TMI Blog2015 (7) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the same parity of reasoning in the cases cited by him and keeping in view that the judgement of ITAT co-ordinate Bench in the case of Transwitch India (2012 (5) TMI 314 - ITAT DELHI) affirmed by Hon'ble Delhi High Court. Therefore, respectfully following the decision of Hon'ble High Court, we direct TPO / A.O. to adjust operating cost by excluding abnormal cost incurred on account of start-up company like salary, rent and depreciation. This matter is restored to the file of TPO/A.O. to re-determine the operating cost on the above lines to arrive at operating profit.- Decided in favour of assessee for statistical purposes. - I.T.A. No.3547/Del/2010, I.T.A.No. 5071/Del/2010 - - - Dated:- 10-7-2015 - SHRI I. C. SUDHIR AND SHRI INTURI RAMA RAO, JJ. For The Assessee : ShriAjay Vohra, Sr. Adv. Shri Neeraj Jain, Adv Ms. Deepika Agarwal, CA For The Department : ShriVijay Chaudhary, Sr. DR ORDER PER INTURI RAMA RAO, AM: These are cross appeals filed by assessee company in I.T.A. No. 3547/Del/2010 as well as Revenue in I.T.A. No. 5071/Del/2010 for the Assessment Year 2003-04. These appeals involve the issue of Transfer Pricing Adjustment (TPA) for the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,09,843 Operating profit ratio (-)37.34% 4. The assessee had conducted transfer pricing analysis by using multiple year data of previous financial year in which data of the 3 years is on actual basis and for 2 years on project basis. The appellant also selected the TNMM to determine the arms length price for the transactions with AE on transactions and for the application of TNMM, the appellant selected .. operating profit /on total cost was taken as profit level indicator (PLI). 5. For application of TNMM, the appellant identified the eight comparable companies engaged in rendering voice based I web based BPO/ITES. Further, the appellant considered the Profit Level Indicator ( PLI ), i.e., Operating Profit /Total Cost of the comparable companies for the financial years 2001-02 and 2002-03, as under: S. No. Name of the Company Margins (OP/TC) Weighted average 2003 2002 1. Ace Software Exports 11.64% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calculation of arm's length price Amount Total operating cost ₹ 33,40,42,401 Arm's length margin 13.56% Profit which the appellant would have earned ₹ 33,40,42,401 13.56% ₹ 4,52,96,150 Less: Operating loss posted by the appellant Rs. (-)12,50,09,843 Difference Rs.17,03,05,993 8. The TPO held in this regards as follows: 6.0 In the transfer pricing approach the assessee has used data for five financial years out of which data of three years is on actual basis and for two years on projected basis. Such kind of approach permitting use of financial data for multiple years' of the taxpayer for working operating profits is not provided in the Indian Transfer, Pricing regulations. The provisions of Rule 108(1)(e) of Income Tax rules contains method of application of Transactional Net Margin Method. It emphasizes use of data for the year in which transaction took place. It may further be mentioned that Rule 108( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of TPO made addition of ₹ 17,03,05,993/- on account of transfer pricing adjustment. Aggrieved by the said order appeal was filed before Ld. CIT(A). However, Ld. cia accepted the plea of assessee company that Transfer Pricing Adjustment should be actually restricted to the amount actually retained by associated enterprises. 10. It was submitted that from the gross revenue received from the end customers in respect of various contracts, the associated enterprise retained in aggregate only a sum' of ₹ 1,19,60,457 at their end the balance amount has been passed on to the appellant, as follows: Associated Enterprises Gross Billing to End- Customer Amount Retained by AE Amount INR Net amount remitted to HCL-BPO HCL-AMERICA 71,073,269 15,507,867 431,660 7,107,327 - 28,650 10% 0% 7% 63,965,942 15,507,867 403,010 Sub Total 87,012,796 7,135,977 79,876,819 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e., the amount received by the associated enterprise from the customer and the actual value of international transactions, i.e., the amount received by the assessee in respect of international transactions. 12.4 In view of the same I am of the considered view that the adjustment to the income of the appellant has to be restricted to ₹ 1, 19,60,457- being the amount retained by the associated enterprises. 13. Aggrieved with this order, the Revenue had come up in the present appeal. Ld. D.R. placed reliance on the order of Ld. CIT(A) and had prayed for quashing of CIT(A) s order on this issue. On the other hand, Ld. Sr., Counsel submitted that the appellant could not have expected to receive from the customers of the AEs of the appellant, anything more than the amount paid by some customer to the AE, if the appellant were to be obtain the contracts for services from the customers directly, i.e., without the involvement of the AEs of the appellant. Thus, at the most the consideration received by the appellant from the AEs may be replaced by the consideration received by the AEs from its customers, for the services provided by the appellant; the price charged by AEs to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard is placed on the following observation of the Hon'ble Delhi bench of the Tribunal in the case of Li Fung (India) Pvt. Ltd. vs. DC IT (ITA No 5156/DeI/2010): 17. The Hon'ble Delhi High Court recently vide order dated 16-12-2013 (in ITA No.306/2012), while adjudicating on the said decision of the Tribunal, held in paragraph 40 of the order that the approach of the TPO arid the tax authorities in essence imputes notional adjustment / income in the assessee's hands on the basis of a fixed percentage of the free on board value of export made by unrelated party vendors. ..... 18. Reliance in this regard is also placed on the recent decision of Delhi Bench of the Tribunal in the case of Hyper Quality India Pvt. Ltd. vs. ACIT (ITA No. 5630/0ell2011 ), wherein, it has been held as under: 7. Ld. TPO erred in evaluating FAR (Functions performed, Assets. employed and Risk assumed) analysis which has been summarily confirmed by DRP. To support its case, assessee furnished split financials of the appellant and its AE. Whereas the appellant has been .able to earn profit in India its counterpart the AE has continuously sustained losses. There being no element of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the bunching adopted by the assessed, and examining and giving benefit of set off. Section 92(3) does not bar or prohibit set off. 20. In view of the aforesaid, it is respectfully submitted that the adjustment shall be restricted to ₹ 1.19 crores. 21. We have head rival submissions and perused the material on record. Ld. CIT(A) had followed the ratio laid down in the case of Global Ventedge P. Ltd. (supra) (in I.T.A. No. 1432 2321 / Del/2009 and 116/Del/2011). This decision was affirmed by both Hon'ble High Court and Hon'ble Supreme Court and his ratio was followed in subsequent decisions as submitted earlier and, therefore, the order of Ld. CIT(A) on this issue is reasonable and we do not find any reason to interfere with this finding of Ld. CIT(A) and hence, the grounds of appeal filed by revenue are dismissed. Accordingly, appeal filed by revenue is dismissed. I.T.A.No. 3547/Del/2010: 22. Now, we deal with the appeal filed by assessee in I.T.A. No. 3547/Del/2010. The assessee has raised following grounds of appeal: 1. That the learned Commissioner of Income-tax (Appeals) erred both on facts and also in law in confirming the addition to the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -04. The relevant previous year, i.e. previous year 2002-03 was, thus, the first full year of operation of the BPO unit of the appellant. It is submitted that during the previous year 2002-03, the appellant was a start up enterprise, due adjustment ought to be made of the start-up/ one-time costs incurred, which inevitably lead to losses. It is submitted that operating profit/ loss of the appellant for the relevant previous year are required to be adjusted to exclude items of abnormal cost / short fall in revenue (owing to lower rate paid to the appellant as start up) to determine the normal profit that could have been earned by the appellant for the purpose of benchmarking with other companies which are not in start-up stage. 25. In case adjustment of the extra-ordinary expenses and considering the average expenses that would have been incurred in the normal operations, the operating profit margin of the appellant works out to 15% as follows: Particulars- Total Optimum Excess / Deficit - Direct / Indirect 18,26,67,573 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compara.ble to an international transaction if-- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) Reasonably accurate adjustments can be made to eliminate the material effects of such differences. 29. Reliance in this regard is also placed on the recent decision of Chennai Bench of the Tribunal in the case of Mando India Steering Systems Pvt. Ltd. vs. ACIT (ITA No. 2092/Mds/2012), wherein, the Hon'ble Bench has remitted the issue back to the file of the assessing officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP cost. The relevant extract of the decision reads as under: We are of the considered view that under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity utilization considering the fact that the year under consideration was the first full year of operation of the appellant. Relevant extract of the decision reads as under: 10. -We have heard the rival contentions and perused the material available on record. The suitable adjustment for non-utilisation of capacity is to be taken in to account after considering the ALP while working out TP adjustment, this proposition has been held by coordinate Bench in the case of the Amdocs Business Services (P.) Ltd. (supra) and various other cases as cited here in above . 11. In the given facts and circumstances it was required on the part of the lower authorities to have given due effect to under capacity utilization of the assessee which has not been done TPO for adjustment for ALP determination. In view of the facts and circumstances we are inclined to set aside the matter and restore the issue of under capacity utilization back to the file of the Assessing Officer ITPO to decide the same afresh after giving assessee adequate opportunity of being heard and to file the necessary evidence on this behalf. Needless to say that a proper and speaking order will be passed deciding the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d concerns during the year under consideration were at arm's length requiring no adjustment/addition on this issue. 16. From the above, it is evident that the appellant is entitled to economic adjustments in the circumstances of under capacity utilization of the company. Of course, such adjustments must be restricted to fixed cost/overheads only. In the 14 instant case, the AO/TPO did not have the occasion to go into the period or the extent of the labour unrest, break-up of the claimed adjustments amounting ₹ 7.32 crores '(rounded off), fixed cost versus the variable cost etc as they' summarily rejected the external comparables in view of their preference to the operating profits of the domestic segment of the carpets. Therefore and consequently, this key issue also has to be set aside to the files of the' TPO/AO for fresh examination of the issue. Prima facie we see the need for such economic adjustments to the total cost of the carpet of the export segment. We refuse to comment on the facts relating to the figures as none of the authorities has gone into the details of such economic adjustments and they summarily rejected the claims. As such, the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r January to March, 2006. The capacity utilization, of the appellant during the quarter January to March, 2006 fell to i2% as' against the normal capacity utilization of 87% to 94% during the financial year ending December, 31, 2005. Further, the fact that the appellant had to shift its office premises at a very short notice, sufficiently substantiates the low capacity utilization of the appellant during the last quarter of financial year 2005-06. We find out ourselves in agreement with the appellant's submission in this regard. 37. Hon'ble Delhi High Court, in the appeal preferred by the revenue in the case of Transwitch India (supra), vide order dated 17.07.2013, upheld the adjustment claimed by the assessee on account of capacity utilization. Reliance in this regard is also placed on the recent decision Delhi Bench of the Tribunal in the case of DCIT vs. Panasonic AVC Networks India Co. Ltd. (ITA No. 4620/0eI/2011), wherein the Hon'ble Bench has held that capacity underutilization is an important factor affecting net profit margin as lower capacity utilization results in higher per unit costs which in turn results in lower profits. The relevant finding of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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