TMI Blog2012 (6) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... details of comparables is required and this requires an exhaustive exercise to be done before giving working capital adjustments. AO was not justified to defy the direction of DRP and not to give working capital adjustment while making addition at ALP of the transactions of assessee with AEs. matter restored to AO to work out margin of profit at ALP of all 30 comparable companies of transactions with AEs and also to give working capital adjustment - IT Appeal No. 8558 (Mum.) of 2011 - - - Dated:- 29-2-2012 - B. R. Mittal, Rajendra Singh, JJ. Sunil M. Lala and Bipin Dodnia for the Appellant. Pravin Varma for the Respondent. ORDER B.R. Mittal, Judicial Member The assessee has filed this appeal for assessment year 2007-08 against order of Assessing Officer passed u/s. 143(3) r.w.s. 144C of I.T. Act dt. 28th October, 2011 mainly disputing making an addition of ₹ 9,29,93,817/- on account of adjustment in respect of transactions with Associated Enterprises by taking profit margin at 27.84% as against margin of 20.17% of the assessee. 2. The relevant facts giving rise to this appeal are that assessee is a subsidiary of M/s. Maersk SSC Holding A/S, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 15.25 7 Galaxy Commercial Ltd. 20.47 8 KPIT Cummins Global Business Solutions Ltd. (-) 18.83 9 M C S Ltd. 13.65 10 Maple Esolutions Ltd. 35.88 11 N I I T Smartserve Ltd. (-) 15.05 12 Spanco Telesystems Solutions Ltd. 18.36 13 Transworks Information Services 15.81 14 T S R Darashaw Ltd. 15.38 Arithmetic Mean 9.59% 6. TPO on the functionality of above 14 comparables found that only 8 comparables i.e. at S. No. 1,3,4,8,9,10,11 and 13 have functions broadly similar to ITES functions of assessee and rejected balance 6 comparables at S. No. 2,5,6,7,12 14 and reasons are stated by TPO at page-3 of his order. TPO has stated that only 8 companies provided in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mold-Tek Technologies Ltd. 113.49% 21 R Systems International Ltd. (Seg.) 20.18% 22 Spanco Ltd. (Seg.) 25.81% 23 Triton Corp Ltd. 34.93% 24 Vishal Information Technologies Ltd. 51.19% 25 Wipro Ltd. (Seg.) 29.70% Arithmetic Mean 30.75% 7. It is relevant to state that in the above list given by department, 3 comparables are common to assessee's remaining 8 comparables, the names of which are above at S. No. 2,9 and 19. The assessee vide its objection letter dt. 10th September, 2010 disputed and rejected 21 out of 25 comparable companies considered by department stating as under: ( a ) In connection with selection of data of earlier financial years, it is submitted that conducting a fresh search /update of economic analysis based on information currently available, but not available at the time of determining of the arm's len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee regarding inclusion of functionally incomparable companies is not tenable. ( ii ) Claim of the assessee such as use of multiple year data, working capital adjustment, risk adjustment, etc. are not acceptable. The data adopted by the assessee to arrive at the mean is old data and pertains to earlier years also, which is not correct. Under Rule 10B(4) of the Income tax Rules, 1962, the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be data relating to the financial year in which the international transaction has been entered into. Hence, the data of F.Y. 2006-07 alone have to be used. ( iii ) The assessee vide letter dated 10.09.2010, explained the working capital adjustment, which is in line with the OECD transfer pricing guidelines. However, the approach adopted by the assessee for making such adjustment is based on several assumptions and accordingly the same is not acceptable. 9. In view of above, TPO determined ALP by applying arithmetic mean of following 30 comparable companies which include 5 companies from list of assessee set and 3 companies are common to both set of comparable companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19 Infosys BPO Limited. 28.78 Department 20 iServices India Private Limited 50.27 Department 21 KPIT Cummins Global Business Solutions Ltd. 32.81 Assessee 22 M C S Ltd. 13.95 Assessee 23 Maple eSolutions Limited 34.05 Common 24 Mold-Tek Technologies Limited 113.49 Department 25 N I I T Smartserve Ltd. -5.29 Assessee 26 R Systems International Ltd. (Seg.) 20.18 Department 27 Spanco Ltd. (Seg.) 25.81 Department 28 Triton Corp Ltd. 34.93 Department 29 Vishal Information Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has stated that assessee has not substantiated nor evidenced its claim as to which multiple year facts and data resulted in their determining their prices as ALP. Further it is stated that it is only an exception to the main provision that the single year data i.e. pertaining to year concerned is to be used. (b) That benefit of standard deduction of +/-5% range as sought by assessee is not a correct interpretation, as the department is litigating the issue further in appellate proceedings. Further, +/-5% is only a safe harbor and not a standard deduction. Thus DRP declined to admit the claim of the assessee. (c) That in so far as working capital adjustment is concerned, this issue was before the then DRP for A.Y. 2006-07 wherein they had allowed the working capital adjustments. Since facts and circumstances are similar, DRP find no reason to differ from the DRP decision of A.Y. 2006-07 and directed the AO to work out the working capital adjustment accordingly. 14. Pursuant to above, AO passed assessment order dt. 28th October, 2011 by making addition of ₹ 9,29,93,817/-. It is relevant to state that AO has stated that on the basis of details given by asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble DRP. Incorrect margin of comparables 4. On the facts and in the circumstances of the case and in law, the learned TPO I AO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO / AO of disregarding the correct margin of alleged comparable companies computed from the annual report available in the public domain. Incorrect rejection of Appellant's benchmarking analysis and comparables 5. On the facts and in the circumstances of the case and in law, the learned TPO / AO erred and the Hon'ble DRP further erred in upholding/confirming the action of the learned TPO / AO of disregarding the benchmarking analysis and the comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Rules and the various submissions made by the Appellant. 6. On the facts and in the circumstances of the case and in law, the learned TPO / AO erred and the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO / AO of erroneously considering the IT services similar to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble DRP further erred in upholding / confirming the action of the learned TPO / AO in failing to appreciate that the Appellant was claiming tax exemption under Section 10B of the Act and accordingly had no intention to shift profits outside India by manipulating the prices charged in its international transactions which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. Lack of adequate opportunity 13. On the facts and in the circumstances of the case and in law, the learned AO and the learned TPO erred in not granting reasonable and adequate opportunity to the Appellant before passing their orders under section 144C(1) and 92CA(3) of the Act respectively and the Hon'ble DRP further erred in not considering the objections / submissions of the appellant while giving directions under section 144C(5) of the Act and the said orders/directions being passed in violation of the principles of natural justice with a pre-determined mind set to make additions are liable to be quashed or alternatively set aside. The Hon'ble DRP's direction not pursuant to Section 144C(8) of the Act 14. On the facts and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by department as well as by assessee. The list of all the said 30 comparable companies have been mentioned hereinabove in para-9. At the time of hearing, Ld. AR submitted that assessee disputes only 7 comparables i.e. companies mentioned at S. No. 1,9,16,24,28,29 and 30 out of said 30 comparable companies finally selected for making adjustment at ALP. 18. (i) Ld. AR submitted that in respect of company mentioned at S. No. 1 i.e. M/s. Accentia Technologies Ltd. (ATL), it is engaged in Healthcare Receivable Management and has ventured into all the areas of Healthcare BPO industry, namely ,medical transcription, medical cording, medical billing and receivables management (collections). He submitted that said company is not functionally comparable as its medical transcription services is the main stream of income which constitute 63% of its total revenue. He submitted that medical transcription consists of trained medical transcriptionists listening to audio files sent over from the US. The medical transcription service demands employing of highly skilled personnel. Hence, this function ATL does not match with the function undertaken by assessee under its back office process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Mold-Tek Technologies Ltd. (Mold-tek) performs a completely different set of functions than those performed by assessee. He referred to page-42 of Paper Book and submitted that it operates two business segments namely (i) plastic division which is engaged in the manufacture of plastic containers, pet bottles, blow moulding, lube oils, paints, pet products, consumer products which is 88.11% of total revenue and (ii) I.T. division which specializes in providing structural engineering and design services for construction of buildings which is 11.89% of total revenue. Therefore this company is engaged in providing engineering design services for construction of building. The function of the company does not match with function performed by assessee which relates to only data entry work requiring only low end skills and tools. He further submitted that NCP calculated for Mold-tek is 113.49%. That charging a mark-up of 113.49% on the cost of the company and billing the same to client is a case of abnormal profits and hence an extreme situation where overly high margins is there, it does not represent industry average. Ld. AR relying on decision of ITAT Delhi Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice support service having a turnover of around ₹ 125.81 crores lacks comparability based on scale of operations. Ld. AR relying on the decision of Pune Bench in the case of E-Gain Communications (P.) Ltd. ( supra ) submitted that due cognizance should be made to turnover of tested party and comparables. He further submitted that this company has brand value as well. Therefore Wipro could not be considered as comparable with assessee company. 19. Ld. AR submitted that if these 7 companies are excluded as comparable with assessee company, then arithmetic mean of balance 23 companies out of 30 companies considered for adopting arithmetic mean, will come 18.69% which will be less than the net profit margin of 20.17% as adopted by assessee company. 20. Ld. AR further submitted that TPO also has committed a mistake in arriving at arithmetic mean of 30 comparable companies at 27.84% and as per their annual reports, it comes to 26.5%. Therefore calculation considered by authorities below while suggesting upward adjustment is not correct, matter has to be restored to AO for rectification of calculation made. 21. Ld. AR submitted that the assessee adopted a detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission; wherein it is stated that assessee conducted analysis for determining the ALP of international transactions pertaining to the provisions of back office support services. He submitted that for the assessment year 2006-07, order of assessment year 2005-06 was followed by Tribunal and it is not a speaking order. Ld. DR submitted that Transfer Pricing Officer rightly clubbed both segments of services and accordingly aggregated to a benchmark to determine the ALP for assessment year 2007-08. Ld. DR submitted that assessee carried out study of 14 comparable companies for its IT enabled services and its arithmetic mean is 9.59%, whereas assessee's operating margin is at 19.73% and in the case of IT services assessee adopted 22 comparable companies and stated the arithmetic means at 10.24% as against its operating margin of 23%. He submitted that TPO rightly considered that services rendered by assessee under IT services segment are similar to back office service and thus aggregated them together. 24. In respect of not giving working capital adjustment by AO, Ld. DR relied on the observation of AO and submitted that since no details were furnished by assessee, AO coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished by assessee in respect of its IT enabled services and out of it he found 8 companies as comparable and rejected the balance 6 companies as not comparable. Since TPO found that 8 comparable companies provided in TPO report of assessee were inadequate in number, he took 25 set of comparable companies for IT enabled services. It is relevant to state that out of 25 set of those companies, 3 companies are common with assessee's own set of comparables. Assessee disputed 21 companies out of 25 comparable companies considered by department and filed objections before TPO as well as before DRP. TPO considered ALP of assessee's international transaction with associated enterprises by adopting arithmetic mean of 27.84% and suggested upward adjustment of ₹ 9,29,93,816/-, after rejecting the objections of assessee. DRP in its order passed u/s. 144C(5) dt. 30th September, 2011 confirmed adjustment suggested by TPO with the direction to AO to give working capital adjustment by following decision of DRP in assessee's own case for assessment year 2006-07. As mentioned herein above, AO made assessment u/s. 143(3) r.w.s 144C of I.T. Act vide order dt. 28th October, 2011 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies that these 7 companies are not comparable functionally with assessee company. 31. Be that as it may, we may state that as per proviso to Sec. 92C(2) as it existed for the relevant assessment year, which provides that where more than one price is determined by most appropriate method, ALP shall be taken to be arithmetic means of such prices or at the option of assessee price which may vary from arithmetic mean by an amount not exceeding 5% of such arithmetic mean. The above issue has been considered by ITAT Mumbai Bench in the case of Emersons Process Management India (P.) Ltd. ( supra ) wherein it was held that prior to amendment in second proviso to Sec. 92C w.e.f 1.10.2009, issues is no longer res integra and the benefit of 5% is to be allowed even in the cases where difference in value of international transactions at its ALP is more than 5%. The same view has also been taken by ITAT Mumbai Bench in the case of Diageo India (P.) Ltd. ( supra ), further in the case of Phoenix Mecano India Ltd. ( supra ) to which one of us is a party (AM) wherein it has been held that benefit of 5% is to be allowed to assessee even in cases where difference in value of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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