AI Drafter 
TaxTMI 
TaxTMI 
2018 (3) TMI 1695
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....ansfer pricing adjustment of Rs. 9,77,11,928 consequential to non consideration / non-acceptance of analysis documented in the transfer pricing study report Erred on facts and in law by making the transfer pricing adjustment to its international transactions in connection with provision of call centre services and not considering/not accepting the comparability analysis documented in the transfer pricing study report for benchmarking purpose. Erred in facts and in law by changing the Profit Level Indicator ('PLI') of Ventura India by including expenses recovered by Ventura India from its AEs (ierecovery of expenses) as part of operating income and operating cost for the purpose of computation of the operating margin. 2. Non-applicability of transfer pricing provisions to the Appellant which is enjoying tax holiday under section 10A of the Act Erred on facts and in law by applying transfer pricing provisions to the Appellant which enjoys tax holiday under section 10A of the Act. 3. Non-consideration of contemporaneous data Erred on facts and in law by conducting arm's length analysis based on information of comparable....
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.... undertaking any risk adjustment. 11. Treating the recovery of expenses as part of operating income and operating cost Erred on facts and in law in treating the recovery of expenses from Club 24 and NEXT Plc in respect of payments made by the Appellant on their behalf as part of operating income and operating cost and re-computing the operating margin of the Appellant. II. Other Grounds 12. Erroneous levy of interest under section 234B of the Act Erred on facts and in law by levying interest under section 234B of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustment without providing any cogent reasons for the same and disregarding the submissions of the Appellant. 13. Initiation of penalty proceedings under section 271(1)(c) of the Act Erred on facts and in law by not adjudicating the ground relating to initiation of penalty proceedings under section 271(1)(c) by considering the contention of the Appellant as premature. 4. The assessee has also filed additional ground of appeal which read as under:- Ground 14 - Acceptance of certain comparable ....
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....peal No.2, 3, 5, 7 and 10. Hence these grounds of appeal are dismissed as not pressed. Further, the ground of appeal No.12 against levy of interest under section 234B of the Act is consequential, hence the same is dismissed. The issue in ground of appeal No.13 against initiation of penalty proceedings under section 271(1)(c) of the Act is premature and the same is also dismissed. 7. Vide additional ground of appeal, the assessee is aggrieved by inclusion of Cosmic Global Ltd. and Vishal Technologies Ltd. as functionally comparable to assessee, which were originally part of transfer pricing study report but were subsequently, identified to be not functionally comparable. The assessee by way of ground of appeal No.4 is aggrieved by the selection criteria applied by the TPO. The assessee is also aggrieved by the directions to the TPO to compute operating margins of comparable companies using Safe Harbor Rules. By way of ground of appeal No.9, the assessee has asked for adjustment on account of low capacity utilization. The ground of appeal No.11 is specific in treating the recovery of expenses from Club 24 and NEXT Plc as part of operating income and operating cost and thus, re-com....
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....wever, rejected submissions made by the assessee and drew up list of final set of comparables which is reproduced under para 20. The assessee filed objections to the final list of comparables prepared by the TPO on the ground that some of the concerns were showing super normal profits during the year and the same were not comparable. However, the plea of assessee for rejection of Cosmic Global Ltd. showing revised margins of 48.59% was not accepted by the TPO since the same concern was selected by the assessee in the original TP study report. The assessee further asked for capacity adjustment and other risk adjustments. The TPO in the final analysis drew up list of ten companies to be comparable to the assessee and worked out the mean margins of said comparables after working capital adjustment of 26.46%. The assessee had shown margins of 11.59% and accordingly, the TPO proposed an upward adjustment of Rs. 8,17,66,432/-. The TPO rejected adjustment on account of capacity and other risk adjustments to the assessee. The Assessing Officer passed draft assessment order and thereafter, passed final assessment order making the upward adjustment on account of transfer pricing at Rs. 8.17 ....
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....trolled transactions were in the nature of lower end ITeS such as Call Centres, etc. for rendering data processing not involving domain knowledge, in such circumstances inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. The Hon'ble High Court therefore, directed the exclusion of Vishal Information Technology Ltd., which is subsequently known as Coral Hubs Ltd. The concern Accentia Technologies Ltd. has been rejected to be not functionally comparable to the concern providing BPO services by Pune Bench of Tribunal in BNY Mellon International Operations (India) Pvt. Ltd. Vs. DCIT in ITA No.23/PN/2014, relating to assessment year 2009-10, order dated 11.02.2015, which is the year in appeal before us. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from final set of comparables. 14. Similarly, E4e Healthcare Solutions Ltd. which is also engaged in providing KPO services, for the same parity of reasoning, is to be excluded from final set of comparables. Accordingly, we hold so. 15. Now, coming to another concern which the assessee ....
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....ion and prescription of data which is entirely different from the functions performed by the assessee. Further, the said concern has been rejected by the TPO himself in the TP assessment proceedings for assessment year 2012-13, in turn, relying on the ratio laid down by the Pune Bench of Tribunal in PTC Software (India) Private Limited Vs. DCIT in ITA No.336/PN/2014, relating to assessment year 2009-10, order dated 31.10.2014 and Principal Global Services Pvt. Ltd. for assessment year 2009-10. The assessee has placed on record the copy of order of TPO under section 92CA(3) of the Act for assessment year 2012-13 at pages 380 onwards of Paper Book with relevant reference at page 397 of Paper Book. 19. The Pune Bench of Tribunal in Eaton Industries Pvt. Ltd. Vs. ACIT in ITA No.2544/PUN/2012, relating to assessment year 2008-09, order dated 30.10.2017 has held that Cosmic Global Ltd. is not to be functionally comparable to a concern which is engaged in BPO services. The relevant findings of Tribunal are as under:- "30. The last concern which the assessee wants to be excluded from the final set of comparables prepared by the TPO is Cosmic Global, wherein the said concern had....
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....t loss making concerns. 26. The learned Authorized Representative for the assessee pointed out that CG VAK Software & Exports Ltd. was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the earlier two years was positive and only in the year under consideration, there was loss of 1.97%. He further stressed that segmental details were available in respect of revenue from software development and revenue from BPO service. The assessee pointed out that the Tribunal in TIBCO software India Pvt. Ltd. Vs. DCIT (2015) 56 taxmann.com 91 (Pune-Trib) at page 13 vide paras 26 and 29 had considered the plea of assessee and held the said concern to be included in the final list of comparables as it was not a consistent loss making company. He further placed reliance on the ratio laid down by the Hon‟ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles (2017) 77 taxmann.com 137 (Bom). 27. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 28. We find no merit in the plea of Revenue in this regard. The reason for exclusion of CG VAK Software & Exports L....
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.... assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds." 29. Accordingly, we allow the ground of appeal raised by the assessee and hold that CG VAK Software & Exports Ltd. is to be included in the final list of comparables." 22. Accordingly, we hold that CG VAK Software & Exports Ltd. is to be included in final list of comparables. 23. Now, coming to the ground of appeal No.8 raised by the assessee against certain mistakes in computing margins of comparables. 24. The learned Authorized Representative for the assessee pointed out that it had filed an application under section 154 of the Act, which was rectified by the Assessing Officer and certain margins were amended. The CIT(A) vide para 2.9.3 has referred to other margins and has given some directions to the Assessing Officer, which have not been carried out. Further, in para 2.9.3, the CIT(A) has referred to Safe Harbour Rules to be applied subsequently. The assessee is aggrieved by the said observations of CIT....
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..... The ld. AR of the assessee has placed on record a copy of the order of Tribunal in assessee‟s own case for the assessment year 2004-05, wherein the identical issue was considered. The relevant extract of the findings of the Tribunal are reproduced here-in-below: "7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance to support his submissions. The assessee in its appeal has raised 6 grounds. Ground Nos. 1, 5 and 6 are general in nature. Hence, require no adjudication. Thus, the effective grounds raised in the appeal are 2, 3 and 4 only. 8. In ground no. 2 the assessee has assailed the findings of Commissioner of Income Tax (Appeals) in upholding the order of Assessing Officer in rejecting functional (capacity utilization) adjustment. The contention of the assessee is that during the period relevant to the assessment year under consideration the assessee has expanded its output capacity by increasing manpower by anticipating new markets and increased volume of work from the existing custome....
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.... the view of Commissioner of Income Tax (Appeals) that future business demands can be predicted with accuracy by using modern business management tools. If that would be the case, no business venture would fail. The future is uncertain, market forces play a vital role in providing buoyancy to new business ventures. The claim of the assessee can be rejected if the assertions made by the assessee are found to be incorrect. The Tribunal in various cases has granted under/low capacity utilization adjustments. 9. The Bangalore Bench of the Tribunal in the case of M/s. Genisys Integrating Systems (India) Pvt. Ltd. Vs. DCIT (supra) has held as under: "15. With regard to low capacity utilization, adjustments to be given in the determination of ALP in ITES sector, the learned counsel for the assessee submitted that during the year under consideration the assessee had under utilized its facilities to the extent of 51.89% and therefore, this adjustments also should be given while determining the ALP. After giving adjustments, according to him the net operating margin on cost would be 27.46%. He submitted that the learned TPO has rejected the adjustments on the ground that co....
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....idering its capacity utilization vis-à-vis that of comparables and resultantly claimed that its increased profit as a result of such reduced operating costs be compared with that of the comparables. The TPO has also agreed in principle with the otherwise availability of the capacity adjustment. The issue of allowing capacity adjustment before us can be divided into two sub-issues for consideration, viz., first, whether the adjustment should be allowed in the hands of the assessee as has been done by the authorities below or comparables and second, how to compute capacity utilization adjustment under the TNMM. We will deal with these aspects one by one. i. Capacity adjustment should be allowed in whose hands? 9.1. It has been noticed above that the assessee claimed idle capacity adjustment by reducing its own operating costs. It is further observed that the authorities below have reduced the amount of adjustment by excluding certain costs from the ambit of the costs qualifying for adjustment. However, the adjustment has been ultimately allowed from the operating costs incurred by the assessee. In such circumstances, the question arises as to whether the acti....
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....erially affect the amount of net profit margin in the open market.‟ It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used for the purposes of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). 9.3. Sub-rule (2) of Rule 10B provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to certain factors which have been enumerated therein. Rule 10B(3) states that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the two or a „reasonably accurate adjustment can be made to eliminate the material effects of such differences.‟ When we read sub-clauses (ii) & (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) & (3) of rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. ....
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....see with that of the comparables. We have noticed above that the difference in the capacity utilizations is an important factor, which needs to be adjusted. No mechanism has been given under the Act or the rules for computing the amount of capacity utilization adjustment. 10.2. On an overall understanding, we feel that under the TNMM, the first step in granting capacity utilization adjustment is to ascertain the percentage of capacity utilization by the assessee and comparables. There can be no difficulty in working out these percentages. The second step is to give effect (positive or negative) to the difference in the percentage of capacity utilizations of the assessee vis-à-vis comparables, one by one, in the operating profit of comparables by adjusting their respective operating costs. Operating costs can be either fixed or variable or semi-variable. One needs to split semi-variable costs into the fixed part and variable part. In so far as the variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjus....
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....ty utilization level. 10.3. Turning to the facts of the instant case, we find that both the TPO as well as the ld. CIT(A) have proceeded on a wrong premise not only by allowing capacity utilization adjustment in the assessee‟s profit, which is contrary to the legal position as discussed above, but also by considering all the comparables as one unit with the average percentage of their respective capacity utilizations. It is further observed that in the calculation of such capacity utilization adjustment, the ld. CIT(A) has considered four companies as comparable, which view has been modified by us supra inasmuch as we have held that M/s Eicher Motors and M/s. Force Motors are incomparable. Naturally, they would also go out of reckoning in the computation of idle capacity utilization adjustment. In the absence of the availability of financials of all the comparable companies, it is not possible at our end to work out the amount of capacity adjustment in the manner discussed above. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. Needless to say, the assessee....
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.... transfer pricing adjustment, the endeavour is to compare like with like and hence, the said exercise should be carried out not only in spirit but in actual fact. In the facts of the present case before us, the assessee is aggrieved by the action of TPO in adopting different methodology for computing its operating margins. The assessee had pointed out that certain costs were recovered from other concerns and the same should be excluded from its operating income and operating cost as it does not have bearing on the margins of assessee. We find merit in the plea of assessee in this regard. The PLI adopted by the assessee and the TPO is operating income / operating cost and hence, only operating income and operating cost of assessee is to be considered for working the margins for the year under consideration. In case certain expenses have been incurred on behalf of related concerns, which in turn, have been reimbursed, then the same are to be excluded from both operating income and operating cost. Accordingly, we hold so and direct the Assessing Officer / TPO to re-work the margins of assessee in this regard and also of comparables. 33. Now, coming to the appeal of Revenue, wherein....