TMI Blog2011 (9) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. Expunging two extreme profit cases from the list of comparables - Held that:- CIT(A), without considering any data of HT and DT or comparing it with the assessee's facts, simply ordered for elimination on sole the reason of their having high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule 10B. As such we are not inclined to uphold the impugned order on this score. - the cases of DT and HT shall be considered by the Assessing Officer/TPO as to whether they qualify their exclusion or not. The remaining exercise of the computation of ALP will be consequently done. - Appeal of the revenue allowed partly. - ITA No. 4425/Mum/2010, - - - Dated:- 23-9-2011 - R.S. Syal, V. Durga Rao, JJ. Goli Sriniwas Rao for the Revenue Kunj Vaidyaand Imran Memon for the Assessee ORDER R.S. Syal, Accountant Member 1. This appeal by the Revenue and Cross objection by the assessee emanate from the order passed by the Commissioner of Income-tax (Appeals) on 09.03.2010 in relation to the assessment year 2004-2005. 2. The only effective ground raised by the Revenue in its appeal is as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e stated to have anticipated the need for assistance in relation to various aspects of the lubricants industry for discharging services to its AEs. Considering its proximity to Castrol India Limited (CIL), which was well established in the business of manufacturing and marketing of lubricants, the assessee entered into an arrangement with it for receiving necessary support on need basis. As per the terms of said agreement, the assessee agreed to suffer the proportionate costs of CIL's personnel (such as salaries, allowances, contributions to PF etc.) involved in providing requisite support to it with a mark-up of 5%. These costs were then to be charged out by the assessee to BPME at a mark-up of 2.5%. Additionally, all out of pocket expenses incidental to the provision of such support (such as travelling, telephone, canteen, training expenses etc.) were agreed to be reimbursed to CIL at actual but the assessee was to charge these costs to BPME with a mark-up of 7.5%. Apart from that the assessee was to be charged a fixed amount per month for infrastructure support and common utilities (such as rent, electricity, maintenance, fixed assets etc.) provided by/shared with CIL. These cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53% Ultramarine and Pigments Ltd. (segment - IT-enabled services) 63.20% FISofex (IT-enabled services segment) 3-75.83% Mukand Engineers Ltd. (segment-Infotech) -33.54% Arithmetic Mean 8.02% 6. As per the above list of comparable cases, the mean of OP/TC (hereinafter called profit rate) was worked out at 8.02%, which was claimed to be close to its profit rate. On going through the list of comparable cases, the TPO found that some cases were having different functional as well as product profile as compared to that of assessee-company. Out of the list of comparable cases supplied by the assessee, the TPO held FI Sofex Ltd. (hereinafter referred to as FI) and Mukund Engineers Limited (Infotech segment)(hereinafter referred to as ME) as incomparable cases. It was seen that as per Transfer Pricing study report, the assessee was engaged in providing Accounting and Control Support Services, Legal and Tax Support Services, Management, HSE and Human Resource Services, Lubricant Support Services, Marketing Support Services, Technical Support Services and services relating to development, maintenance and operation of Interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of these two comparable cases was appropriate or not. As regards FI, the assessee highlighted that the TPO had inadvertently considered revenue from IT enabled services as revenue from Software services and vice versa for the years ending 31.03.2002 and 31.03.2003. As regards ME, the assessee submitted that the analysis of the company's "Infotech" segment for financial year 2001-2002 and 2002-2003 would show that the segment's operations consisted of Electronic Data Processing Services and training activities etc. It was contended on behalf of the assessee that the Infotech segment continued to provide Electronic Data Processing Services. After recording the assessee's submission in this direction, the learned CIT(A) held in para 4.16 that: "Based on the above, I am inclined to accept the view of the assessee that the above two companies ought to be retained in the set of comparables, as they are functionally comparable to the assessee. If the above companies are reinstated, the OP/TC margin of the comparables for FY 2003-04 works out to 8.02%. In contrast, the Appellant's margin (after including passthrough costs) is 4.79%". 9. Thereafter the learned CIT(A) proceeded to exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of International delivery data capture systems, invoicing and cash /debt collection. The case of FI considered by the TPO as not comparable and liable for elimination from the list of comparable cases supplied by the assessee divulges income from software services at Rs.82,31,765 and income from IT enabled services at Rs.72,39,330for the year ending 31.03.2004, which is the year under consideration. The learned A.R. admitted that the nature of services provided by the assessee to its AEs match only with the IT enabled services rendered by FI and not the software services made available by FI. This indicates that the software services which constitute more than 53% of the revenues of such other company are different from that of the assessee-company. The learned CIT(A) has held that this company as functionally comparable to the assessee-company by noting that the TPO had inadvertently considered the revenue from IT enabled services as revenue from software services and vice versa for the years ending 31.03.2002 and 31.03.2003. It is relevant to note that we are dealing with assessment year 2004- 2005 and in this respect the figures of software services and income from IT enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) of clause (e) of Rule 10B(1) provides as under:- "the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base;" (emphasis supplied by us) 11.5. From the prescription of the above Rule it can be seen that the net profit margin is to be considered qua the comparable uncontrolled transaction or number of such uncontrolled transactions. "Uncontrolled transaction" has been defined in Rule 10A(a) to mean "a transaction between enterprises other than associate enterprises, whether resident or non-resident". When we consider Rule 10B(1)(e) in juxtaposition to Rule 10A(a), the position which emerges is that in applying the TNMM, net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions thus envisaged for making a case as comparable for this purpose, should not only be comparable but also have uncontrolled transactions. These ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble because of the qualitative difference in the nature of services provided by them vis- -vis the assessee, the ld. DR, apart from propelling this argument, also put forth that these two cases were incomparable for want of transactions, whatever little resemblance their services had with those provided by the assessee, with their associated enterprises. It is wholly improper to argue that the ld. DR has set up an altogether different case. A line of distinction needs to be drawn between a new argument and an additional plea on the same point. The present case falls in the latter category and not the former. As such we are not inclined to entertain the argument raised on behalf of the assessee that the ld. DR transgressed his limit by arguing on a new point. Be that as it may, it is simple and plain that there can be no estoppel against legislation (including delegated legislation). When Rule 10B unequivocally provides that the comparable case should be that of uncontrolled transactions, there is no point in arguing that this piece of delegated legislation should be ignored simply because the TPO did not expressly mention it in so many words. Further it is axiomatic, that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot. 12.3. The cases of FI and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule 10B read with Rule 10A as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the ld. CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis of relevant considerations and not the higher or lower p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the ld. CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables. 12.7. Now let us examine the facts of the case of Quark System (supra), which is the trump card of both the ld. CIT(A) as well as the assessee. In that case it was contended on behalf of the assessee, by way of an additional ground, that a particular case with high profit rate was not comparable wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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