TaxTMI 
TaxTMI 
2019 (5) TMI 1832
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....No. 1 - Transfer Pricing Adjustment of Rs. 1.67,98.967 1.1 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in not considering the Transfer Pricing analysis submitted by the Appellant and confirming the upward adjustment made by the learned transfer pricing officer to the extent of Rs. 1,67,98,967. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of learned transfer pricing officer in rejecting the Internal Comparable Uncontrolled Price ("CUP") method adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.3 On the facts and in the circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned transfer pricing officer in rejecting the Internal Transaction Net Margin Method ("TNMM") adopted by the Appellant as the most appropriate method for benchmarking the international transaction of the Appellant. 1.4 The learned CIT (A) has erred by not considering risk ad....
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....ons are extracted as under: Nature of services Associate Enterprise (AE) Amount (Rs.) Provision for call centre and related services Etech Inc. 1903, Berry Drive, Nacogdoches, TX - 7564 USA 18,63,87,386/- Reimbursement of expenses (Call termination and internet charges) Etech Inc. 1903, Berry Drive, Nacogdoches, TX - 7564 USA 1,11,74,431/- 2.1 The Assessee filed the transfer pricing study report in respect of these transactions wherein it benchmarked its international transaction with AE by applying internal CUP method. 2.2 The assessee also claimed that similar services were rendered to Non AEs. The assessee in respect of the services rendered to its AE charged the fees at the rate of Rs. 275.49 per hour whereas in case of non AE it calculated the hourly rate charged at the rate of Rs. 126.24 per hour. Accordingly, the assessee in its TP study report claimed that price charged in case of non AEs is lower than AE, therefore, the transactions with the AE are at Arm Length Price (ALP). 3. However, the TPO on perusal of TP study report noted certain facts in respect of internal CUP as under: (i) In case of AE, fee is receivable on per hour ....
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....submitted that if there were differences in the risk profile, TPO ought to have made the adjustment in respect of risk profile between AE and non AE segment. The assessee in support of his contention also submitted calculation of adjustment of risk by taking the difference between PLR rate and Bank rate where PLR rate as a normal risk bearing rate whereas Bank rate is as risk free return. Accordingly, the assessee worked out the difference in rate as 5.25% (11.50%-6.25%) and contended that by making the upper adjustments of 5.50% in non AE segment, both the segment would be comparable as after adjustments margins of non AE would reach to -75.65%. 3.8 However, TPO disregarded the contention of assessee and held that CUP can be applied in the cases where services rendered are highly comparable which is not in the present case as discussed in the SCN, therefore, internal CUP applied by assessee for the purpose of benchmarking is rejected. 3.9 In respect of internal TNMM, the TPO held that assessee has only submitted calculation of quantification of the risk but has not established any link for the difference in the return between Government security and AAA rated bonds with the ....
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....hat though the services provided by the assessee under both the agreements are in the nature of call Centre/BPO services but they are quite different. As such under the CUP method high level of comparability in the characteristics of services provided is required. Further, the basis of remuneration charged in both the case is different. Accordingly, ld. CIT (A) dismissed the appeal of assessee by following his own order of AY 2009-10. 4.6 In respect of TNMM, the ld. CIT(A) held that there is huge difference between the turnover of the AE segment and non AEs segment. Therefore the same are not comparable. Thus the contention of assessee that the turnover needs to be ignored while applying the internal TNMM is not tenable in the present facts and circumstances. 4.7. Further, in the case (supra), as relied by the assessee, the matter was remanded back to determine the cost allocation properly and further held that if non AEs transactions are more only up to 5% but cost allocation is more than 50% then further examination is required. In the present case also assessee has not justified the basis of allocation of cost between AE and Non-AEs as the non AE business forms only 1.7% o....
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....nce it is prayed that internal CUP should be accepted as most appropriate method. 5. On the other hand the Ld. DR before us vehemently supported the order of the lower authorities. 6. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that similar issue related to internal CUP method was raised in assessee's own appeal in the assessment year 2009-10 in ITA No. 2411/Ahd/2014 where issue was decided in favour of assessee by the ITAT vide order dated 16-01-2018 by observing as under: "10. We have given thoughtful consideration to the orders of the authorities below. We find that the assessee is eligible for tax holiday u/s. 10A of the Act, therefore, we do not find any merit in holding that the assessee manipulated the prices and shifted the profits to the overseas jurisdiction for avoiding taxes in India. Moreover, the taxes rates in the USA are higher than the tax rates prevailing in India. Moreover, the AE of the appellant company has incurred losses in providing end to end services to third parties. If the assessee had directly undertaken contracts with the third parties in USA, it would also hav....
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....rease capacity utilization. The total turnover of Non AE segment of Rs. 5.67 lacs as against the turnover of Rs. 1909.60 lacs in the case of international transactions with AE. The ld. CIT(A) confirmed the rejection by holding that the turnover of the third party segment is very much less compared to that with AE. The ld. CIT(A) further held that the appellant has not proved the allocation of the common cost between AE and non AEs and whether they are scientific and at arm's length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. Insofar as the difference in the turnover, we find that the Tribunal Delhi Bench in the case of Lummus Technology Heat Transfer BV Vs. DCIT 42 taxmann.com 342 has held as under:- 5. Rule 10B(l)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that "the net profit margin realised by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or....
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.... that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other signi....
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....anies who have less than 75% of the revenues as export sales were excluded Companies who have diminishing revenues/persistent losses for the period under consideration were excluded * Companies having different financial year ending (i.e. not March 31, 2010) or data of the company dues not fall within 12 month period Le. 01-04-2009 to 31-03-2010, were rejected * Companies that are functionally different from that of taxpayer or working in peculiar economic circumstances, after giving valid reasons, were excluded, * Companies having turnover less than Rs. 1cr. and more than Rs. 200cr. were rejected. 7.1 In view of the above the TPO selected 8 companies as comparables. The list of such comparables is available on page 60 to 61 of the TPO order. At the same time the assessee suggested three companies as comparables but the TPO rejected the same. The details of the companies suggested by the assessee stand as under: i. Informed technologies India Ltd ii. CG-Vak Software and exports Ltd iii. R systems International Ltd 7.2 On appeal to the ld. CIT-A rejected some of the comparables suggested by the TPO and all the comparable....
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.....5 The TPO has only considered the information received u/s 133(6) as per his convenience as comparable party submitted that it is engaged in data processing in insurance sector but at the same time it also submitted that it is not a call centre. 8.6 However, the ld. CIT (A) disregarded the contention of assessee and held that assessee is contending only on the basis of various rulings and rules without bringing any material on records. Further, the assessee is also only relying on the website information without meeting out the observation of TPO. Accordingly, ld. CIT (A) dismissed the appeal of the assessee. Aggrieved by the order of ld. CIT (A), the assessee is in appeal before us. 9. The LD. AR before us submitted as under: Cross Domain Solution Pvt Ltd The learned TPO and CIT(A) has erred in considering this company as functionally comparable to the Appellant. In this regard, the Appellant submits that this company is engaged in rendering high-end KPO service and hence cannot be compared with the Appellant who is a low end BPO services provider. For detailed discussion kindly refer Para 2.6,4 of submission filed dated 15 May 2015 before the lea....
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....4 hours", With Effipay Lite and Effipay Lite Plus, our bouquet of services cover end to end payroll, retrials, reimbursement, tax proof verifications upto issue of Form 16 for employees of our clients across different industry verticals. Our processes are highly scalable and provide end to end payroll solutions to clients with headcount ranging from 5 to 65,000. " "Crossdomain's IT knowledge and domain competence has provided the edge to develop information systems to implement process innovation and continuously increase efficiency and tum-a round-time for business critical processes. " Source: http:/ www.cross-domain.com As can be seen from the above, the business of Cross Domain ranges from high end KPO services, development of product suites and routine low end ITES service. However, there is no bifurcation available for such verticals of services. Therefore the assessee contends that Cross Domain cannot be compared to a routine ITES service provider. III. 1 We are of the view that in the absence of any reasons given to the contrary either by the TPO or the DRP for regarding this c9mpany as a comparable, this company should be excluded fr....
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....of Rs. 2.29 crores which is 11.42% of total revenue of Rs. 20.05 crores. As such the company was not developing its brand name or trade mark. 12.1 Assessee further submitted that AMP expenditure of Rs. 2.29 crores also includes other expenses such as marketing salary, marketing travel, commission on sales and advertising & sales promotion which are in the nature of selling expenses. Therefore such expenses cannot be clubbed with AMP expenses. The assessee in its support also placed reliance on L.G. Electronics India (P.) Ltd. vs. ACIT (152 TTJ 273) and contended that if the abovementioned selling expenses are excluded then AMP expenditure would hardly constitute only 0.015% of total sales. 12.2 However, the TPO observed that assessee itself has admitted the fact that the company has incurred the AMP. Accordingly the TPO held that the ITES segment of R system was incomparable. 12.3 The TPO from the information obtained from R system u/s 133(6) also observed that it has given segmental result in respect of software development services and BPO services. The TPO further observed that on one hand the assessee is objecting the inclusion of entities engaged in diversified activi....
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....Design Systems (India) (P) Ltd. Vs DCIT (Delhi ITAT) [2018] (89 Taxmann.com 443) (Refer para 12 at page no 64 of legal paper book) - G E India Exports (P.) Ltd. Vs DCIT (Bangalore ITAT) [2017] (81 Taxmann.com 418) (Refer para 37 at page no 82 of legal paper book) 15. The Ld. DR vehemently supported the order of authorities below. 16. We have heard the rival contentions of both the parties and perused the materials on record. In the instant case we note that ld. CIT (A) rejected the comparables selected by the assessee on the ground that the comparable has been identified after the documentation of TP study, therefore, the exercise is post facto analysis. 16.1 Regarding this we note that ld. CIT (A) in assessment year 2009-10 has confirmed this company as comparable. Now this year it has been rejected on account that it is a risk bearing entity. In this regard we are of the view that department cannot cherry pick the comparables as per its convenience. Once in a year it has been held that it is a case fit for comparable then in later years it cannot be excluded as comparable company unless there is any material change within the entity related to its structure or b....
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....does not exceed Rs. 1 crores, therefore, it does not fulfill the applied filter criteria. 17.4 The ld. CIT (A) without prejudice also held that the exercise of assessee is post facto analysis as the assessee has not submitted the comparable in the TP study report rather it was submitted only during the assessment proceeding. Aggrieved by the order of ld. CIT (A), the assessee is in appeal before us. 18. Ld. AR before us submitted as under: The learned TPO has held that the turnover of the relevant comparable segment business is less than 1 crore and hence does not qualify turnover filter. Further, the margin of the company are fluctuating and hence not comparable. The learned CIT (A) has held that the turnover of the relevant comparable segment business is less than 1 crore and hence does not qualify turnover filter. In this regard, the Appellant submits that the turnover of the relevant segment of the company is Rs. 82.78 lakhs which is less than Rs. 1 crore. However just because this company does not pass the turnover filter of 1 crore this should not be rejected as the business is exactly similar to that of the Appellant. Further the turnover ....