The assessee cannot be allowed to chang....
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....91 India Tourism Development Corporation Limited (Segmental) 9.40% 11.91 Priya International Ltd. (Segmental) 18.15% 17.07 In House Productions Ltd. (Segmental) 0.56% -5.90 Arithmetic Mean 21.35% 20.30% 13. The assessee has submitted vide letter dated 23.12.2010 that in order to earn the Market Support and Research Services charges of Rs. 2,64,99,480/-, the assessee has incurred expenses of Rs. 3,15,02,986/-. Therefore, it is clear that the assessee has incurred losses in this segment and because of the losses in this segment; the assessee had used data for future years for establishing comparability. In effect, the assessee is trying to compare the financials of FY 2009-10, 2010-11 and 2011-12 of the tested party with the financials of comparables of FY 2005-06, 2006-07, and 2007-08. It is amply clear from the above discussion & analysis that the comparability analysis has to be of contemporaneous data only, i.e. the financials of the tested party of FY 2007-08 are to be compared with financials of comparables for FY 2007-08 only. 14. It is also clear that the compensation model of the assessee is not proper i.e. the assesses c....
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....at the transfer pricing study conducted by the appellant is defective and not reliable. The appellant had used data pertaining to prior year for carrying out comparability analysis without fulfilling the conditions mentioned in the Proviso to Rule 10B(4) i.e. the taxpayer did not demonstrate that the data in the case of those comparables would materially affect the transactions carried out in the current year. Order passed u/s 144C(3) r.w.s. 143(3) in the instant case is also considered under the light of Circular No. 12 of 2001 and Circular No. 14/2001 and Instruction No. 3 of 2003 which reaffirm the legal position that if conditions mentioned in clauses (a) to (d) of section 92C(3) are satisfied, the ALP determined by the tax payer can be rejected. The AO's action is correct in accordance with the ratio of the special bench of the Hon'ble ITAT in the case of M/s Aztech Software [294 ITR 125 (AT)] wherein it has been held that when tax authorities are of the opinion that the ALP has not been correctly determined by the tax payer, they can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. Based on the above, I a....
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....keting support services during FY 2007-08. M/s. Hitachi India BO has rendered sales, marketing support and market research services to its AE and has received Rs. 2,64,99,480/- from the AE. This transaction has been benchmarked by the appellant using TNMM method with OP/OC as the Profit Level Indicator. The appellant has selected 13 comparables and has taken weighted average of 3 years to justify the arm's length nature of the transaction. In addition to it, the appellant has taken the projected financial statement of FY 2009-10, 2010-11 and 2011-12 to compute the OP/OC of the tested party for FY 2007-08. During the assessment proceedings, the appellant submitted that out of 13 comparables taken in the TP report, 6 were not comparable to the appellant. The appellant was using multiple year data for benchmarking. The appellant has contended that this being the first year of operation, the scale of operation was quite low, while the comparables selected in the TP report were companies which were in the business for a few years now. On this pretext, the appellant has sought the adjustment on the basis of capacity utilization. The appellant has sought to adjust the cost by a ratio ....
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....07-08 are to be compared with financials of comparables for FY 2007-08 only. Considering the facts of the case, I am of the view that the AO has correctly rejected the use of projected operating margins of the appellant for the purpose of determining arm's length price for the international transactions pertaining to provisions of sales and marketing support services and provision of market research/development services to its AEs. The order of the AO rejecting the claim of the appellant for quantitative adjustments for capacity utilization is upheld. As discussed above, the AO has computed the working capital adjusted margins of the comparables, as submitted by the appellant vide its submission dated 23.12.2010. Accordingly, these grounds of appeal arc dismissed." 11. The ld. CIT(A) also upheld the adjustment of Rs. 20,85,690/- made by the AO on account of cost allocation in respect to shared services from AE by following the ratio laid down by the ITAT in the following case laws: * Gem Plus India Pvt. Ltd. Vs ACIT in ITA No. 352/Bang/2009 * Knorr-Bremse India Pvt. Ltd. Vs ACIT (2012) 27 Taxmann.com 16 (Del.) 12. Now the assessee is in appeal. The ld. C....
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....ed Provision of research and survey service and products. The company provides user research, verticals research, go-tomarket services and the consulting services income. India Tourism Development Corporation Limited Provision of event management services. The Company organizes conferences and exhibitions of varying sizes Priya International Ltd. Provision of support services to chemical consumers in identifying reliable sources of supply from India, establishing product standards and supporting systems and logistics. In House Productions Ltd Provision of information services. The Company specializes in marketing of knowledge databases to the healthcare industry, and in providing assistance in business process outsourcing. The Appellant, on the other hand is engaged in rendering less complex marketing research and research/ development: services. However, the Learned AO failed to take cognizance of such fact and determined arm's length margin at 20.3 percent on operating cost. Your goodself would also appreciate that any new company cannot be expected to earn profits in the first year of operations. It requires a reasonable period of time ....
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....ble companies, and also failed to appreciate and give due cognizance to factual data submitted on the number of years of operations of the comparable companies. In this regard, we wish to submit that FY 2007-08 was the first year of operations for Hitachi India BO and it was still in the start-up gestation phase. The scale of operations was also quite low. However, the comparables selected in the Transfer Pricing Report, through the search ' process, were companies which have been in the business of rendering business support services for a few years now. These companies operated at a higher level of capacity utilization. In this regard, without prejudice to our previous submission, we wish to submit the following information regarding first year of operations of the comparables finally selected by the Learned AO, in the table given below: Company Operating Margin of FY 2007-08 Year in which established Access India Advisors Limited 45.97% 1996 Educational Consultant (India) Limited 5.20% 1981 ICC International Agencies Ltd. 55.28% 1995 IDC India Limited 14.87% 1986 India Tourism Development Corporation Limited ....
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.... the tested party was categorised into fixed and variable costs based on the nature of expenses. * The fixed cost of Appellant was adjusted using the ratio of capacity utlisation of 60% * Lastly, the adjusted fixed costs are considered as part of costs to arrive at the adjusted operating profits the Appellant. The adjusted operating profit is computed as follows: Adjusted Operating Profit = Operating Income - Variable Cost - Adjusted fixed cost The computation of adjusted operating margin of the Appellant is given in the table below: Particulars Opera ting Items (A) Excess cost due to unutilized capacity (to be excluded) (B) Non Operating Items not considered (C) Total (D=A+B+C) As per P & L (E) Income Service Income 24,893,357 - - 24,893,357 24,893,357 Other Income 917,620 - - 917,620 917,620 Total operating Income 25,810,977 - - 25,810,977 25,810,977 Expenditure Personnel expenses 8,723,692 5,815,794 - 14,539,486 14,539,486 Rent 3,977,773 2,65....
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....rming the same. 17. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that a similar issue has been decided by this Bench of the Tribunal in the case of MGE UPS System India Pvt. Ltd. Vs DCIT, Circle-6(1), New Delhi (supra) wherein the relevant findings have been given in paras 14 & 15 which read as under: "14. We have considered the submissions of both the parties and perused the record of the case. 14.1 We find considerable force in the submission of Id. Counsel for the assessee that for determining the arm's length price of international transactions between associated enterprises if the comparable selected are operating since long and the assessee is in the initial stages of operation then considerable adjustments has to be made to the operating expenses in order to give due leverage to the contribution of income to the fixed cost. Unless the fixed cost is fully recovered, the break even cannot be arrived at. 14.2 Under such circumstances, the losses incurred by the assessee cannot be the basis for finding out the arm's length price without making due adjustments to the op....