TaxTMI 
TaxTMI 
2015 (6) TMI 959
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....ing products. 3) Support for marketing and promotion of products, scheme etc. of AEB. 3. The assessee had filed its return of income declaring loss of Rs. 6,62,96,780/-. The AO noticed that assessee had undertaken International transactions with its associated enterprise to the tune of Rs. 7,03,224/-. Therefore, in accordance with the provisions of section 92CA of the Income Tax Act, the International transaction entered into by the assessee with the associate enterprise was referred to the Transfer Pricing Officer (in short "TPO") for determining the arm's length price. The TPO passed the order u/s 92CA(3) on 7th October, 2010 making an upward adjustment of Rs. 3,42,63,209/- to the income of the assessee, being the difference between arms length price and the price charged by the assessee. The AO passed the draft assessment order after considering the assessee's submissions and made the addition of Rs. 3,42,63,209/- to the income of the assessee. The assessee filed objections before Dispute Resolution Panel (in short "DRP") and the DRP issued directions u/s 144C(5) on 2nd August, 2011 confirming the TPO's action. 4. Being aggrieved, the assessee is in appeal before us and has t....
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....inance Distribution Limited as functionally comparable to the Appellant. 5.5 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by selecting certain companies earning super normal power as comparable to the Appellant. 5.6That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis-à-vis the comparables and in the process also neglected the Indian transfer pricing regulations. OECD guidelines on transfer pricing and judicial precedence. 6.That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 per cent range as the Appellant has the right to exercise this option under the pre-amended second proviso to sec. 92C(2) of the Act. 6.1That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. TPO/AO have erred in applying the amendment to section 92C(2) retrospectively and in the proces....
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....s. 4. TID review and analysis. 5. Initiatives such as 6 Sigma, BCP coordination and adherence to GFES policies. The fee for the above services is payable to the AESIL as under: i. The Fees payable by AEII to AESIL for the services shall be arrived at by taking into account the total cost incurred by AESIL for providing the services plus a mark up of 15.09%. ii. The fees shall be payable on a quarterly basis by inward remittance into India of the amount of the fees. iii. The fees shall be payable within 30 days from the completion of the period to which the fees relate. iv. AESIL shall provide AEII with a detailed breakup of the total cost incurred by AESIL and further furnish all such clarification as may be required by AEII in this connection." 8. The TPO noticed that assessee had applied TNMM method for determining arm's length price in regard to provision of the marketing services to Amex India in respect of credit cards and personal loans. He noted that the profitability of the company had been computed at 12.81%. He observed that for arriving at this profit margin assessee had selected six companies as comparables the operating profit/operating cost of which was ....
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....06-07). But the taxpayer excluded the current year's data in most of the comparable cases. 2. Some companies though qualify all the filters applied by the tax payer based on the data pertaining to the F.Y. 2006-07, they have not been selected. 3. The assessee has himself in a way rejected its transfer pricing study and has rejected its own comparables during the present proceedings." 11. In view of these defects the TPO rejected the assessee's first objection that its TP Study should be accepted. 12. The second objection of assessee was that the companies identified by TPO were functionally different. In this regard TPO observed that assessee had not been able to demonstrate any functional differences in the companies selected by him and the assessee company. He pointed out that the company selected by him, as noticed in para 7 of his order, were the companies which were deriving income from commission like the assessee. He further observed that under the TNMM a broad comparability is required. In this regard, he also referred to OECD guidelines which read as under: - 2.62 "One strength of the transactional net margin method is that net profit indicators (e.g. return on assets....
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....ults. For sake of ready reference, the relevant Para is extracted below. 3.63 Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed "comparable" merely appear to be very different from the results observed in other proposed "comparables". 3.64 An independent enterprise would not continue loss-generating activities unless it had reasonable expectati....
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....y analysis. Hon'ble ITAT relying on para 1.47 of OECD TP guideline has held that it was necessary for the TPO to examine whether these entities have been taken rightly as comparable. The relevant guideline of the OECD is reproduced as under: "1.47 Whether the application of one or more methods produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may results from figures of the comparable data that require adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm's length range". Contrary to the above, Hon'ble ITAT in case of Philips Software Centre (P) Ltd. vs. ACIT, Circle 12(2) [2008] 26 SOT 226 (BANG), has held that a comparable disclosing high profit should be excluded from comparability analysis. For the sake of clarity the relevant part of the judgment is reproduced as under: "X) The TPO has grossly erred in 'normalizing' the profits of super profit companies. Such companies should have been excluded f....
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....the computation to be correct. He has tabulated the comparables along with their operating margins on operating cost (%) as under: - S.No. Name of the Company Operating margin on operating costs (%) for FY 2006-07 1. Access Global Solutions Ltd. 4.64% 2. Eastern Financiers Limited 9.76% 3. Empire Industries Limited 20.53% 4. Geojit Commodities Ltd. 3.09% 5. ICC International Ltd. 82.92% 6. NYK Line (India) Ltd. 5.03% 7. Priya International Ltd. 13.97% 8. Publicity Society of India Ltd. 12.80% 9. Relic Technologies Ltd. 12.90% 10. Reliance Communications Infrastructure Ltd. 20.85% 11. India Infoline.com Distribution Company Ltd. 0.39% 12. Allianz Securities Ltd. 12.37% 13. Sundaram Finance Distribution Ltd. 84.79% Arithmetic mean 21.85% He, accordingly, computed arm's length price by taking arithmetic mean PLI 21.85% and made an adjustment of Rs. 3,42,63,209/- as under: - Arithmetic mean PLI 21.85% Operating Cost 361,589,674 Arms Length Price (ALP) @ 21.85% of operating cost 440,597,017 Price received 406,333,808 Shortfall being adjustment u/s 92CA 34,263,209 ....
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....cause assessee had supplied the said comparable, the same could not automatically been considered without properly examining whether the comparable company was functionally same or not. In this regard ld. Counsel relied on the decision of ITAT, Chandigarh Spl. Bench in the case of Deputy Commissioner of Income Tax vs. Quark System Pvt. Ltd., wherein it was held that even if assessee has taken "D" as a comparable in its transfer pricing data, still it was entitled to point out that said enterprise had wrongly been taken as a comparable. He, therefore, submitted that TPO was wrong in not excluding Sundaram Finance Distribution Ltd. (in short "SFDL) mainly on the ground that assessee had provided the said comparable without considering functional dissimilarity. He pointed out that Sundaram Finance Distribution Ltd. earned commission as an insurance agency for life insurance products and general insurance products, whereas assessee provided marketing support services. In this regard ld. Counsel referred to page 48 of the paper book, wherein the director's report is contained, wherein the business review, it is stated as under: - "BUSINESS REVIEW During the year under review, the tota....
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....sition that a comparable selected by assessee is not to be excluded merely on the ground that the same was earning high margin of profit. The said para reads as under: - 15.1 "Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself." 28. Ld. DR further referred to page 186 of paper book, wherein the assessee's transfer pricing report is contained, wherein the assessee has stated as under: - "The comparables selected for analysis could also include companies that may perform additional functions (while being engaged in providing comparable services). Further, the risk profiles of independent companies usually differ from that of AESIL, as they may undertake business risks, legal and contractual risks, etc. The effect of these functional and risk differences on profit margins, needs to be factored while determining the arm's length price. However, no adjustments have been made to account for such functional ....
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....the findings of the TPO, we find that the intangibles or outsourcing the manpower will not materially affect the price or profit margin. In our considered opinion, no two comparable companies can be replicas of each other. The application of Rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. In this view of the matter, we find no infirmity in the order of the CIT(A) in confirming the action of the TPO by selecting the VITL as comparable company. The case-law relied on by the ld. Counsel for the assessee is distinguishable on facts. Hence, the ground raised by the assessee on this issue is rejected." He, therefore, submitted that mere outsourcing of activities was of no consequence. 31. We have considered the submissions of both the parties and have perused the record of the case. 32. The main issue for consideration is in regard to selection of following two comparables for computing arithmetic mean of margins: - (a) Sundaram Finance Distribution Ltd. selected by assessee and (b) ICC International Ltd. selected by TPO. 33. The assessee's contention is that since both these comparables had earned super profits, therefore, they shou....
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...., we are concerned with transactional net margin method (TNMM) on the adoption of which there is no dispute. In this method the net profit margin realized by the enterprise from an international transaction entered into with associate enterprise is computed in relation to cost incurred or sales affected or assets employed or to be employed by the enterprise or having regard to any other relevant base. In the present case, the operating cost has been adopted as the relevant base in relation to which net profit margin has been determined. The net margin realized by the enterprise, having regard to the operating cost, is required to be adjusted as per Rule 10B(e)(iii) to take into account the differences, if any, between the international transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transaction, which could materially effect the amount of net profit margin in the open market. It goes without saying that comparision can be made amongst equals and not amongst dissimilar objects. The object is to bring the assessee's transaction in relation to all possible aspects on the same footing on which the comparable uncontrolled transactio....
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....aram Finance Distribution Ltd. and ICC International Ltd. were earning super net profit margins should be excluded is devoid of any merit. It has only to be adjusted for the material differences between business modules as adopted by the assessee vis-a-vis business module adopted by the comparable uncontrolled transactions. If the comparables are performing the same functions then merely on the ground of they being earning super profits, cannot be excluded. Material differences between their business modules, however, are required to be taken care off and duly adjusted. In the case of Sundaram Finance Distribution Ltd., we find that the main objection of assessee is that the said comparable was included because assessee had supplied the same and the second objection is that in the said comparable there was no staff. As far as first objection is concerned, we are in agreement with the assessee's counsel that merely because the said comparable was provided by assessee, the same could not be included without proper examination to account for the differences. The assessee is well within his right to demonstrate that a comparable supplied by it in the transfer pricing analysis was not c....
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....ects had to be taken into consideration and due adjustment was required to be made to the net profit margin for brining the comparable on the same platform at which the assessee was performing its functions. 39. Admittedly the assessee's objections in regard to ICC International, as noted earlier, have not been considered by DRP and, therefore, we consider it in the interest of justice that this issue should also be restored to the file of TPO for fresh consideration. 40. In view of above discussion, we proceed to decide the various ground of appeal raised in Part 1 of its ground of appeal. Ground nos. 3 & 4 deals with reference to the TPO. We find that the TPO has clearly stated in his report that the assessee itself rejected certain comparables given by it and in ultimate analysis only three comparables were left. Therefore, TPO had resorted to such analysis in order to find out other comparables. The reference to TPO is made u/s 92CA(1), wherever AO consider it necessary or expedient to do so. We, therefore, reject the ground no. 3 & 4 raised by the assessee. Ground no. 5 is allowed for statistical purposes; ground no. 5.1 is rejected; ground no. 5.2 is decided against the ass....
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....,000,000 and valuing the same at Rs. 30,000,000 based on the asstt. order passed for the AY 2002-03. 8.1 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in disallowing the claim of the appellant for depreciation on the acquired business database u/s 32 of the Act. 8.2 That on facts and in law, the Hon'ble DRP has erred in confirming and accordingly, the ld. AO has erred in following the assessment orders passed by the predecessor for asstt. years 2002-03 to 2006-07 that the acquired business database could not be regarded as plant and machinery. 8.3 Without prejudice to the above, the ld. AO has erred in not appreciating that the database falls under the head of "intangible asset" and accordingly, depreciation should be allowed on the same. 9. Without prejudice to the above, the ld. AO has erred in disallowing the amount of Rs. 7,519,793 as depreciation on database without appreciating the fact that depreciation on database actually claimed in the return of income is Rs. 1,210,254. The ld. AO has erred in disregarding the fact that Rs. 7,519,793 is the tax depreciation on all the blocks of assets of the business of the App....
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....en allowed on the same." 2. The ld. counsel for the assessee submitted that assessee is joint venture between TATA Finance Ltd. and American Express International. It is engaged in the business of money changing, foreign exchange and other related services as permitted by the RBI. The assessee had purchased four foreign exchange service locations of American Express-TRS(Legal Entity: AEB India) for a consideration of Rs. 26.77 crores. A sum of Rs. 12 crores was paid towards the business of database. While framing asstt. order in AY 2002-03, AO has taken the value of database at Rs. 3 crores. He did not grant the depreciation to the assessee. Ld. CIT(A) accepted the value of database at Rs. 3 crores as determined by the AO but directed the AO to grant depreciation as admissible on plant and machinery. The dispute traveled to the ITAT in ITA No. 4106/Mum./07 and Crossobjection No. 202/Mum./09. The ITAT has held that value of database is to be accepted at Rs. 12 crores as disclosed by the assessee, because the transaction between the assessee and the Associate Enterprises for purchase of business database were subject to transfer pricing scrutiny. The ITAT further held that the depre....
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....nbsp; VICE-PRESIDENT Dated: 15/05/2012" 45. In view of above observations, the additional ground no. 1 and ground no. 7 raised by the assessee stands allowed. The additional ground no. 2 raised by the assessee also stands allowed as it has been held that the depreciation would be admissible by treating the data base as intangible asset vide ITAT order in ITA No. 4106/Mum./2007 and CO No. 202/Mum./2009. 46. Brief facts apropos ground no. 8.1 to 9 are that the AO had disallowed the claim of Rs. 75,19,793/- following the order for assessment years 2002-03, 2003-04, 2004-05 and 2005-06. In view of the findings of Tribunal in regard to additional ground no. 2, the depreciation is to be allowed. 47. Ld. Counsel submitted that depreciation is to be allowed @ 25% instead of @ 15% allowed by the AO by treating the data base as plant and machineries. We find that ITAT in assessee's own case dated 03.02.2012 has held as under: "8. We find that it is not ....
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...., inter-alia, have observed that "It is worth noting, the scope of sec. 32 has been widened by the Finance (No. 2) Act, 1998 whereby depreciation is not allowed on intangible assets acquired on or after 1st April, 1998. As per section 32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature." In view of these discussions as also bearing in mind the entirety of the case, we are of the considered opinion that the CIT(A) ought to have allowed the depreciation on the entire payment of Rs. 12 crores towards Acquired Business Database. We, therefore, reject the appeal filed by the AO against partial relief granted by the CIT(A) and uphold the grievance of the assessee in this regard." 48. We, therefore, restore the matter to the file of AO to decide this ground in terms of the order of Tribunal in assessee's own case noted above. 49. In the result, these grounds are allowed for statistical purposes. 50. Brief facts apropos ground no. 10 are that assessee company had claimed depreciation of Rs. 38,18,949/- on computers. The AO required the assessee to provide details o....