TMI Blog2013 (1) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... temporaneous and should exist latest by the specified date referred to in section 92F(4) which has the same meaning as 'due date' in Explanation 2 to section 139(1). In the assessee's case, this would be '30th day of September' as it is a company. It is clear, that the Act has not provided for any cutoff date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP - no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation. Safe Harbour - sought the benefit of +/- 5% - Held that:- The new section 92C(2A) mandates that if the arithmetical mean price falls beyond + / - 5% from the price charged in the international transactions, then the assessee does not have any option referred to in section 92C(2). Thus the + / - 5% variation is allowed only to justify the price charged in the international transactions and not for adjustment purposes accordingly the 5% benefit is not allowable in the assessee's case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss incurred by the parent company is not acceptable. the assessee mainly states that the T.P. regulations being anti avoidance legislation, the TPO has to prove that tax avoidances had in fact taken place before making any T.P. adjustment - Held that: - As decided in case of Aztec Software Technology Services Ltd v. Asstt. CIT [2007 (7) TMI 329 - ITAT BANGALORE] that it is not necessary to prove that profits are shifted out of India for making a transfer pricing adjustment. Thus it is not necessary for the TPO to demonstrate tax avoidance and diversion of tax/income before invoking the provisions of section 92C and 92CA of the Act. Individual Companies for Comparability - Vishal Information Technologies Ltd. (VIT) - Held that:- An in the case of this comparable the Mumbai Tribunal in the case of Asstt. CIT v. Maersk Global Service Center (India) (P.) Ltd. [2011 (11) TMI 465 - ITAT MUMBAI] has held that since Vishal Information Technologies Ltd is outsourcing most of its work it has to be excluded from the list whereas the assessee in the cited case was carrying out the work by itself. In the instant case of the assessee also the assessee was carrying out its work by itself e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (Appeals)-IV, Bangalore dt.30.11.2009 for Assessment Year 2004-05. 2. The facts of the case, in brief, are as under : 2.1 The assessee, an Indian Company engaged in the business of providing call centre services exclusively to its Associated Enterprise (A.E.), 24/7 Customer.Com.Inc., USA (24/7 USA), filed its return of income for Assessment Year 2004-05 on 22.11.2004 declaring a total loss of ₹ 40,84,968. The case was processed under section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was taken up for scrutiny by issue of notice under section 143(2) of the Act. A reference under section 92CA(1) of the Act was made by the Assessing Officer to the Transfer Pricing Officer (TPO) in respect of the following international transactions entered into by the assessee with it's A.Es. Nature of International Transactions Value Rs. Call Centre Services 66,00,46,029 Import of Capital Equipment 45,43,167 Reimbursement of Expenses 1,78,60,545 Cross Charge o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m's length margin - The learned CIT (Appeals) erred in upholding the adjustments made by the learned TPO to the arm's length margins computed by the appellant in respect of rendering of call centre services to its associated enterprise. - The learned CIT (Appeals) erred in accepting comparable companies having related party transactions, as proposed by the TPO. - The learned CIT (Appeals) erred in accepting comparable companies having economies of scale, as proposed by the TPO. - The learned CIT (Appeals) erred in accepting comparable companies owning intangibles, as proposed by the TPO. - The learned CIT (Appeals) erred in rejecting the comparable companies selected by the appellant on the account of use of non-contemporaneous data. Ground 2 : Revised benchmarking - The learned CIT (Appeals) erred in not taking into consideration the fresh bench marking analysis conducted after adopting the criteria postulated by the learned TPO. Ground 3 : Applicability of multiple year data - The learned CIT (Appeals) ought to have accepted the use of multiple year data for computing the final margin of the comparable. - The learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the assessee works out to 9.5% on cost. As the margin of the assessee was above the arithmetical mean margin of the comparables, the assessee held that its international transactions were at arm's length. 5.3-5.4 The TPO's approach : The TPO analysed the Transfer Pricing report submitted by the assessee and the export and domestic sector of IT Enabled Services (ITES) and applied the following additional criteria. (i) Companies with data available for 31.3.2004 were considered as mandated by Rule 10B(4) of IT Rules, 1962. (ii) Companies providing ITES (As call centre services are ITES) wholly or mainly to export markets were considered as the assessee is rendering 100% of its services to the export market. (iii) Companies with significant related party transactions were excluded. (iv) Companies providing ITES were considered. 5.5 Accordingly, the following 8 comparables were identified by the TPO as the final set of comparable companies. S.No. Name of the comparable Operating Revenue Operating cost (OC) Operating Profit (OP) OP/OC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sub-ground in Ground No. 1 : Adjustment to arms length margin challenging the learned CIT (Appeals)'s action in rejecting the comparable companies selected by the assessee on account of use of non-contemporaneous data (supra) is not pressed in this appeal. In this view of the matter, we dismiss this ground as infructuous. 8. Applicability of Multiple Year Data 8.1 The learned counsel for the assessee also submitted that the ground raised at S.No. 3 - Applicability of Multiple Year data was also not being pressed in this appeal. Consequently, we therefore dismiss this ground as infructuous. 8.2 Even otherwise, this ground of the assessee is liable to be dismissed. Rule 10B (4) of the IT Rules, 1962 specifies the requirement regarding data to be used for analyzing the comparability of an uncontrolled transaction with an international transaction which reads as under : Rule 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the specified date referred to in section 92F(4) which has the same meaning as 'due date' in Explanation 2 to section 139(1) of the Act. In the assessee's case, this would be '30th day of September' as it is a company. It is clear, after going through the relevant provisions of law, that the Act has not provided for any cutoff date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP or making TP adjustments. Both the assessee and Revenue being bound by the provision of the Act and Rules are required to take into consideration contemporaneous data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to maintain the information and documentation as required rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue and accordingly the 5% benefit is not allowable in the assessee's case. The various judicial decisions cited pertain to the period prior to the retrospective amendment in section 92C(2A) of the Act and are not applicable to the facts of the assessee's case. In view of the amendment brought about therein by Finance Act, 2012, this ground raised by the assessee is not maintainable and is accordingly dismissed. Ground No. 2 Revised Benchmarking 10. This ground challenging the benchmarking is general in nature and was not agitated before us in the course of appellate proceedings. In this view of the matter, the ground raised being general in nature, no adjudication is called for thereon and the ground is therefore dismissed as infructuous. 11. Rejection of T.P. Study 11.1 The learned counsel for the assessee vehemently argued that the TPO erroneously rejected the procedure adopted by the assessee in identifying the list of comparable companies. In this appeal, it is seen that the TPO rejected the transfer pricing documentation prepared and maintained by the assessee mainly due to three defects, namely, (i) the assessee did not use data of the relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Sony India (P) Ltd. (supra), the Assessing Officer/TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15% of total revenues for the financial year 2003-04. 14. Economies of Scale 14.1 In ground No. 1 : The assessee has contended that the learned CIT (Appeals) erred in accepting comparable companies having economies of scale as proposed by the TPO. The learned counsel for the assessee argued that size is an important facet of an enterprise - level difference. He submitted that size as one of the selection criteria has been approved by various benches of the ITAT in many cases. It was further submitted that size as a criterion for selection of comparables is also recommended by the OECD in its T.P. Guidelines. Hence, the learned counsel for the assessee contended that an appropriate turnover range should be applied in selecting a comparable of uncontrolled companies. In this regard, he drew our attention to the decision of the co-ordinate bench of this Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 53 SOT 159, wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangibles some of the comparables chosen by the TPO have their own, software products and hence own intangibles. It is submitted that such companies, having the ability to deliver services, penetrate the market and provide faster delivery, ought not to have been taken as comparable companies as has been done in the case of Wipro BPO Ltd., Tricom India Ltd. and Fortune Infotech Ltd. It is urged that these companies ought to be excluded from the list of comparables. The learned counsel for the assessee argued that intangible assets, in the normal commercial sense, are those which have intrinsic productive value, even though they may not have any intangible form and substance such as Research Development, Patents and Software. He quoted from the synthesis report of the OECD, which forms part of the paper books, to stress that intangible assets play an important role in value creation and enabling productivity and efficiency to reap economic gains. It was contended that in the service industry, service providers who have better brand or other intangible assets get better premium for their services, as in the case of some of the comparable companies selected by the TPO. Whereas, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed an abnormal growth of 33% increase in PAT in the relevant period due to the fact that it has developed its unique software to provide BPO services to its customers. The learned counsel for the assessee referred to the Annual Report of this comparable, wherein it is mentioned that it does specialized services such as Title Plant maintenance and Electronic Data discovery which gives it an edge over other Indian Company competition thereby enabling it to generate higher revenues and margins. It was also submitted by the learned counsel for the assessee that it has a process of continuous in house R D process for upgradation of software and training its professionals to develop its own software to cater to the needs of its clients. On appraisal of the submissions and the material on record, it would certainly stand to reason that a company having unique software developed in house which also renders specialized services in its area of specialization gets that sort of competitive edge that gives it an advantage. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses. Each case would have to be looked at on the basis of its own facts. 16.4 The issue of parent company under losses was considered and examined by the Delhi ITAT in the case of Dy. CIT v. Carraro India Ltd. [2009] 28 SOT 53 (URO) and it held as under : Where a business is carried on between a resident and a non-resident and it appears to the Assessing Officer that, owing to the close connection between them, the course of business is so arranged that business transacted between them produces to the resident either no profits or less than ordinary profits which might be expected to arise in that business, the Assessing Officer shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident. In the same decision at para 17 thereof, it was held that 'the burden was on the appellant to show that this case of 'no profit' is not on account of any arrangement between the parties. Similar transactions carried on between unrelated parties were to be seen. 16.5 The above decision is based on the decision of the Hon'ble Apex Court in the case of Mazagaon Dock Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Thus, the assessee mainly states that the T.P. regulations being anti avoidance legislation, the TPO has to prove that tax avoidances had in fact taken place before making any T.P. adjustment. In fact on this issue, the Special Bench of the ITAT, Bangalore in the case of Aztec Software Technology Services Ltd v. Asstt. CIT [2007] 107 ITD 141/15 SOT 49 has held that it is not necessary to prove that profits are shifted out of India for making a transfer pricing adjustment. In this view of the matter, respectfully following the decision of Aztech SoftwareTechnology Service Ltd. (supra), we hold that it is not necessary for the TPO to demonstrate tax avoidance and diversion of tax/income before invoking the provisions of section 92C and 92CA of the Act. 16.8 In the case of Coca Cola India Inc. v. Asstt. CIT [2009] 309 ITR 194, the Punjab and Haryana High Court dealt with the matter of anti-avoidance and transfer pricing in detail and held that it was not necessary for the Assessing Officer/TPO to show that the profits were shifted out of India to determine the arms length nature of any international transactions. Consequently, it is wrong in attaching importance to the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Wipro BPO Ltd. 322.3 430.31 108.01 33.51 % 4. Tricom India Ltd 6.34 9.24 2.90 45.74 % 5. Fortune Infotech Ltd 8.08 11.28 3.30 40.84 % 6. Spares Telesystems Solutions Ltd. 10.32 15.44 4.57 40.10 % 7. Ultramarine Pigments Ltd. 6.18 10.99 3.91 63.27 % 8. Allsec Technologies Ltd. 24.10 24.94 0.83 3.44 % Arithmatical Mean 36.49% From the record, it is seen that the TPO rejected the transfer pricing documentation mentioned by the assessee mainly on three parameters/defects namely : (i) The assessee did not use data of the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case in Assessment Year 2004-05. Tricom India Ltd. 17.5 This comparable has already been considered and dealt with by us in para 15.3.3 of this order (supra) wherein we have directed the Assessing Officer/TPO to exclude it from the list of comparables for the assessee's case in Assessment Year 2004-05. Fortune Infotech Ltd. 17.6 This comparable has also been considered and dealt with by us in para 15.3.4 of this order (supra) wherein we have directed the Assessing Officer/TPO to exclude it from the list of comparables for the assessee's case for Assessment Year 2004-05. Spanco Telesystems Solutions Ltd. 17.7 The assessee's main contention was that this company should be rejected as a comparable at the segmental level (call centre activity) and as it had related party transactions of about 12% of total sales. The learned counsel for the assessee relied on the decision of the ITAT, Mumbai in the case of DHL Express (I) (P.) Ltd. v. ACIT [ITA No. 2423/Mum/2006] in which case the Tribunal was of the view that segmental results of comparable company engaged in multiple activities need not be considered when direct comparables are available. From an ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned higher profits than the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that the comparable has incurred loss or made abnormal profits. Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at as per the annual report of this company for F.Y. 2003-04, there are no related party transactions at all and therefore this company should be accepted as a comparable. We have perused and considered the material on record. It is seen that the TPO in her order has mentioned 'related party transactions amounting to more than 40% of turnover' as the reason for rejection as a comparable. From a perusal of its annual report for F.Y. 2003-04 though it does not appear to have any related party transactions, it is seen that out of its total revenues of ₹ 12.2 Crores, only ₹ 6.50 Crores i.e. about 54% of its revenue was received from ITES. This shows that significant Revenue earning of about 46% is not from IT enabled services which will render it functionally different and not comparable to the assessee We, therefore, direct the TPO to verify the claim of the assessee in respect of related party transactions and also our observation as to whether the company is functionally comparable to the assessee in view of 46% of its revenue being from non-ITES business. MCS Ltd Tata Share Registry 18.4 In respect of these two companies, in the business of share tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue cannot be treated as regular operating costs and hence averaged the costs incurred on these items for the earlier years for comparability. The assessee contends that these are normal reasonable expenses and were incurred as the company was in an expansion mode which has been misconstrued as extraordinary expenses and therefore the adjustments made by the TPO are not called for. We have considered the material on record. We find that the TPO in her order has not explained as to why these expenses cannot be taken as regular operating expenses for comparability or the basis for making the adjustments worked out by averaging the costs on the basis of the previous two years. We, therefore, direct the Assessing Officer/TPO to examine the issue, based on the assessee's submissions and then decide on the adjustment, if any, that would be required to be made for comparability. Additional ground of appeal 19.1 The assessee vide letter dt.10.9.2012 filed an application seeking leave to urge additional grounds under Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 which are as under: Ground 1 : Transfer Pricing It is most humbly prayed that this Hon'ble T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat case. It cannot be anybody's case that an adjustment has to be necessarily granted whenever and wherever there is difference in depreciation between the tested party and the comparables. An adjustment for difference in depreciation is a valid principle for comparability, but whether this case entails such an adjustment has to be examined in the light of the particular facts of the case. Hence, the additional ground raised by the assessee is as much as issue of fact as it is of principle. 19.5 Before us, the assessee has not been able to adduce any reason as to why this issue was not raised before the authorities below. It gives credence to the view of the learned Departmental Representative that this claim is only an afterthought, pursuant to the learned CIT (Appeals) confirming the adjustments proposed by the TPO. 19.6 Besides this, the adjustment for depreciation, sought for by the assessee, does not appear to be tenable even on merits. It has been stated in the additional grounds raised that while the depreciation of the assessee is 25% of its gross block, it is 10% of the gross block for the comparables. It is interesting to note that the assessee has compared the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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