TMI Blog2013 (8) TMI 753X X X X Extracts X X X X X X X X Extracts X X X X ..... l determine the T.P. adjustments by excluding Vapi and WAPCOS comparables. Rate of depreciation on computers – Assessee charged depreciation @ 60% - Held that:- It is well settled that computers and peripherals are eligible for depreciation @ 60%. Besides assessee's opening WDV cannot be disturbed. - ITA No. 6390/Del/2012 - - - Dated:- 5-7-2013 - R.P. TOLANI AND SHAMIM YAHYA , JJ. For the Appellant : Pawan Kumar and Rohit Tiwari. For the Respondent : Peeyush Jain. ORDER:- PER : R.P. Tolani This is assessee's appeal against the assessment order dated 3-10-2012, passed by the Add. Commissioner of Income-tax, Range-1, New Delhi u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 relevant to assessment year 2008-09. 2. Various grounds are raised, out of which assessee's following grounds are pressed; rest of the grounds being not pressed are accordingly dismissed. 1. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred both on facts and in law in confirming the addition to the extent of ₹ 3,83,76,374/- to the income of the appellant out of the total addition of ₹ 5,49,44,194/- as proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risk, rework/ correction risk, price risk and capacity utilization risk. The customers are Group Companies only and as they undertake all the marketing and business development functions overseas, with no involvement of the assessee, it is also claimed to be not exposed to other critical risks such as credit risk/ debt collection risk and market risk. 3.2 During the relevant FY, the assessee undertook the following international transactions with its Associated Enterprises ('AEs'), which were duly reported in the Accountant's Report ('Form No 3CEB') filed along with the assessee's return of income: S.No Nature of Transactions Value (Rs.) 1. Provision of Advisory and Consultancy Services 383,783,645 2. Reimbursement of expenses 76,449 The above transactions being closely interrelated, have been aggregated for the purpose of analysis from a Transfer Pricing perspective. 3.3 Assessee thus claims that it provides non binding financial advisory support services in the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying out its search on Indian databases. However, the Assessee conducted a search for the global comparable companies from OneSource.com (Asia Pacific Database) and the same was included in the TP report for the year. The final comparable companies and the results considered in the TP report are as follows: Sr.No. Name of the comparables FY 2005-06 FY 2006-07 FY 2007-08 Three Years Average 1 Aegis Group Plc 15.21% 15.28% 14.97% 15.11% 2 Creston plc 18.94% 16.69% 17.38% 17.39% 3 CRM Company Group SA 16.33% 6.30% 1.38% 4.30% 4 Forrester Research , Inc. 10.83% 12.38% 12.04% 11.82% 5 Harris Interactive Inc. 5.33% 7.17% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 Technical Chemise (India) Limited 7.32% 12.76% 9 Vapi Waste Effluent Management co. 18.53% 9.23% 10 WAPCOS Limited (Seg) 40.37% 60.09% Average 21.76% 23.08% 3.7 This resulted in final TP Adjustment by averaging the e mark-up on cost of 23.08% after adjusting for working capital difference, it was higher than the mark up on cost of 9.25%1 earned by the assessee during FY 2007-08. Ignoring objections, the Ld. TPO proposed an adjustment of ₹ 54,944,194 to the income of the assessee on the basis whereof the draft assessment order u/s 144C(1) of the Act was issued by assessing officer. 3.8 Assessee carried the matter before DRP which overruled the assessee's objections and confirmed the TPO's adjustments. Aggrieved, assessee is before us. 4. Ld. Counsel for the assessee contends that the entire controversy about transfer pricing adjustments can be resolved if the two comparables adopted by the TPO and approved b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany's main strength lies in its technical expertise, and it works as a technical consultancy organization. (i) Vapi Waste Effluent Management Co. Limited: It is a functionally different comparable. The company deals in the infrastructure sector and is engaged in undertaking high end technical services and project implementation on varied nature of infrastructure projects. The company's revenue streams include effluent treatment, common solid waste treatment and management, etc. This is evident from the annual report of the company for the FY 2007-08. The relevant extract of the annual report of the company is as under: Operations: During the year under review your company has successfully continued with its activities of effluent treatment and common solid waste management Cluster projects: The Ministry of Commerce Industries, Government of India, though Department of Industries Policy Promotion ('DIPP') has approved the Vapi Chemical Cluster Project cost at ₹ 5431 crores under the Industrial Infrastructure Upgradation (IIUS)Scheme of 2003 and the government of India has sanctioned a Grant in aid of ₹ 40.49 crores aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendering engineering consultancy is exposed to higher risks because of its nature of business and cannot be compared with routine marketing support service, by following observations: We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies and provide end-to-end solutions and whereas the appellant company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable. ii) WAPCOS 4.7 The Assessee submits that WAPCOS Limited is a MINI RATNA Public Sector Enterprise and is engaged in providing high end technical consultancy services mainly in the nature of the engineering services in the field of water resources, power and infrastructure sectors in India and Abroad. 4.8 The facts of foreign projects handled by the company clearly indicate that the company in involved in design, engineering kind of activities. These facts emerge from the public domain information i.e. website and annual report of the company for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the DRP proceedings. The relevant extract of the DRP order is provided below for ready reference: According to the Assessee WAPCOS is a Mini Ratna public sector enterprise under the aegis of the Union Ministry of Water Resources. WAPCOS has been providing consultancy services in 4 centers i.e. water resources, power and infrastructure. Apart from India, the company is providing its consultancy services in 40 other countries. Broadly functionally similar being in services sector. According to the assessee economic factors pending a pay revision is effecting its results. We have examined the issue and find pay revision occurs in normal course and cannot be treated as an extraordinary circumstance affecting comparability analysis. Hence in view of DRP it can be retained as a comparable.' 4.13 Assessee contends that its submissions before the Ld. TPO and DRP were unambiguous to the effect that WAPCOS cannot be functionally compared to a Company engaged in rendering business/ marketing support services since the revenue generated by them through the consultancy and engineering projects segment includes revenue from high end technical consultancy services mainly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or entities are comparable, a functional analysis is necessary. 4.17 The Special Bench of the ITAT on the similar type of issue in the case of Aztec (I.T.A. No.584/Bangalore/2006) held as under: Before we go into each one of these methods, the fundamental requirement in any of the method selected, is the selection of comparables , for benchmarking international transactions. This selection of a comparable should be based on functional, asset, and risk analysis of both the parties and transactions. 4.18 The ld. AR submitted that DRP with respect to WAPCOS (Segment) has not controverted its contentions raised during the course of the DRP proceedings. 4.19 The resultant arithmetic mean of the comparable companies (after excluding WAPCOS (Segmental) and Vapi comes to as under: Sr.No. Company name Working capital adjusted margins TPO/RP's OP/TC 1. Best Mulyankayan Consultants Ltd. 11.84% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... os and TCE are engineering companies that provide end to end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profit is vastly different and hence on this count also they are not comparable. 4.22 The difference between capital finance/ market consultancy provider and independent high-tech engineering end to end solutions provider have been explained in detail before the TPO/DRP and in written submissions. In view of the above submissions and case laws it is pleaded that these two comparables deserves to be excluded from T.P. working. 4.23 Apropos addition on account of excess depreciation on computer peripherals - ₹ 258,110, ld. Counsel contends: 4.23.1 Assessee as earlier claimed depreciation on computer and peripherals @ 60%. Assessing officer however made disallowance of ₹ 258,110/- on 45% of the total opening written down value of the block of computers as on April 1, 2007 on the premise that the same contain items in nature of plant and machinery entitled for depreciation @ 15% only. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r adjusting their profit margin, the assessee has not applied the filter i.e. the companies who have incurred expenses of more than 5% of its sales on advertisement and marketing which required to be excluded. At this stage, in the absence of any finding, at the level of the TPO or of the learned DRP, it is difficult to verify the version put forth by the learned counsel for the assessee. 5.1 Thus, the claim of the assessee that it carried no risk is not a correct argument. It is to be borne in mind that it carries elements of risk. 5.2 Coming to the issue of exclusion of these two comparables, ld. CIT (DR) relies on the following judgments: (i) M/s Bayer Material Science P. Ltd. Vs. Addl. CIT ITA no.7977/Mum/2010 order dated 16-12 2011. (ii) ITA no. 7894/Mum/2010 M/s Symantec Software Solutions Pvt.Ltd. Vs. ACIT order dated 31-5-2011. (iii) TA no. 1082/Hyd/2010 DCIT Vs. M/s Deloitte Consulting India Pvt. Ltd. order dated 22-7-2011. for the proposition that the comparables cannot be excluded merely on the basis of turn over or some marginal difference of functionality. Determination of ALP is a work of estimate and the assessee is in marketing c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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