2014 (9) TMI 143 - ITAT HYDERABAD

Determination of ALP – International transaction with AE - validity, legality and propriety of the procedure adopted by the TPO – Held that:- The assessee has used data of different companies pertaining to the period from April, 2001 to February 16, 2004 - the assessee has used data of the preceding two financial years and partly of the current financial year, from April 1, 2003 to February 16, 2004 - under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction - Under Rule 10B(4), it says the data to be used in analyzing 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. Thus, as per the above provisions, user of data of the current financial year, in which international transaction has been entered into by an assessee, is mandatory.

There is no option but to use the data of only the relevant financial year, in which the international transaction has been entered into by the assessee, for comparability analysis - Though, in the proviso below the Rule 10B(4), it says that data relating to the preceding two financial years may also be considered, if data reveals facts which could have an influence on determination of transfer prices in relation to the transactions being compared, since in the instant case, the assessee has not been able to reveal any facts pertaining to the earlier financial years which had an influence on the determination of transfer prices with reference to those comparable companies, the TPO justified in using the data of only the current financial year 2003-04, for determining the ALP – relying upon Honeywell Automation India Ltd. v. Dy. CIT [2009 (2) TMI 736 - ITAT PUNE] – Decided against Assessee.

Selection of comparables – Exclusion of gain on account of foreign exchange fluctuation – Held that:- The exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate - the gain or loss is on account of exchange fluctuation arising in the normal course of business transaction, it should be considered while computing the net margin for the international transactions with the AEs of the assessee – relying upon SAP LABS India Ltd.(P.) Ltd. v. ACIT [2010 (8) TMI 676 - ITAT, BANGALORE] - if the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further - if the loss of the comparable is abnormal and there is no trading activity of whatsoever, data of such company cannot be considered – the AO is directed to consider the data of MCS Ltd. as comparable while computing the ALP and to exclude other two companies from comparables.

Loss making companies to be treated as comparable or not – Held that:- Determining of ALP is depend upon the comparables of identical or similar in controlled transactions in similar or comparable circumstances and thereafter suitable adjustment has to be made to set off the difference to make the transaction commercially comparable - only abnormal loss making companies are to be taken out from the comparables – relying upon DCIT Versus Quark Systems Pvt. Ltd. [2009 (10) TMI 591 - ITAT, CHANDIGARH] - when companies which are loss making are excluded from comparables, then super profit making companies are also to be excluded from the comparables for determining the ALP- the AO has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons – Decided in favour of Assessee.

Controlled transaction with related parties – Held that:- Related party disclosure in Ace Annual Report shows no services are provided to Apex Data Services - Relationship has to be examined as per definition of Associated Enterprises (AEs) as per section 92A of the Act - Apex Data Services is having 7% share capital in Ace Software Exports Ltd. - Even otherwise provisions of section 92A(2)(i) deems two companies as AEs only, if 100% goods are purchased and sold - Though the transactions with related parties cannot be considered for the purpose of comparison, in the present case considering the facts, rejection is not justified – Decided in favour of Assessee.

Computation of net margin – Held that:- Segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee - segmental data of the company F.I. Sofex Ltd., ought to be considered as comparable if there is normal loss - there is abnormal loss on account of extraordinary reasons, then it is not comparable and to be excluded from comparables – Decided in favour of Assessee.

Salary cost as percentage of the total cost is very abnormal - Held that:- The employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40% - The assessee's employee's cost to total cost ratio is worked out at 47% - the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources - the assessee is not alike to M/s. Vishal Information Technologies Ltd. Accordingly, M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables.

Computation of deduction u/s 10A – Reduction of communication expenses - Held that:- Following the decision in ITO v. Sak Soft Ltd. [2009 (3) TMI 243 - ITAT MADRAS-D] - for the purpose of applying the formula under subsection (4) of section 10B, the freight, telecom charges and insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are numerator and denominator, respectively in the formula – the order of the CIT(A) is upheld.

Expenditure pertaining to internet services utilised from VSNL – Payment falls under the category of fees for technical services or not – Failure to deduct TDS – Held that:- In availing such service facility from VSNL, there is involvement of human skill - efforts of technical personnel were involved in availing the said internet connection and the incidental services availed from VSNL - payment made by the assessee to that service provider has to be treated as fees for technical services and hence the assessee was under obligation to deduct tax at source from the same – thus, for non deduction of tax at source, the AO was justified in disallowing the amount u/s. 40(a)(ia) of the Act – Decided against Assessee.

Ad-hoc disallowance @ 15% upheld - Rent, electricity charges, communication charges, insurance and foreign exchange loss excluded – Held that:- Though the assessee has clarified about the nature of various expenditure claimed by it, it has not been explained as to why and under which circumstances it could not produce the books of accounts and those bills and vouchers for verification before the AO during the assessment proceedings - the assessee has not produced the books of accounts and bills and vouchers for verification on that date – the action of the CIT(A) in disallowing a part of expenses claimed by the assessee is upheld.