TaxTMI 
TaxTMI 
2020 (9) TMI 1286
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....Rules'). 2. The Hon'ble DRP/ learned AO / learned TPO erred in making an addition of Rs.67,437,268/ (Catalogue Manufacturing including Custom Synthesis / research services segment - Rs. 64,497,705/- and Information Technology ('IT') enabled services - Rs. 2,939,563/-) to the total income of the Appellant on account of adjustment in the arm's length price ('ALP') of the international transactions with its Associated Enterprises ('AE'). 3. Without prejudice to the above, the action of the Assessing Officer in passing draft assessment order which in substance is final assessment order is contrary to section 144C(1) of the Act and hence, liable to be quashed. 4. The Hon'ble DRP / learned AO/ learned TPO erred in not considering the multiple year financial data of comparable companies while determining the ALP of the international transactions of the Appellant. 5. The Hon'ble DRP/ learned AO/ learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the Transfer Pricing ("TP") documentation for comparable companies while determining the ALP of the international t....
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....fit Margin as an appropriate Profit Level Indicator ('PLI') for the custom synthesis / research services having accepted the same in case of catalogue manufacturing operations to eliminate the impact of high depreciation cost in case of Appellant. 6.6. Without prejudice to the ground that appellant is entitled for adjustment of under-utilisation of capacity, the learned authorities below ought to have granted adjustment towards abnormal costs, in respect of manufacturing and alleged R & D segment. 6.7. The Learned TPO / DRP have erred in law and on facts in not applying export filter in manufacturing segment although said filter was applied in the case of alleged R&D segment and ITES segment. 6.8. The Hon'ble DRP erred in law and on facts in upholding the rejection of certain comparables selected by the appellant while carrying out its TP study in respect of manufacturing segment. 6.9. The Hon'ble DRP erred in law and on facts in upholding the selection of certain comparables finally selected by TPO in respect of manufacturing and alleged R & D segment. 6.10. The learned TPO erred in law and on facts in adopting Vimta Labs as comparable though the out....
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....pellant vis-a-vis the comparables and thereby not allowing the benefit of appropriate adjustment towards the risk differential, when the comparables selected are full-fledged entrepreneurial companies. 8. That the appellant ought to have been allowed the benefit of proviso to section 92C(2) in respect of each segment of the appellant. 9. Without prejudice to the above, the learned TPO erred in law and on facts in making adjustment u/s 92CA in respect of non-AE transactions also instead of restricting it to AE transactions alone in respect of alleged R&D segment or manufacturing, if integrated with R&D. 10. The Hon'ble DRP ought to have held that the observations of the learned TPO that the appellant didn't raise any objection to the comparables selected by the TPO are perverse and hence, liable to be quashed. 11. Corporate Tax - Disallowance of Stock write-off on account of physical difference and errors in receipt of stock amounting to Rs. 689,875 11.1. That on the facts and in the circumstances of the case and in law, the Hon'ble DRP / learned AO has erred in disallowing the amount of Stock write-off on account of physical difference and errors in recei....
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....the DRP erred in directing the AO to allow the claim of the assessee under the head "Expired Inventory" without appreciating the fact that the assessee company is making huge claim under the head every year without any substantiation. 5. On the facts and in the circumstances of the case, the DRP erred in directing the TPO to adopt Profit before Depreciation Interest and Taxes (PBDIT) on cost instead of Profit before Interest and taxes (PBIT) on cost without appreciating that Depreciation is not an operating expenditure. 6. On the facts and in the circumstances of the case, the DRP erred in deleting the comparable Clingine International Ltd, despite it being mainly focusing on clinical trials and research works and rightly selected by the TPO as a comparable to the assessee company. 7. On the facts and in the circumstances of the case, the DRP erred in deleting the comparable Cyber Media Research Ltd, despite it being in the business of research and survey services and products and rightly selected by the TPO as a comparable to the assessee company. 8. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Re....
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....unit) 11,03,57,902/- (-)52.2% Trading 215,84,97,500/- 7.93% R &D 1,22,10,111/- (-)79.49% ITES 2,45,50,073/- 12.72% 8. Ld.TPO did not object to margin computed by assessee under trading segment. Since taxpayers margin was not less than margin computed by Ld.TPO, the transaction was treated to be at arms length. 9. In respect of other 3 segments, Ld.TPO recomputed the margins. ITES segment: 10. Ld.TPO noted that, assessee followed TNMM as most appropriate method by using OP/OC as PLI. Ld.TPO noted that assessee used 8 comparables with average margin of 14.34%. Not agreeing with comparables selected by assessee, Ld.TPO finalised following set of 8 comparables with an average margin of 25.03%. ITES FINAL COMPARABLES AY 09-10 Sl. No. Name of the Company Margin 1nfosys B P 0 Ltd. 24.41% 2 Aditya Birla Minacs Worldwide Ltd. 23.86% 3 Microland Ltd.(both segments) 1.53 % 4 Allsec Technologies Ltd. -16.63% 5 Accentia Technologies Ltd. 46.40% 6 Informed Technologies India Ltd. 22.61% 7 Cosmic Global Ltd. 40.61% 8 Eclerx Services Ltd. 57.46% AVERAGE PLI 25.03% 11. Ld.TPO granted working capital adjustment however rej....
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....t order observed that assessee has disclosed total turnover of Rs.20236,00,99,176/- and has shown net profit of Rs.4,46,00,706/- and gross profit of Rs.68,37,07,135/-. Ld.AO, thus worked out GP rate at 28.97%. And the net profit at 1.89%. Ld.AO noted that, in immediately preceding assessment year net profit declared by assessee was at 8.97% and that there was a fall in the net profit rate for the current year. Ld.AO, thereafter on examination of profit and loss account observed that, assessee debited sum of Rs.22,11,63,722/-, as stock write-off the bifurcations of which are as under: Particulars Amount in Rs. Quality rejects 8492223 Breakage,leakage & damage 4110416 Expired inventory 8075287 Genosys 739794 Physical Difference d Error in receipt 689875 Sales promotion samples 56127 Total 22163722 Ld.AO disallowed claims made by assessee, and made addition of Rs.1,80,69,951/-. 18. Aggrieved by proposed additions, assessee preferred objections before DRP. 19. In respect of transfer pricing adjustment proposed by Ld.TPO, DRP directed as under: Manufacturing Segment: 20. DRP directed Ld.TPO to verify applicability of various filters adopted by him in respect ....
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.... though admittedly, it could perform independently of manufacturing activity. For R&D segment DRP rejected capacity underutilisation and depreciation adjustment. Assessee also challenged exclusion of certain comparales, amongst which DRP directed Ld.AO to verify RPT of Clinigene International Ltd., and observed that in the event RPT is more than 25% the comparable needs to be rejected. And in respect of Cyber Media Research Ltd., DRP was upheld for exclusion. ITES segment: 26. Assessee challenged certain comparables for exclusion and proposed certain comparables for inclusion. Assessee submitted before DRP that PBDD should be treated as operating, while computing margins. 27. Assessee had also challenged exclusion of certain comparales, amongst which DRP rejected. Corporate tax issues: 28. DRP directed Ld.AO to delete addition made in respect of disallowance made under stock right off and also directed Ld.AO to grant MAT credit available to assessee. 29. On receipt of DRP directions, Ld.AO passed order by making addition in the hands of assessee at Rs.6,81,27,143/- against the order passed by Ld. AO, assessee as well as revenue are in appeal before us. 30. Revenue is aggr....
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....O accordingly, on assumption basis, disallowed 50% of the claim and added back to the income of assessee. 37. We note that all these disallowances have been addressed by coordinate bench of this Tribunal in assessee's own case in preceding assessment years. This tribunal while considering the disallowances has referred to various statistics to consider the reasonability of such claim. Breakage, Leakage etc; 38. Assessee in order to establish breakage leakage etc had filed a chart showing the ratio of the law is on such breakage to sales during the relevant years which is negligible as compared to huge turnover of assessee. We therefore direct assessee to file identical details for year under consideration to establish the claim in view of the observations made by this tribunal in immediately preceding years. 39. Ld.AO is directed to verify the same and allow the claim of assessee is signed in accordance with the observations of this tribunal in assessee's own case for immediately preceding assessment years. Expired inventory : 40. It is noted that this Tribunal dealt with this disallowance, based observations in following decisions: Alpha level India Ltd vs DCIT (2003) 133....
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..... We note that in preceding years assessee had filed charged highlighting the ratio of on sales and on cost of goods sold quality rejection. Assessee is directed to provide such details for year under consideration. Ld.AO is directed to verify the same and allow the claim of assessee in accordance with observations of this Tribunal in assessee's own case for immediately preceding assessment years. Accordingly these grounds raised by revenue stands allowed for statistical purposes. 47. Ground No. 5 is in respect of the direction to Ld.AO to adopt profit before depreciation interest and taxes on cost as against profit before interest and taxes. 48. Ld.CIT.DR submitted that, depreciation is not an operating expenditure and DRP erred in directing Ld.AO to consider it as operating expenditure. It has been submitted that DRP has not given any basis for adopting the PLI to PBDIT. 49. Learnt CIT DR placed reliance on orders passed by learnt TPO. On the contrary, Ld.AR submitted that, this being second year of full operation, there has been capital infusion and investment by way of capital asset consequentially has incurred huge initial depreciation cost. It was submitted that, compara....
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....under R&D segment, amongst which DRP directed Ld.AO to verify RPT of Clinigene International Ltd., and observed that in the event RPT is more than 25% the comparable needs to be rejected. He submitted that related party transaction of this comparable admittedly is 32% of transaction with related parties as against gross revenue. 58. Ld.AR submitted that, it was On verification of all these facts that the directions by DRP have been followed by Ld.AO, thereby excluding this comparable. 59. And in respect of Cyber Media Research Ltd., DRP upheld exclusion since this company was into media research and functionally different from assessee. 60. He thus relied on observations and directions of DRP in respect of the 2 comparables. 61. We have perused submissions advanced by both sides in light of records placed before us. 62. We note that, nothing contrary to observations of DRP has been brought to our notice by revenue. Ld.AO excluded Clinigene International Ltd., after verifying RPT being more than 25% which was in consonance with the directions of DRP. And in respect of cyber media research Ltd., has been excluded for being functionally different which has not been objected befor....
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....ment and R&D segment. Under manufacturing segment admittedly assessee has utilisation of 28% and under R&D segment assessee has utilisation of 20%. This position has not been disputed by Ld.TPO. Assessee wide submission dated 08/01/2013 and 03/01/2013 placed at page 540 and 568 of paper book volume 1 submitted before authorities below that it has installed 220 products out of which actual capacity utilised was only in respect of 62 products. Further it has been submitted that assessee hired 52 chemists but utilised only 9 of them. 71. DRP admittedly granted depreciation as an operating expenses for manufacturing segment considering the fact that this was the 2nd full year of operations for assessee and that assessee had a higher depreciation cost on sales as against the comparables. It has also been submitted that the comparables considered under these segments have achieved a higher capacity utilisation and therefore while computing margin of assessee both depreciation as well as capacity utilisation adjustment has to be granted. 72. It is an admitted fact that, adjustment on account of difference in capacity utilisation is one of the recognised adjustment under Rule 10B(1)(e)(i....
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....ansfer pricing adjustment of Rs. 7,26,60,103/-, for which addition was made by the AO. The ld. CIT(A) accepted the assessee's contention about not making any TP adjustment in relation to non-AE transactions. The Revenue is not aggrieved to that extent. As regards adjustment for capacity utilization, the ld. CIT(A), by considering the companies finally held by him as comparable, applied the factor of 29/46 for reducing the operating costs actually incurred by the assessee. Apart from the adjustments allowed by the TPO on Administration expenses and Depreciation, the ld. CIT(A) also reduced Advertisement & Marketing expenses, Employee cost (by taking entire employee cost, other than bonus, at Rs. 35515709 as fixed). The Revenue is aggrieved against the allowing of capacity utilization adjustment to this extent by the ld. CIT(A). 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 claim....
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....alised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 9.2 Sub-clause (i) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. 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 sub-clause (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 transacti....
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.... the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly 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 ....
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....ization. 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 utilization level." 74. We note that this Tribunal in case of M/s SKF Technologies India Pvt.Ltd vs DCIT (supra), relying on above observations, upheld adjustment towards d....
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.... us that assessee manufactures its products for its group entities on need basis. No ground has been raised before DRP in respect of this issue. Assessee has raised additional ground in respect of not applying export filter in manufacturing segment. As we note that this issue has not been dealt with by authorities below, in the interest of Justice we remand this issue back to Ld. AO/TPO in respect of comparables alleged by assessee here in. The Ld. AO/TPO shall verify applicability this filter and then consider alleged comparables accordingly. Accordingly comparables raised by assessee are remanded to Ld.AO/TPO for verification. 80. As regards considering depreciation as operating expense, Ld.AR submitted that, DRP granted depreciation as operating expense under manufacturing segment, however did not give identical directions for R&D segment. It has been argued that TNMM has not been disputed as most appropriate method and therefore the net profit only needs to be compared for computing the margins. Ld.AR thus submitted that, depreciation for year under consideration has been high in case of assessee being initial years of activity being carried out. It has also been submitted t....
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....td reported in (2015) 67 Taxmann.com 60 as under: Accentia Technologies Ltd. The learned AR of the assessee has submitted that though the TPO has recorded the business profile of the assessee, however, the international transactions of the assessee are carried out only in respect of service of contact centre outsourcing to its AE as per the service agreement. The learned AR of the assessee has referred to Annual report of Accentia Technologies Ltd., and submitted that this company has acquired M/s.Oak Technologies Inc, USA during the year under consideration and therefore, there is an extraordinary event of acquisition of another company. He has thus submitted that in view of the extraordinary event of acquisition, this company cannot be considered as a good comparable of the assessee. Apart from this objection, learned AR of the assessee has submitted that even otherwise this company is not functionally comparable with the assessee so far as services provided to the AE. He has referred to various business transactions and services provided by Accentia Technologies Ltd., and submitted that this company is in the various segments of activities like medical transcription, medica....
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.... absence of the relevant fact that the business of the said company has been merged with Accentia Technologies Ltd., it may be a case of acquiring the shares and M/s. Oak Technologies still remains an independent entity and business activity. Therefore, in the absence of complete relevant facts, it cannot be held that the so- called acquisition of M/s. Oak Technologies can be considered as an extraordinary event having impact on the revenue as well as business activity of Accentia Technologies Ltd. Accordingly, this argument of the learned AR of the assessee is rejected for want of complete facts. (iii) As regards the functional dissimilarity, we note that Accentia Technologies Ltd is engaged in diversified activity of medical transcription, medical coding, billing, receivable management. Thus it is clear that the said company is engaged in the healthcare activity and providing BPO service in the healthcare sector, that too by providing specific services of medical transcription, medical coding, medical billing etc. We note that these activities are quite different from the service of contact centre provided by the assessee to its AE which is purely in the nature of call centre.....
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.... Thus it is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO's service providing company has been examined by the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra) in paras.82 & 83 as under : 82. In so far as M/s eClerx Services Limited is concerned, the relevant information is available in the form of annual report for financial year 2007-08 placed at page 166 to 183 of the paper book. A perusal of the same shows that the said company provides data analytics and data process solutions to some of the largest brands in the world and is recognized as experts in chosen markets-financial services and retail and manufacturing. It is claimed to be providing complete business solutions by combining people, process improvement and automation. It is claimed to have employed over 1500 domain specialists working for the clients. It is claimed that eClerx ....
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....nfosys BPO Ltd. The learned AR of the assessee has referred to the Annual Report of this company at page 57 of the paper book and submitted that though this company was initially selected by the assessee, however, the assessee has raised objections against this company even before the TPO and further before the DRP. Therefore, this company, if found functionally different, has to be excluded from the list of comparables. The learned AR of the assessee has pointed out that this company is having more than 17000 employees in comparison to only 6 employees of the assessee. Therefore, even on the parameter of the scale and strength of employees, this company cannot be considered as functionally comparable with that of the assessee. Further, he has referred to the Annual Report of the company and submitted that during the year under consideration, there is amalgamation of PAN Financial Services India Pvt. Ltd. w.e.f. 1/4/2008. The scheme of amalgamation has been approved by the Hon'ble High Court on 6/4/2009 and 10/3/2009. Therefore, there is an extraordinary event of amalgamation during the year under consideration and hence this company cannot be considered as a good comparable....
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....note that as per the segment reporting in para.16.2.21 this company is providing business process management services as under: "Segment reporting The company's operations primarily relate to providing business process management services to organizations that outsource their business processes. Accordingly. revenues represented along industry classes comprise the primary basis of segmental information set out in these financial statements. Secondary segmental reporting is performed on the basis of the geographical location of customers. The accounting principles consistently used in the preparation of the financial statements are also consistently applied to record income in individual segments. These are set out in the note on significant accounting policies." Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO but it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is en....
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..... 7.37 crores has been earned by this company from the activity of translation services. We further note that the company has debited an expenditure of more than Rs. 3 crore on account of translations charges paid. Thus it is clear that this company is outsourcing its services of translation work which is the main activity of this company yielding major revenue earned during the year. Thus it is manifest from the record that this company is in the entirely different nature of activity and cannot be compared with the activity of providing contact centre of the assessee to its AE. In the case of Lam Research (India) (P.) Ltd. (supra) the co- ordinate bench of this Tribunal had occasion to examine the comparability of this company in para. 34 as under: "34. With respect to Cosmic Global Ltd., Hyderabad bench of ITAT in the case of Capital IQ Information Systems (India) P. Ltd., in para 19 of its order, had held as under Cosmic Global Ltd. 19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO....
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....to incomparable on the alternative argument advanced by the Id. AR to the effect that total revenue of the Accounts BPO segment of Cosmic Global Limited is very low at Rs. 27. 76 lacs. We have discussed this aspect above in the context of CG-VAK's case and held that a captive unit cannot be compared with a giant case and thus excluded CG-VAK with turnover from Accounts BPO segment at Rs. 86.10 lacs. As the segmental revenue of BPO segment of Cosmic Global Limited at Rs. 27. 76 lac is still on much lower side, the reasons given above would fully apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables. In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons. 90. Nothing has been brought on record by revenue to establish any functional difference between assessee and e-4-e Business Solutions India Ltd. In view of the above discussion by coordinate bench, we hold these comparables as not functionally similar to assessee.....