TMI Blog2013 (10) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... ely because some loss making companies are there those cannot be straightly rejected as comparables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. Transfer Pricing adjustment is not a law in strict sense though base on certain legal principles but it is arithmetic and while making the plus minus, the balance is required to be maintained - in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report - Decided in favour of assessee - IT Appeal No. 118 (Pune) of 2011 - - - Dated:- 31-5-2013 - R.S. PADVEKAR AND R.K. PANDA, JJ. For the Appellant : Rajan Vora. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by CTTL India was only on account of an error in reporting the value of the transactions. Moreover, the purchases transactions is not tax deductible in the hands of the CTTL UK in India. Assessee also contended that it believed that there was no requirement to separately report such transactions in form No.3CEB and, therefore, CTTL UK obtained and filed a revised report in form No.3CEB wherein the non-taxable transactions including the transaction of purchase of goods was not reflected as an international transaction. The assessee also pleaded before the DRP that Transfer Pricing provisions do not apply to international transactions not liable to income tax in India. But the assessee did not find any favour for his submissions. 4. The Ld. Counsel submits that there are certain transactions of purchase/ sale of goods by CTT UK to CTTL India. He submits that so far as the transactions of purchase is concerned, the said transaction did not result into any tax liability in India as the said transactions are entered into outside India. He further submits that the assessee has no permanent establishment (PE) in India and, therefore, no covered u/s.5 of the Act. He submits that the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year(%) Operating profit on operating cost F.Y. 03-04 F.Y. 04-05 F.Y. 05-06 1 Ace Software Exports Ltd. 0.72% 15.42% N.A 8.69% 2 Allsec Technologies Ltd. -37.68% 26.19% N.A. -3.66% 3 C S Software Enterprises Ltd. 13.36% 9.89% N.A. 11.48% 4 Fortune Infotech Ltd. 34.07% 14.12% N.A. 23.08% 5 Genesys International Corporation Ltd. (Consolidated Segmental) 14.47% -2.15% N.A. 6.30% 6 Kirloskar Computer Services Ltd. (Segmental) 25.85% -35.16% N.A. -12.19% 7 Mercury Outsourcing Management Ltd. 5.70% -36.94% N.A. 15.03% 8 Nucleus Netsoft and GIS(India) Ltd. 16.88% 41.33% N.A. 30.20% 9 Pentasoft Technologies Ltd. (Segmental) 13.21% 6.70% N.A. 11.28% 10 Spanco Telesystems and Solutions Ltd. (Segmental) 29.71% 13.07% N.A. 18.16% 11 Transworks Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wipro BPO Solutions Ltd. 8.1. The TPO gave the following reasons for excluding the above comparables which were otherwise adopted by the assessee for the benchmarking purposes: (a) Kirloskar Computer Services Ltd. The company is into data processing, software consultancy and in other fields. During the year under consideration, a major client withdrew from the services of the company which has resulted in a substantial fall in the revenue. This fact has found to be mentioned in the company's management discussion and analysis for F.Y. 2005-06. Further, the company is a perpetual loss maker and has incurred losses in the immediate preceding year, in the year under consideration and even in subsequent years. It may be seen from the FAR analysis given of the assessee, that it is into the global planning, data base support, product management, supply chain management, IT services, finance and marketing. Accordingly, the data processing is not one of the major functions of the assessee. Further, the assessee company is remunerated on the cost plus mark-up basis and accordingly, can never incur losses in its rendering of services to the Headquarter. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices segment even if the data was available, is way different compared to the functions which are performed by the assessee in rendering services to its Headquarter. In view of the facts as aforesaid, the company Pentasoft Technology Ltd. is not found to be comparable, and is accordingly proposed to be excluded from the set of comparables. (d) Nucleus Netsoft and GIS (India) Ltd. and Wipro BPO Solutions Ltd. It is also seen that data for the companies Nucleus Netsoft and GIS (India) Limited and Wipro BPO Solutions Limited is not available for the year ending 31.03.2006. Accordingly these two companies are also proposed to be excluded." 9. In sum and substance the TPO considered only 8 comparables from the comparables adopted by the assessee and worked out the average Operating Profit/Operating Cost at 26.43%. The Assessing Officer proceeded to make the adjustment of Rs.9,16,677/- that it considering difference between the arithmetic mean of PLIs of comparables and that of the assessee, i.e. 26.43% minus 14.15%, i.e., 12.28% and this percentage was worked out on the total operating cost relating to the international transactions at Rs.74,64,793/-. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputer Services Ltd. has operating profits in F.Y. 2003-04 and therefore, it cannot be called as persistent loss maker, and accordingly the same was accepted as comparables. (c) Mercury Outsourcing Management Limited ('Mercury'): Mercury has operating profit in F.Y. 2003-04, and hence, cannot be said to be a persistent loss maker, and it has been further contended that the losses are operating in nature, and not due to extraordinary reasons. It has been contended, that the comparability of companies having incurred losses and the relevant submission in this regard, has been given while dealing with the company Genesys, and the same is applicable here also. (d) Pentasoft Technologies Limited ('Pentasoft'): That the segmental results of Engineering Services segment is available, which is basically the project segment of the company; that the CAD/CAM/CAE projects are nothing but I.T. enabled services, and therefore, engineering services of Pentasoft categorized under the project segment for the F.Y. 2005-0, is an I.T. enabled service, and therefore, comparable to the services of CTT India branch. Accordingly, it would be incorrect to reject the company on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be used. Use of data for the purposes of analysis is governed by Rule 10B(4) of I.T. Rules, 1962 and when a specific Rule is given in respect of data to be used for the purposes of comparability of an uncontrolled transaction with an international transaction, then to draw an indirect inference based on the Rule 10D (4) which only encumbers, maintenance of type of information/documents by the assessee, in respect of an international transaction would not only be out of place but incorrect also and further even if the inference is drawn from there then the same can in no way supersede the provision given in the Rule 10 B (4) which directly deals with use of data for comparability. In view of the facts as aforesaid and discussion as above, the decision quoted of Hon'ble Supreme Court in the case of Supd of Taxes, Dhubri and others reported at 1975 CTR 172 is found to be not applicable. [2.1.2] Assessee has also quoted from circular 12 of the 2001 of the CBDT and has contended that the tax payer should not be put to avoidable hardship. In this regard it is stated that by conducting analysis as per the law and Rules governing the same, the assessee is not put any avoidable h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended that the use of financial information of the comparable companies for a period of earlier two years i.e. 2003-04 and F.Y 2004-05 which were available to the company at the time of complying with the transfer pricing documentation requirements is in accordance with Rule 10B (4) and it has been further contended that the weighted average margins of three years should be used to decrease any variability/distortions between the comparables and assessee. Further the use of single year data may not adequately capture the market cycle and that the use of single year data would be contrary to the provisions of the Act and Rules. The Rule 10B (4) of I.T. Rules 1962 which stipulates about the use of data reads as under : "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 : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable" Para 3.44 of the OECD Guidelines: "Multiple year data should be considered in the transactional net margin method for both the enterprise under examination and independent enterprises to the extent their net margins are being compared, to take into account the effects on profits of product life cycles and short term economic conditions." It can be seen from the aforesaid guidelines that the Para 1.49 deals with the aspect that examination of data of year consideration and of the prior year might be useful as the same may disclose facts that may have influenced the determination of transfer price. What this guidelines stipulates is such examination may be essential in order to understand the facts and circumstances surroun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the current year and for the comparables of the earlier two years as well. [2.2.4] In view of the facts of the case and discussion as above the contention of the assessee in respect of use of multiple year data is not found to be acceptable and is accordingly rejected. [2.3] Rejection of certain comparables identified by CTT India branch : Assessee has given it submissions in respect of the companies proposed to be excluded from the set of comparables adopted by it in its benchmarking analysis. The submissions of the assessee in respect of the individual companies are being discussed here in under: (a) Genesys International Corporation Ltd.: It is seen from the details available about the company in the public domain that "Genesys International Corporation Limited is engaged in providing Geographical Information Services comprising Photogrammetry, Remote Sensing, Cartography, Data Conversion, related Computer based Services and Information Technology enabled and other related Services." Further Genesys has capabilities relating to Photogrammetry/remote sensing services, Cadastral mapping, 3D mapping and Navigation maps. From the back ground as mentioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther the ruling sighted by the assessee of Hon'ble ITATs are distinguishable on the facts of the case and accordingly have not been found to be applicable in the instant case. Therefore Genesys is excluded from the set of comparables for the purposes of benchmarking the international transaction relating to provisioning of IT enabled services by the assessee to its UK parent. (b) Kirloskar Computer Services Limited : In respect of this company the facts given in the show cause notice have not been disputed by the assessee. The company is into data processing and is into losses from the FY 2004-05 to the even the years subsequent to the year under consideration. It could be thus seen that data processing is not even one of services that the assessee provides and the services provided are in respect of global Planning, Database Support, Product management, supply chain management, Information technology services, Finance and marketing to the AE. The assessee for the provisioning of IT enabled services is a company which is risk mitigated company and is cost protected and accordingly in this mode of business cannot incur losses. Therefore a company which is into losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of global Planning, Database Support, Product management, supply chain management, Information technology services, Finance and marketing to its AE and as such cannot be said to in the provisioning of engineering services as the case of Pentasoft. Accordingly Pentasoft is found to functionally dissimilar. [2.4] Need for working capital and risk adjustment: Drawing strength from Rule 10B(2) and 10B(3), and further relying on a decision of Hon'ble ITAT Delhi in the case of Mentor Graphics (Noida) Pvt. Ltd. (TTA NO.. 1969/D/2006), Aztech Software technology Services Limited Vs. ACIT and decision in the case of E-gain Communication Pvt. Ltd. of Hon'ble ITAT Pune, it has been contended that it is imperative to do an adjustment to the comparables' operating margins to make them comparable to assessee's receipt of IT enabled services, as CTT UK is a risk mitigated entity undertaking no business or market risk, where as the comparables are full risk bearing entities. Accordingly, assessee has sought the working capital adjustment. In this regard it is stated that assessee for its operations receipt of IT Enabled services is a limited risk company and the working capital adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP confirmed the adjustment made by the TPO. 12. We have heard the rival submissions of the parties and perused the record. In respect of the rejection of the comparables by the TPO, the company-wise the Ld. Counsel made the following arguments: 12.1. He submits that Genesis International Corporation Ltd. (GIS) has been classified as ITeS by the Report from CRISINFAC (report is given at page 235 of the Paper book -I) and Notification no. 890(E) dated 26 September 2000 from CBDT (relevant extract of the notification is given at page 80 of the appeal memo dated 27 January 2011). He submits that for determining the average price/ margin of an industry, all companies in the industry (whether incurring losses or earning profits) which are comparable to the tested party need to be considered so that the arithmetic mean is representative of the normal profits/ losses earned by companies in that industry. 12.2. He submits that the OECD Guidelines do not prescribe considering the range of results of only profit making companies and ignoring companies incurring losses. Further, it specifically points out the fact that comparable company can be of a wide variety as far as financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time of conducting analysis by the department is not justified as the appellant is required to compare its international transaction with data of which it had no knowledge and which was not publicly available at the time of complying with the transfer pricing regulations. Further, Kirloskar has earned profits in FY 2003-04. (b) Mercury Outsourcing Management Ltd. Using data available at the time of conducting analysis by the department is not justified as the appellant is required to compare its international transaction with data of which it had no knowledge and which was not publicly available at the time of complying with the transfer pricing regulations. Further, Mercury has operating profits in FY 2003-04. Also, the learned TPO has failed to comment on the nature of the losses. As per the profit and loss account, notes to accounts and director's report of Mercury for the financial year ended 31 March 2006 (refer page 236 to 242 of Paper Book I) as extracted from the database, it is evident that the losses of Mercury are operating in nature and not due to extraordinary reasons. Hence the contention of the learned TPO that the losses are due to extraordinary r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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