TMI Blog2009 (10) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... are pitted against each other, the cause of substantial justice deserves to be preferred - transfer pricing was in the initial stages in this year and we are inclined to take a rather liberal approach by giving assessee an opportunity to make out its case properly and place all the relevant facts before the tax authorities so that proper arms length price can be determined in accordance with the law the proceedings before the tax authorities are not adversarial proceedings and the assessee should not therefore be placed at under advantage because of his inadvertent and bonafide mistakes - The matter stands restored to the file of the Assessing Officer as such - the appeals are allowed for statistical purposes - ITA No. 100/CHD/2009 - - - Dated:- 22-10-2009 - ORDER Per : Bench : 1. On recommendations dated 4.5.2009 made by the Division Bench of this Tribunal, Hon'ble President has constituted this Special Bench. Initially the reference was made for deciding a particular question but pursuant to the request made by both the parties. Hon'ble President referred both the appeals in its entirety to be decided by the Special Bench. That is how we have come to in-seisin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent company by way of providing help to customers facing technical problems and is a dedicated service provider for the said purpose. In consideration of the services so rendered, the assessee receives a fees computed with reference to associated costs plus 13.5% mark up thereon, it may be stated that in the original agreement, mark up as only 10% but w.e.f. 1.9.2001, the mark up was increased to 13.5%. 5. In the course of assessment proceedings, a reference was made by the Transfer Pricing Officer (TPO) for determination of arm length price in respect of the international transactions with the assessee entered into with its parent company. The TPO took note of the fact that the assessee has employed Transactions Net Margin Method for the purpose of computing Arm Length Price and did not dispute the same. He, however, noted that the one of the comparable independent comparable selected by the assessee included in the computation of arms length price is M/s Imercius Technologies India Pvt Ltd, which shows a net loss @ 73.48%. in response to, the Transfer Pricing Officer requiring the assessee to show cause as to why this comparable not be excluded, on the ground that it is a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gative Net companies as a comparable. Further, the turnover of M/s Imereius Technologies is Rs. 1.46 Cr as on 31.3.2004, which is much less than for turnover of tasted party. In view of the net worth and turnover criteria this company is rejected as a comparables" 7. Aggrieved by the actions taken by the Assessing Officer, the assessee carried the matter in appeal before CIT(A) but without any success. The learned CIT(A) upheld the exclusion of the said company and observed that the turn over of a Imercius Technology India Pvt Ltd was just Rs 145.73 lakhs whereas the turn over of the assessee was Rs. 13.6 crores. It was also observed that M/s Imereius Technology india Pvt Lid was in the first year of its operation, which essentially applies that the expenditure for setting up will be much large and the turn over will be lower. Learned CIT(A) also noted that the income is also not comparable for the reasons that as evident from the notes of the accounts, the company is engaged in transition services and customers contact services which was different from the activities of the personal expenses are unusually high at Rs. 217.67 lakhs as compared to the turn over of Rs 145.73 lakhs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account in the computation of mean profit and comparable entities. In effect, thus, we are also called upon to adjudicate, subject to admission of this additional ground so raised by the assessee, as to whether or not Datamatics Technologies Ltd should be excluded from the comparables. 10. As far as appeal for the Revenue is concerned, the only issue raised is whether or not in the facts addition circumstances of the case the learned CIT(A) has erred in allowing benefit of 5% to the assessee whereas the relevant provisions of section 92C(2) is meant to cover only marginal case and not to allow a standard deduction of 5% in all cases. 11. We have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicability of the legal position. 12. As far as this issue in appeal is concerned, learned representative fairly agreed that this issue is not required to be reconsidered in the light of the amendment brought about in Proviso to section 92C(2) which inter alia states " It is variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... horities below in justifying such an exclusion. It was pointed out that the main reason for excluding M/s Imercius Technologies India Pvt Ltd is stated to be that it is a start up company and, therefore, it cannot be taken as a comparable but then according to the learned counsel the M/s Imercius Technologies India Pvt Ltd. as evident form the Director's report of the said company placed on record had more than 100 employees and was a functional company. According to learned counsel, as to whether a company in the first year of operation or not does not materially effect the comparability for the reason that as is evident from the profit and loss account of the M/s Imercius Technologies India Pvt Ltd, which was placed in the paper book there are no major start up expenditure reflected therein. As from the reasons of the TPO, that net worth of M/s Imercius Technologies India Pvt Ltd was negative and that increases with the international practice negative worth company are not taken as comparable, learned counsel stated that if the figures in the beginning of the year are taken into account, the assessee company has a positive worth and marginal negative worth as reflected in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel. 16. In response to Bench question that the employee cost in the case of M/s Imercius Technologies India Pvt Ltd are unusually high at 164% of the receipts, as against 56% of the receipts in the case of tested party, learned counsel submitted that when a comparable is functionally accepted, the other criteria cannot be applied as a reason for rejection of the comparables. On the contrary, he justified such a case being included in the computation of mean profits so as to leave to a proper mix of cormparables which in turn leads to better reliability of resultant mean profits. 17. In response to Bench's question that as per the Director's report of M/s Imercius Technologies India Pvt Ltd, the company was engaged in the "telemarketing activities" which is not comparable with the activity of the tested party i e providing help to customers facing technical problems and dedicated service provider for the said purposes, the learned counsel submitted that functions are to be taken at the border level, it was once again emphasized that the tested party as also M/s Imercius Technologies india Pvt Ltd was placed under the same broad category of Information Technology informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also submitted that all the relevant details are already on record in as much as relevant annual account of Datamatics Technologies Ltd filed before the CIT (A), we must entertain these grievances of the assessee on merits. Learned counsel for the assessee relied upon Hon'ble Supreme Court Judgment in the case of National Thermal Power Corp Ltd Vs CIT (229 ITR 383) in support of prayer for admission of the aforesaid additional ground. Without prejudice to the above arguments, learned counsel submitted that there is an arithmetical difference in the computation of mean profit which escaped the attention of the assessee in as much as expenses of Rs 5.79 crores were not taken into account while computing the operating profits. It is thus prayed that the same be taken into account now which will bring down the operating profit to cost ratio figure. 19. Learned counsel further argues that since two of the comparables, which are loss making comparables have already been admitted to be comparable entities by the TPO and since M/s Imercius technologies India Pvt Ltd is excluded mainly for the reason that it is high loss making comparable, a deduction of average loss as a percentage of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings before the CIT(A). Shri Kapila submits that these is no material on record to show that even before the CIT (A) such details were ever filed As regards the question of intra Associated Enterprises transaction being involved in the turnover of the Datamatics, Shri Kapila submits that this issue was never taken up before any of the authorities below. The details were also not available in the Prowess database and have come to the light only as a result of detailed balance sheet of Datamatics Technologies Ltd company filed now by the assessee. In such circumstances, according to the learned special counsel we should not entertain a grievance regarding exclusion of Datamatics Technologies Ltd in the comparables without prejudice to this opposition learned counsel fairly submits that in the event the Tribunal is pleased to admit this ground of appeal, the matter can at best be remitted to the file of the Assessing Officer for the limited purpose of examining the relevant fact regarding Datamatics Technologies Ltd. Learned counsel further submits that in case we are inclined to remit the matter to the file of the Assessing Officer, he has no objection to the matter being restor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Learned counsel thus submits that this comparable is wholly unsuitable for being taken into account in the case of the assessee. It is submitted that in the case of telemarketing activity the time gap between recruiting the staff and being able to get any yield from them is much higher. It is submitted that the assessee being a captive unit has assured work from the very initial stage, and, therefore, assessee in later years of being business cannot be comparable at all with a telemarketing company at the very initial stage. Learned counsel further submits that the work profile of the employees of Imrnercus and the assessee before us is entirely different. He, submits that the Imercius being a loss making company in the start up stage can indeed not be compared with the assessee. For all these reasons, he supports the stand of the authorities below and urges us not to interfere in the matter. 23. In rejoinder, learned counsel for the assessee reiterates his submissions and urges us to hold that Imercius be included in the comparables for the purposes of working out ALP of the services rendered by the assessee on the TNMM basis. He further urges us to direct the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores turnover and the assessee has a turnover of Rs 13.06 crores. Even the filter of lower turnover at Rs 1 crore is without any reasonable basis and there is no filter for higher turnover at all. The application of turnover filter also leaves much to be desired and has no rationale basis. In our considered view, it is improper to proceed on the basis that the turnover of Rs 1 crore to infinite is a reasonable classificalion as turnover base. While we agree that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of arms length price. Imercius is a case in which not only functional area is different, Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the assessee companies. For all these reasons, the exclusion of Imercius is quite justified and therefore, action of CIT (Appeals) on this issue is upheld. Our reasoning may be different but our conclusions are the same as arrived at by the authorities below. 26. In view of the above discussions we hold that the authorities below were quite justified in excluding Imercius from the list of comparables for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the taws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 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 (Appeals) in appeal. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee 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 ofR.B.Jessa Ram Fateh Chand vs. CIT 81 ITR 409, it has been found and observed as under: "Mr Brijial 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 section 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the Income-tax Officer 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. 29 ITR 661, their Lordship of Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or taxpayers as a justification for making groundless 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 principal 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. 38. Accordingly on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as compar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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