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2015 (6) TMI 35 - ITAT PUNE

2015 (6) TMI 35 - ITAT PUNE - TMI - Transfer pricing adjustment - assessee has charged its Associate Enterprise at cost + 12% basis - assessee has considered TNM method to be the most appropriate method for benchmarking its transaction with AE with return on capital employed/operating profits as the appropriate PLI - selection of comparables - Held that:- The matter requires fresh adjudication at the level of the TPO considering the fact that assessee has not considered any company as comparable .....

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r of assesse for statistical purposes. - ITA No. 49/PN/2012 - Dated:- 29-4-2015 - Ms. Sushma Chowla and Shri R.K. Panda, JJ. For The Assessee : Shri Prakash K. Jotwani & Shri Shrikanth For The Revenue : Ms. Nishtha Tiwari ORDER PER R.K.PANDA, AM : This appeal filed by the assessee is directed against the order dated 28-01-2011 of the CIT(A)-I, Pune relating to Assessment Year 2005-06. 2. Facts of the case, in brief, are that the assessee Ocean Connect (I) Pvt. Ltd., (OCIPL in short) is a who .....

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uring the course of Transfer Pricing assessment, the TPO noted that the assessee during the impugned assessment year has entered into international transaction as under : Sr.No. Name & Address of the AE Description of transaction with AE Amount received/paid as per books (Rs.) 1 Occeans Connect (UK) Limited Outbound/Inbound telemarketing/Call centre service 8,32,10,579/- The TPO further noted that the assessee has charged its Associate Enterprise at cost + 12% basis. The assessee has conside .....

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pany. The assessee also justified the working for the margin of 12% over costs by submitting as under which has been reproduced by the TPO and which reads as under: ....... III) We have studied the call center industry in india to locate a comparable case, i.e., one satisfying the following conditions : 1) A cal centre providing services as mentioned above 2) Having a single customer 3) Having a capacity of 80-100 seats IV) Given the nascent stage of this business and the fact that this business .....

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ove. Many of the companies identified provide data entry and related outsourced services in addition to call center services. Further, their size and industry vertical also differ from that of OCIPL. VI) Moreover, given the nature of services as per the agreement (ref. Section D), the risks and responsibilities involved as well as the requirement of funds over the near future the rate of return is appears to be reasonable. Further, the rate per seat as worked out on the basis of revenues calcula .....

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account and hence include amortizations and depreciation. Therefore the price has been calculated on a reasonable basis and this is borne out by the fact that the pricing helps to cover estimated future requirement of funds." 4. However, the TPO was not satisfied with the above explanation of the assessee and issued a show cause notice under the proviso to section 92C(3) of the I.T. Act. In the said notice, the TPO had proposed the following 2 companies to be taken for benchmarking the inte .....

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ces. It was argued that Ocean Connect (I) Pvt. Ltd., is wholly owned by OCUK. All technology, hardware and software specifications have been decided by OCUK. The finance for this has also been provided exhaustively by OCUK. The assessee further stated that all the risks other than the pure risks are borne by OCUK which is also responsible for marketing, customer services, legal and financial aspects OCIPL is only executing the contract as per the instruction of OCUK. It was further argued that n .....

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in the I.T. Act, 1961 and I.T. Rules, 1962. However, the assessee has not even objected to the PLI adopted by the TPO. According to the TPO, while applying TNM method, the I.T. Rules, 1962 prescribe that the comparison has to be made between the controlled transaction and that between uncontrolled transaction. The transaction between the assessee and its AE is controlled transaction is a foregone conclusion. However, the justification for charging a specific amount should not be met only from th .....

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biggest risk. According to the TPO it is not possible to quantify the risk factors. Similarly, the assessee has also not tried to demonstrate the same. Therefore, he rejected the argument of the assessee that adjustment should be made considering the risk factor. Rejecting the various explanations given by the assessee, the TPO considered the two comparables namely Maple Esolutions and Saffron Global Ltd., as comparables. Considering the arithmetic mean of 29.79% of the 2 comparables the TPO mad .....

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jecting the other 8 comparables which he has initially selected from the prowess process. However, the Ld.CIT(A) was also not satisfied with the arguments advanced by the assessee and upheld the addition made by the AO/TPO. While doing so, he held that the TPO after examining the issue in detail issued the show cause notice wherein he had given the details about the 9 comparables found during the T.P. study and why 2 are proposed to be adopted. If the assessee had any objection on that issue, th .....

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proper opportunity was not granted. According to him the transaction between the assessee and the AE are between the parent company and the subsidiary and therefore the agreement is undisputedly between 2 interested parties and therefore the same cannot be given weightage as is being claimed. There is nothing on record which can show why 12% of marking is correct. He accordingly upheld the T.P. adjustment made by the AO. 9. Aggrieved with such order of the CIT(A) the assessee is in appeal befor .....

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r of Income Tax (Appeals) has erred in not entertaining the basic argument placed by the appellant that the instances quoted by the TPO were extreme and extra ordinary results which are comparable as the same view have been held by many benches to the Hon Tribunals. 4. The learned Commissioner of Income Tax (Appeals) has erred in confirming the additions without entertaining additional evidence by way of data of the companies referred to in by the TPO in selection of the companies whose data hav .....

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o the decision of the Hyderabad Bench of the Tribunal in the case of Market Tools Research (P) Ltd. Vs. DCIT reported in 43 taxmann.com 195 (copy of which is placed at page 124 to 127 of the paper book) submitted that the Tribunal following the decision of various benches of the Tribunal including that of the Hyderabad Bench have held that Maple Esolutions Ltd. cannot be treated as comparable as its financial results are not reliable. Accordingly, it has been held not to treat this company as a .....

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ribunal had directed to exclude this company from the list of comparables for A.Y. 2007- 08 also. Referring to the said decision he submitted that the company Triton Corporation Ltd. was also involved in fraud for which it was held that the financial results of the company are not reliable. The Tribunal further held that whenever a company or its directors are found to be involved in a fraud, the Coordinate Benches have taken the consistent view of excluding the said company from the final list .....

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submitted that the assessee was not aware of the order passed by the TPO by the time the letter was addressed. However, the AO or the CIT(A) has not commented upon this issue. He submitted that Saffron Global Ltd., and Maple Esolutions belong to the Triton group and since Saffron Global Ltd., and Maple Esolutions are found involved in fraud, therefore, in view of the various decisions cited, these 2 companies are to be excluded from the list of comparables. Once these 2 companies are excluded, .....

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olved in fraud, for which it has to be excluded from the comparables, the book results declared by the assessee has to be accepted. 12. In his alternate contention, he submitted that it may be set aside for the limited purpose of considering the 2 comparables as to whether they are involved in fraud or not and if so then to exclude the same. 13. The Ld. Departmental Representative on the other hand strongly supported the order of the CIT(A). He submitted that the assessment year involved in the .....

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the orders of the Assessing Officer/Transfer Pricing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. The assessee in the instant case has entered into international transaction with its AE amounting to ₹ 8,32,10,579/-. It has charged its AE at cost + 12% basis. Further, the assessee has considered TNM method to be most appropriate method for benchmarking its transaction with AE with return on capital .....

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during TP assessment proceedings considered Maple Esolutions Ltd. with PLI of 34.86% and Saffron Global Ltd. with PLI of 24.72% as the final set of comparables for determining the ALP of the international transactions carried on by the assessee and accordingly made upward adjustment of ₹ 1,48,03,162/- to the International Transaction. 15. It is the submission of the Ld. Counsel for the assessee that Maple Esolutions and Saffron Global Ltd. belong to Triton Corporation Ltd. which are found .....

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