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2022 (3) TMI 1528
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....10.01.2019 under Rule 13 of the DRP' Rules, restricting TP adjustment in the manufacturing segment to Rs.10,13,12,220, thereby reducing the aggregate TP adjustment to Rs.11,96,99,769. The A.O. passed rectification order u/s 154 of the I.T. Act giving effect to the revised directions of the DRP. An appeal has been filed before the Tribunal against the order u/s 154 of the I.T. Act also. 3. The learned AR during the course of hearing submitted that IT(TP)A No.790/Bang/2019 (arising out of 154 order) may be dismissed as infructuous. In view of the submissions of the learned AR, IT(TP)A No.790/Bang/2019 is dismissed as infructuous. Though the assessee has raised 40 grounds in its memorandum of appeal in IT(TP)A No.103/Bang/2019, the learned AR confined his submissions to the following issues:- (i) Manufacturing segment (Grounds 4 to 13) (ii) Management fees (Ground 14 to 22) [This adjustment was not proposed by the TPO but was unilaterally added by the DRP) (iii) ITES segment (Grounds 23 to 34) (iv) Management fee (Grounds 35 to 37) [This addition was unilaterally added by the DRP as a protective addition] We shall adjudicate the above issues a....
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.... 93.67% of OR 38,83,92,886 Price paid 48,29,05,474 Shoftfall being adjustment u/s 92CA 9,45,12,588 4.3 Aggrieved by the above TP adjustment in the manufacturing segment, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee and confirmed the TPO's order. Pursuant to the DRP's directions, the final assessment order was passed. 4.4 Aggrieved by the final assessment order, the assessee has raised this issue before the Tribunal. The assessee has filed a paper book enclosing therein the TP study, the financials etc. The learned AR has filed a brief written submission. The contentions raised are summarized as follows:- (i) The learned AR submitted that the TPO has disregarded the AE and non-AE segment details given by the assessee and clubbed both the segments into one revised the segment and made additions. The assessee has also argued that the TP adjustment should be restricted only to the international transactions. The learned AR submitted that the TPO has erred in computing the transfer pricing adjustment for the total manufacturing segment costs. The learned AR submitted that the transaction with non-AE cannot be....
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....ejected by the DRP. 4.5 The learned Departmental Representative has filed a brief submission supporting the orders of the TPO and the DRP. 4.6 We have heard rival submissions and perused the material on record. On the issue of segmental financials and TP adjustment to be restricted to AE transactions, we find that the TPO has rejected the segmental profit and loss account given by the assessee and reworked the segmental profit and loss account. The TPO has not given any reason for rejecting the segmental profit and loss account given by the assessee. Further, we find that the TPO has redrawn the segmental profit and loss account on pages 6 to 8 of the order u/s 92CA. However, no basis of allocation has been given in the order. The assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions, i.e., transactions with AE. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. We are of the view that in the given facts and circumstances of the case, it would be just and appropria....
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....ns in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 25. As per Section 92C of the Act, ALP is required to be computed using any of the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the most appropriate method would be one which inter alia provides the most reliable measure of ALP, and one of the important factors to be taken into account herein is the ability to make reliable and accurate adjustments. 26. The OECD Guidelines on this aspect is as follows:- Para 1.35 of the OECD Guidelines states as follows: "Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: ".... material differences between the compared transactions or enterprises should be taken into account. In order....
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.... or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule 10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of M/s. Mando India Steering Systems Private Limited vs Assistant Commissioner of Income Tax, [I.T.A. No. 2092/Mds 12012], the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. .......... We are of the considered view that underutilization of production capacity in the initial years is a v....
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....ssessee for grant of capacity utilization adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010). Relevant extract of the decision is under:- "15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of." 30. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested par....
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....luding a banking company or any officer thereof, to furnish information in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :" 34. In this regard, we find that the Mumbai ITAT in case of M/s Kiara Jewellery P.Ltd. (I.T.A. No. 8109/Mum/2011), has directed the AO/ TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assesse....
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....ed impairment loss during the current assessment year. The TPO and the DRP have not properly analysed the issue and thus it would be appropriate to set aside the impugned order on this issue and remand the issue to the TPO. 4.6.5 On the issue of comparable selection, we find that the DRP has not properly analysed the submissions of the assessee. The DRP has also observed that the annual report of the comparables was not filed by the assessee. The DRP has made general observation that TNMM requires broadly similar comparables and exactly similar companies are not required. This is not proper reason and TPO / DRP are duty bound to specifically analyse the comparables submitted by the assessee and the assessee's objection to the comparable selected by the TPO. The assessee is also duty bound to file the annual reports and make specific submissions with respect to the comparables. Therefore, the entire TP adjustment made by the TPO in management segment is set aside. The TPO shall undertake a fresh TP analysis and make necessary TP adjustment in accordance with law, after affording reasonable opportunity of hearing to the assessee. It is ordered accordingly. 4.6.6 In the result, ....
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....national transactions should not have subjected one transaction (management charges) to a separate treatment. (iv) Double adjustment. Further, the assessee wishes to highlight that the TPO had already considered management charges as part of cost base while computing adjustment for manufacturing segment under TNMM. The same was also separately disallowed by the DRP. The same amounts to duplicate adjustment for the same international transaction leading to double adjustment. (v) Since the DRP has made the disallowance arbitrarily, without calling for any details and without affording opportunity of hearing, the assessee has submitted additional evidence regarding the management fee, with a request to admit the same and consider the details submitted. 5.3 The learned Departmental Representative supported the orders of the DRP. 5.4 We have heard rival submissions and perused the material on record. This adjustment was not proposed by the TPO but was unilaterally added by the DRP. During the course of hearing before the DRP, the assessee was not requested to furnish any information / documents. The DRP suo moto determined the ALP of this transaction as ....
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.... 22.34% Operating cost (B) 27,76,87,074 Arm's Length Price (122.34% of (B) 27,85,52,366 Price received 25,85,93,776 Shortfall being adjustment u/s 92CA 1,99,58,590 6.1 The limited submission of the learned AR before the ITAT are as follows:- (i) The exclusion of comparable companies (Ground 23) * Infosys BPO Limited * Microland Limited (ii) Inclusion of three comparable companies (Ground 24) * Informed Technologies, * Crystal Voxx * Jindal Intellicom Limited. (iii) Grant of working capital adjustment (Ground 26) We shall adjudicate the above issues raised as under:- Exclusion of comparable companies (ground 23) - (i) M/s.Infosys BPO Limited & (ii) Microland Limited. (i) M/s.Infosys BPO Limited 6.2 This company Infosys BPO Limited was selected as a comparable company by the TPO. The assessee objected to its inclusion both before the TPO as well as the DRP, but both the authorities below rejected the assessee's objections to its inclusion. 6.2.1 The assessee objected to the inclusion of this company, on the following grounds:- (a) Functionally diversified - Provi....
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....Infosys' has consistently been rejected as a comparable to companies rendering routine back office services in various judicial pronouncements of the Tribunal; including the two decisions cited by the assessee (supra). In the case of CGI Information Systems and Management Consultants (P) Ltd., (2018) 94 taxmann.com 97 (Bangalore - Trib) for Assessment Year 2012-13, cited by the assessee, this company 'Infosys' has been excluded from the list of comparables for the reason that it has brand value which had an impact on its pricing and margins. As the facts of the year under consideration are similar, the decision rendered in the earlier year would apply to the year under consideration as well. In this factual view of the matter, we hold that Infosys BPO Ltd., stands on a totally different footing from a company engaged in rendering routine back office ITES; being both functionally different and having brand value and therefore is to be excluded from the final set of comparables. We hold and direct accordingly." 6.2.3 Since the profile of the assessee-company and the profile of the assessee in the case of M/s.Ocwen Financial Solutions Pvt. Ltd.(supra) being similar and the assessme....
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.....4.2 We have perused the Annual Report of the company 'Microland', placed at pages 140 to 277 of the paper book. At page 14 of the Annual Report, this company has characterized itself as a service company primarily rendering Infrastructure Management Services. At page 97 of the Annual Report, it is mentioned that the company is organized in business segments comprising of infrastructure services and ITES thereby clearly indicating that the services rendered in both segments are different and distinct from each other. In our view, the TPO / DRP have not brought on record any evidence to support their contention that both the aforesaid segments are rendering ITES only. If that were so, there was no reason whatsoever for the company to show Infrastructure Management Services as different and distinct segment from the ITES. 8.4.3 From an appraisal of the details submitted, it is seen that the services rendered by 'Microland' under Infrastructure Management services are Server Management, Database Management, storage management, Archival Management, Network Management, etc., which has been classified as different from the back office processing services rendered by companies li....
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.... is 100%. (b) The company is functionally similar and qualifies all the filters applied by the TPO in the TP order. 8.2 The learned AR relied on the order of the ITAT in the case of M/s.Ocwen Financial Solutions Private Limited (supra). 8.3 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of M/s.Ocwen Financial Solutions Private Limited (supra), had included M/s.Informed Technologies Limited in the list of comparable company. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:- "10.4.1 We have considered the rival submissions and carefully perused the material on record. On a perusal of the Annual Report of this company 'Informed', it is seen that at page 12 thereof it is stated that this company is engaged in and operating as an ITES provider. A perusal of the TPO's order also indicates that the TPO has not disputed that this company is functionally comparable to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown....
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....rations of the company predominantly relate to a single segment, namely "BPO Activity". At note 6, the income in foreign currency is shown as Rs.3,23,08,386/-. In the Director's Report, at page 480 of the paper book, the foreign exchange earnings is given as Rs.3,23,08,386/-. In the factual matrix of the matter, as laid out above, we are of the considered opinion that the reason ascribed by the TPO and DRP for exclusion of this company, 'Crystal' is factually incorrect. Taking into consideration that the company 'Crystal' is otherwise comparable to the assessee in the case on hand as it is operating as a BPO company which is a provider of ITES, we direct that this company, Crystal Voxx Ltd., be included as a comparable company in the final set of comparables in the case on hand. The AO / TPO are accordingly directed." 9.3.1 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the AO/TPO is not justified in excluding the above company from the list of comparable companies. Accordingly, we direct the AO/TPO to include Crystal Voxx Limited in the list of comparables. (iii) Jindal Intellicom Limited (`Jindal') 10. The assessee has objected to the ex....
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....er Assessment Years 2011-12 and 2012-13 and again in the immediately subsequent Assessment Year 2015-16. In this view of the matter, as discussed above, we are of the view that the above cited decision in the case of CGI Information System and Management Consultant Pvt. Ltd., (supra) would apply to the facts and circumstances of the case on hand also being similar; as seen from the acceptance of the company 'Jindal' by the TPO in both earlier and subsequent Assessment Years. Therefore, taking into consideration the factual matrix of the case as discussed above, Revenue's stand of accepting this company as a comparable both in earlier Assessment Years and the immediately subsequent Assessment Year 2015-16 and respectfully following the decision of the Co-ordinate Bench of this Tribunal in the case of CGI Information Systems and Management Consultants (P) Ltd., (supra), we direct the AO / TPO to include this company 'Jindal Intellicom Ltd.,' in the final set of comparables." 10.3.1 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the AO/TPO is not justified in excluding the above company from the list of comparable companies. Accordingly, we direct ....
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....es, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised 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 [or the specified domestic transaction]: (f).**** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) ....
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....ans that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to hi....
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....s is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year, (ii) Segmental working capital is not disclosed in the annual reports of companies engaged or different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disreg....
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.... adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting raters) of interest applicable 10 a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of t....
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....allowed for statistical purposes. Management fees (Ground 35 to 37) (Corporate Tax Issue) 12. After proposing the TP adjustment on account of management fees, the DRP suo moto proposed disallowance of the same management fees u/s 37 of the I.T. Act. This disallowance had been proposed on the ground that the assessee has not furnished the details of the expenses. 12.1 After hearing both the sides, we are of the view that the protective disallowance of management fees u/s 37 of the I.T. Act needs to be considered afresh since the issue of transfer pricing adjustment of management fees has already been remitted back to the AO/TPO for fresh examination. It is ordered accordingly. 12.2 In the result, ground 35 to 37 are allowed for statistical purposes. 13. In the result, the appeal filed by the assessee in IT(TP)A No.790/Bang/2019 is dismissed and IT(TP)A No.103/Bang/ 2019 is partly allowed. Order pronounced on this 22nd day of March, 2022. ============= Document 1 56. The same reasoning given for including Informed Technologies India Ltd., would apply for including Jindal Intellicom Ltd., also. This company was selected by the Assessee in its TP study and ....