TaxTMI 
TaxTMI 
2021 (2) TMI 350
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....xpedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 3. The Ld. CIT(A) erred on facts and in law in determining the arm's length price of the Appellant's international transactions with its associated enterprises in the Administrative/market support and IT enabled segments in the following manner: 3.1 By upholding the Ld. Transfer Pricing Officer's ("TPO") approach of applying additional and modified quantitative filters in order to arrive at a set of comparable companies. 3.2 By upholding the Ld. TPO's approach of selecting companies which were functionally not comparable to the Appellant and operated on a different business model under Transactional Net Marginal method ("TNMM"). 3.3 By upholding the Ld. TPO's approach to include companies as comparable despite the fact that such companies had witnessed abnormal margin/growth during the year under consideration. 3.4 By upholding the approach of the Ld. TPO in denying economic adjustment for the difference in risk ....
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....e assessee is engaged in providing technology-based testing services, support services for computer-based examination, software support services, marketing support services etc to its Associated Enterprises (AEs) located abroad. For the year under consideration, the assessee filed its return of income on 30/09/2008 declaring total income of Rs. 1,93,55,507/-, which was selected for the scrutiny assessment. The statutory notices under the Income-tax Act, 1961 (in short 'the Act') were issued and complied with. The Assessing Officer observed international transactions carried out by the assessee with its Associated Enterprises and therefore for determining arm's-length price of those international transactions, he referred the matter to the learned Transfer Pricing Officer (TPO). The Ld. TPO, after providing opportunity to the assessee, proposed transfer pricing adjustment of Rs. 3,57,86,942/- in his order dated 31/10/2011 under section 92CA(3) of the Act. The Ld. Assessing Officer in his order dated 30/01/2012 included the transfer pricing adjustment proposed by the Ld. TPO. Aggrieved with the transfer pricing adjustment, the assessee filed appeal before the Learned CIT(....
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....ting additional ground where the learned Dispute Resolution Panel (DRP) has been mentioned instead of Ld. CIT(A). The Learned DR also submitted that the contention of new information in public domain regarding the comparable is not correct as order of the Learned TPO was passed on 31/10/2011 and order of the Learned CIT(A) was passed on 3/11/2014 whereas the assessee is approaching now in the year 2019 for admitting the additional ground. Accordingly, he submitted that additional ground of the assessee might not be admitted. 4.4. We have heard rival submission of the parties on the issue of additional ground raised. On the issue of exclusion of comparable which was selected by the assessee before the learned TPO, the Tribunal in the case of DCIT Vs. Quark Systems (P) Ltd. (supra) has held as under: "30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the d....
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....ssessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the Department to tax that income in that year even though legally such income did not pertain to that year." 32. In the case of R.B. Jessaram Fatehchand vs. CIT (1971) 81 ITR 409 (All), it has been found and observed as under: "Mr. Brijlal Gupta appearing for the Department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under s. 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the ITO was incorrect, the defect is not cured by the attitude taken up by the assessee." 33. In the case of CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC), their Lordships of Supreme Court made the following observations: "On the question of the admissibility of the deduction ....
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....ndless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principle regardless of where the burden of proof lies." 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part." 4.5. This decision of the Tribunal has been further upheld by the Hon'ble High Court of Punjab and Haryana as reported in (2011) 244 CTR 542. 4.6. Relying on the decision of the....
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....The assessee in its transfer pricing study reported following international transactions and method selected for determining arm's-length price: Sl. No. Nature of Transactions Method Value of transaction 1. Provision of support services for computer based testing TNMM OP/TC 91,064,861 2. Provision of marketing support services 31,134,838 3. Provision of back office based IT enabled services 46,184,808 6.2. Further, the assessee selected 12 comparables for the support service for computer based testing and marketing support service segment and in view of the average margin of those comparables based on multiple year data, was worked out at 7.90%. The assessee's margin being higher in both segments, the transactions were treated as at arm's-length. Similarly, in the case of ITeS, seven comparables were chosen by the assessee and their mean margin was worked out at 10.04%, and thus, the transaction was considered at arm's-length. 6.3. The learned TPO though accepted the method adopted by the assessee to benchmark the international transaction, however he rejected the comparability analysis and conducted a fre....
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....shal Information Technologies Ltd . (Also known as Coral Hubs Ltd ) 50.68 Average 38.07 6.7. In view of the mean margin of comparable is under ITeS segment at 38.07%, the learned TPO worked out the arm's-length price of the transaction at Rs. 5,95,95,668/- and proposed transfer pricing adjustment of Rs. 1,34,10,860/- for the shortfall. In this manner, the Learned TPO proposed total transfer pricing adjustment of Rs. 3,57,86,942/- (1,62,18,949 + 61,57,133 + 1,34,10,860) 6.8. The Learned CIT(A) rejected three comparables for MSS segment and 4 comparables in ITeS segment. The summary of the comparable companies finally selected by the Ld. CIT(A) is as follows: Segment No. of Comparables Arm's Length Margin single year data Margin of the Appellant Quantum of Addition (in INR) Marketing Support Service Segment 8 10.54% 7.00% NIL Support Services for Computer based Testing Segment 8.79% NIL IT enabled Services Segment 5 20.23% 7.00% 5,710,514 6.9. In grounds along with additional grounds raised, the assessee is contesting inclusion of two comparables in the ITeS segment and one comparable in m....
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....s operations P. Ltd. [ITA No. 160/Bang/2014] [AY 2009-10] dated 28.02.2017 * Cummins Technologies India ltd. [ITA No. 784/PN/2014] [AY 2009-10] dated 30.03.2016 * BNY Mellon International Operation (India) Private Limited [ITA No. 23/PN/2014] [AY 2009-10] dated 11.02.2015 * ADP Pvt. Ltd. [ITA No. 191/Hyd/2014] [AY 2009-10] dated 18.01.2017 7.2. On the other hand, the Learned DR submitted that translation services are also in the nature of ITeS services and therefore functionally similar to the assessee. He also disputed the ratio of vendor payments to total cost in the case of the company presented by the assessee. 7.3. We have heard rival submission of the parties and perused the relevant material on record. This company was included by the assessee in its set of the comparables filed before the Learned TPO and the Ld. TPO also accepted this company as valid comparable. Now, the assessee is seeking exclusion of the company on the ground of functional dissimilarity and different business model. 7.4. On perusal of page 376 of the paper-book of the annual reports, which is director's report of the company, wherein under the head review performa....
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....clusion of the company from the set of the comparables to the file of the Learned AO/TPO for verifying from the Annual Report or by way of issuing notice under section 133(6) of the Act to the company. It is needless to mention that the assessee shall be provided copy of the information gathered by the AO/TPO from the company and also provide adequate opportunity of being heard on the issue. The additional ground No. 1 of the appeal is accordingly allowed for statistical purposes. 8. In additional ground No. 2, the assessee has sought for adopting correct margin of comparable M/s. R Systems International Ltd. under the ITeS segment. 8.1. The Learned Counsel of the assessee submitted that corrected margin of the company should be considered for computation of the arm's-length margin. He submitted that the company follows year ending, which is different from the assessee. Accordingly, submitted that computation of margin might be remanded to the file of the learned TPO based on quarterly filing of the company. 8.2. On the other hand, the Learned DR relied on the margin computed by the learned TPO. 8.3. We have heard rival submission of the parties on the issue in disp....
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.... facts of the case in both the years. * HSBC Electronic Data Processing India Ltd. ITA No. 1624/Hyd/2010; AY 2006-07; Paragraph 9.2- Page 6; wherein, the Hon'ble ITAT relied upon DRP directions for subsequent year, AY 2008-09 in assessee's own case based on similar facts of the case in both the years. * Cognizant Technology Services Pvt. Ltd., Hyderabad ITA No. 255/Hyd/14 AY 2007-08, 2008-09 9.2. The Learned DR, on the other hand, contested that in the case of the company claim of salary expenses being low as compared to vendor payment is not correct. Before the Learned TPO, the assessee challenged inclusion of the company "Vishal Information Technology Ltd." on the ground of outsourcing model. The learned TPO rejected this ground following the finding of the Tribunal in the case of Deloitte Consultant Private Limited (supra). Before the Learned CIT(A) this ground was not taken and only the company was challenged on the ground of functional dissimilarity, which was rejected by the Learned CIT(A). The Learned Counsel of the assessee has referred to Schedule 14A of financial statement (page 401 of the paper-book of Annual Reports) and has submitted that v....
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....e finding of the Ld. CIT(A) and submitted that company is functionally similar to the assessee. He further submitted that the assessee company is also capital intensive company and therefore cannot be rejected on the ground of asset deployed by the company. 9.6. We have heard rival submission of the parties and perused the relevant material on record. The learned TPO held the testing services of the company as functionally similar to support services provided by the assessee. He also rejected the contention of the assessee that 58% of the assets of the company were testing instruments, on the ground that plant and machinery in the case of the assessee also constitutes 58.81% of the fixed assets. The Ld. CIT(A) upheld the finding of the learned TPO. We have perused the annual report of the company (page 20 of annual report), wherein the segment reporting on page 22 of the annual report MSS paper-book, is mentioned, which is reproduced as under for ready reference: "08. Segmental Reporting: The Company treats Analytical Charges & Consultancy Receipts as a single segment and therefore details of segments are not separately shown. The Company is a Commercial Testing House e....
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...., the Hon'ble ITAT. * M/s. DHL Express (India) Private Limited (I.T.A. No. 7360/Mum/2010 -A.Y 2006-07 "held that when direct comparables are available, comparables with segmented results should not be used. 10.3. We have heard rival submission of the parties and perused the orders of the lower authorities on the issue-in-dispute. The learned TPO retained the company in the set of the comparables on the ground that the company cannot be excluded due to super profit during particular year. He rejected the contention of the assessee of non-reliability of expense allocation by the company under different segments. The Ld. CIT(A), however, excluded the company on the ground of the functional dissimilarity. The company is engaged in four segments, namely, publication, energy, event management and pharmaceuticals. It was admitted by the assessee that "event management" segment was found comparable during financial year 2005-06 and 2006-07 but in the year under consideration the assessee sought exclusion on the ground of unreliability of segment information. Before us, the learned Counsel of the assessee has referred to activities carried out under event management segment ....
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.... addition to being a government-owned company, it is also not functionally comparable as it is engaged in rendering consultancy services mainly in the transportation infrastructure sectors. Further submitted that company has been rejected in assessee's own case for assessment year 2009-10 and 2010-11 on the basis of different functional profile and no further appeal has been filed by the Department on this issue. 11.4. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The Ld. CIT(A) has excluded above both companies observing as under: "(b) I have considered the facts of the case, the submissions of the appellant and various judicial cases on the subject. Before adjudicating on the comparability of these companies with the appellant company, it is necessary to have an overview of the functions of the two companies: RITES Ltd. provides pre-project planning services in the fields of engineering design, construction and project management for railway tracks and electrification together with traffic and software consultancy assignments to Malaysian Railways. Hence the services provided by it are e....
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....rket support services. Further, both are government-owned companies, who gets priority in getting any government contract and thus there profitability gets influenced by related party transactions. Accordingly, we do not find any infirmity in the finding of the Learned CIT(A) on the issue in dispute and accordingly, we uphold the same. The ground No. 2 and 3 of the appeal of the Revenue are accordingly dismissed. 12. In ground No. 4, Revenue has challenged exclusion of M/s. Accentia technologies Ltd. 12.1. The learned DR submitted that in view of the CBDT Circular, the activity of the company is in the nature of the ITeS and, therefore, it is a valid comparable. 12.2. On the other hand, Learned Counsel of the assessee relied on the finding of the Learned CIT(A) and submitted that company operates into segments i.e. ITeS and software development, and therefore it cannot be compared with the assessee at entity level. 12.3. We have heard rival submission of the parties on the issue-in-dispute and perused the order of the lower authorities. We find that before the learned TPO, the assessee sought to exclude the company on the ground of multiple segments and extraordinary ev....
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....e appeal is accordingly dismissed. 13. In ground No. 5, the Revenue has challenged exclusion of E-Clarx Services Ltd. The learned DR submitted that the finding of the Ld. CIT(A) that company is engaged in providing KPO services is not correct and the company is mainly engaged in ITeS segment only. 13.1. The learned Counsel, on the other hand, relied on the order of the Learned CIT(A). 13.2. We have heard rival submission of the parties on the issue in dispute and perused the order of the lower authorities. Before the Learned TPO, the assessee sought exclusion of the company on the ground of functional dissimilarity as company being a knowledge processing outsourcing (KPO) company. According to the learned TPO, in view of TNMM selected as most appropriate method, only broad similarity of function was required. The learned TPO also rejected objection of the assessee of extraordinary event during the year under consideration and intangibles owned by the company. The Learned CIT(A) excluded the company from the set of comparables, observing as under: "c) I have considered the facts of the case, the submissions of the appellant and various judicial pronouncements on th....
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....CIT(A) on the issue-in-dispute and we accordingly, uphold the same. The ground No. 5 of the appeal of the Revenue is accordingly dismissed. 14. In ground No. 6, the Revenue has challenged exclusion of M/s. HCL Comnet Systems and Services Ltd.' 14.1. The Learned DR submitted that CIT(A) is not justified in rejecting the comparable on the ground of related party transaction. According to him while comparing related party transactions, entire transaction of purchase and sales cannot be compared with the sales only. 14.2. The Learned Counsel, on the other hand, relied on the order of the Ld. CIT(A). 14.3. We have heard rival submission of the parties on the issue in dispute and perused the order of the lower authorities. The Ld. CIT(A) has excluded the company on the ground of related party transactions being more than 25% of the sales. The relevant finding of the Ld. CIT(A) is reproduced as under: "(c) I have considered the submissions of the appellant and gone through the facts of this case. The appellant is challenging the inclusion of this comparable on two fronts, firstly the massive disparity in turnover of the appellant company on the one hand and HCL on....
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.... direction of the Learned CIT(A) on the issue in dispute are set aside and the Learned AO/TPO is directed to retain the said company as comparable in the final set of the comparables. The ground No. 6 of the appeal of the Revenue is accordingly allowed. 15. In ground no. 7, the Revenue has challenged exclusion of M/s. Mold-Tek Technologies Ltd. 15.1. The Learned DR relied on the order of the TPO, whereas the learned Counsel of the assessee submitted that in view of the extraordinary event of demerger of the plastic division of the company and amalgamation of Teck Men Tools Private Limited during the year under consideration, the company cannot be included as a valid comparable. He supported the order of the Ld. CIT(A) on the issue in dispute and also relied on following decisions: * M/s. Symphony Marketing Solutions India Private Limited V/s ITO (IT (PA) No. 1316/Bang/2012)- AY 2008-09 * M/s. BA Continuum India Private Limited V/s ACIT (ITA No. 1144/Hyd/2014)- AY 2008-09 * ICC India Private Limited V/s DCIT (ITA No. 25/Del/2012)- AY 2007-08 * M/s. Capital IQ Information Systems (India) Pvt. Ltd. (ITA No. 1961/Hyd/2011; AY 2007-08 Paragraph ....
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.... "32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the learned CIT(A) on the basis of FAR analysis to show that the selection of M/s. Vimta Labs as comparable is not justified', the learned CIT(A) has not accepted the stand of the assessee on the issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India Pvt. Ltd. (ITA No. 5043/Dei/2000 dtd. 21.01.2011) + (2011 -TII-13-ITAT-DEL-TP), Delhi Bench of ITAT has held that exclusion of comparables showing supernormal profits as compared to other comparable is fully justified. We, therefore set aside the impugned order of the id. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the learned CIT(A) and keeping in view the Delhi Bench of ITA in the case of Abode Systems India Pvt. Ltd. (supra). In this view of the matter, we accept the contentions of the assessee that this company cannot b....