AI Drafter 
TaxTMI 
TaxTMI 
2016 (6) TMI 1342
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....g computerized embroidery design, emblem, art works, drawings, badges, and other allied products. Under the data conversion services, the company develops documents such as invitation cards, resumes, business cards, letterheads, labels, brochures, etc. on order basis. During the assessment year under appeal, the assessee entered into international transactions with its AE. Accordingly, the Assessing Officer made reference to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act. The international transactions entered into by the assessee during the assessment year 2006-07 are as under : Sr. No. Details of transaction Amount (Rs.) 1 Provision of Digitizing Services 9,67,30,190/- 2 Provision of Data Conversion/Creation services 8,60,54,474/- 3 Import of Capital Goods 2,28,275/- TOTAL 18,30,12,939/- The assessee adopted TNM method as the most appropriate method to benchmark Arm's Length Price (ALP) of transactions with its AE. For the purpose of analyzing international transactions, the assessee selected six external comparables. The details of the&....
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....sp; absorption of overheads. 4. Rejection of Genesys International Corporation Limited as a comparable company. 4.1 The learned DCIT erred on the facts and in circumstances of the case in rejecting a comparable Company 'Genesys International Corporation Limited' ("Genesys International") selected by the Appellant in the Transfer Pricing Study Report. 5. Initiation of penalty proceedings. The learned DCIT erred on the facts and in law in proposing to initiate penalty proceedings section 271(1)(c) of the Act, without considering the facts of the case. 6. Levy of interest obligation 6.1 The learned DCIT has erred on the facts and in law by levying interest under section 234B of the Act, on account of the unanticipated adjustments made by the learned TPO. 6.2 The Appellant pleads that the shortfall in advance tax has resulted in view of the adjustments which have been objected in the Grounds above and accordingly is consequential in nature. 7. Transfer pricing adjustment without giving benefit of +/- ....
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....e. The Tribunal has remitted the matter back to the file of Assessing Officer to grant the benefit of capacity utilization adjustment. The ld. AR placed on record a copy of the order of Tribunal in ITA No. 106/PN/2012 for the assessment year 2004-05 decided on 09-03-2016. 5. On the other hand Ms. M.S. Verma representing the Department vehemently supported the findings of TPO and the DRP. The ld. DR submitted that Genesys International Corporation Ltd. is mainly engaged in the business of Geospatial Information System (GIS). Genesys International Corporation Ltd. has capabilities relating to Photogrammetry/remote sensing services, Cadastral mapping, 3D mapping and Navigation maps. GIS is a computer system for capturing, storing, checking, integrating, manipulating, analyzing and displaying date related to positions on the Earth's surface. GIS service provides for land use planning project, Ecological and hydrological investigations, Watershed assessments, etc. Whereas, the activities carried on by the assessee are entirely in a different sphere. The assessee is engaged in the bus....
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....uded Genesys International Corporation Ltd. as one of the comparables on the ground that both the companies are engaged in ITES services. The assessee opposed the same and carried the matter to the Tribunal. The Tribunal held that since GIS is notified ITES product therefore the same is a good comparable with company providing ITES services. The relevant extract of the findings of the Tribunal on this issue are reproduced here-in-below: "xv) Genesys International Corporation Ltd. 37 The Id AR of the assessee has submitted that this company was engaged in the business of software services and I T consultancy services and hence, should be rejected as a comparable. He has referred the order of the TPO and submitted that the TPO itself has recorded in the impugned order that this company has software service and IT consultancy services. 37.1 On the other hand, the Id DR has submitted that this company has derived the revenue from Geographical Information systems (GIS) activity which is ITES activity. He has filed a copy of the notification no. SO 890(E)....
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.... India Services P. Ltd. Vs. DCIT (supra) where similar issue had come up and the assessee had objected to the selection of Genesys International Corporation Ltd. as comparable. The assessee had taken a specific stand that Genesys International Corporation Ltd. is engaged in high end ITES services i.e. GIS. The Tribunal rejected the contention of the assessee and upheld the inclusion of Genesys International Corporation Ltd. in the list of comparables. The relevant extract of the findings of the Tribunal reads as under : "21.9. GENESYS INTERNATIONAL CORPORATION LTD. The assessee has objected to the selection of this comparable on the ground that it is engaged in high end ITES services i.e. Geographical Information Service (GIS). As we have held earlier, only on the ground of high end or low end segment, comparable could not be excluded or included. GIS is an IT enabled service. The entire revenue of the company as per the annual report placed on record is from GIS activities. We also note that the Tribunal in case of Willis Processing Services India (P) Ltd. (Supra....
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....ibunal 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 customers. However, the volume of the work did not increase in commensurate with the expanded production capacity of the assessee company. While ....
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....ommissioner 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....
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.... "8. We have heard the rival submissions and perused the relevant material on record. Before embarking upon the question of allowability and extent of capacity adjustment under the TNMM, we want to make it clear that the assessee reduced its operating costs by considering 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....
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....on. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per subclause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially 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 fac....
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....need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM: - 10.1. Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee 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. ....
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....the fixed costs incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are Rs. 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to Rs. 50 (Rs.100 into 25/50) as against the actually incurred fixed cost by it at Rs. 100. When we compute operating profit of B by substituting the fixed costs at Rs. 50 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity u....