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2015 (9) TMI 1170 - ITAT DELHI

2015 (9) TMI 1170 - ITAT DELHI - TMI - Calculation mistake committed by the Transfer Pricing Officer (TPO) in computing the profit margin of two comparable companies - Held that:- When there is a specific challenge to the calculation of OP/TC of the relevant segment of this company and the TPO has not mentioned how he determined this percentage of profit, we are helpless to evaluate the contention of the ld. AR. Under such circumstances, we are of the considered opinion that the ends of justice .....

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been contended before us, then the TPO/AO should consider the correct percentage and, consequently re-determine the arm’s length price (ALP) of the international transaction.

Similar is the position regarding working of OP/TC of M/s Agricultural Finance Corporation Ltd. The TPO computed PLI of this company at 7.43%. The ld. AR contends that this figure is incorrect. No relevant details leading to the computation of this profit rate are available in the TPO’s order, which position has .....

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her the dates of incurring such revenue expenses, though capitalized as deferred revenue expenditure, are available on record nor there is any record to link these expenses with the earning of revenue from the AE. In the absence of the necessary details of these two factors relevant for deciding the question as to whether or not these should be treated as operating cost of the year and then their extent, we consider it appropriate to send the matter back to the file of the AO/TPO. The assessee i .....

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t correct. In the fresh exercise of finding out the amount to be treated as operating or non-operating out of total deferred revenue expenses, the TPO will also take the aspect of Preliminary expenses into consideration.Ex consequenti, the impugned order is set aside on this score and the matter is sent back to the file of the AO/TPO for a fresh determination in accordance with our above observations.

Treatment of M/s Artefacts Software and Finance Ltd. as a comparable company - Held .....

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hat it wrongly chose a company as comparable which is actually not comparable. Under the given circumstances, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for examining the assessee’s contention about the non-comparability of this company. If the related party transactions of this company turn out to be what has been contended by the ld. AR, then it would make the transaction as controlled. There is hardly any need to accentuate that only uncontrolled .....

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sessee is directed against the final assessment order passed by the Assessing Officer (AO) under section 143 (3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2006-07. 2. Concise grounds have been filed by the assessee in supersession of the grounds taken in appeal memo. Apart from that, the assessee has also filed certain additional grounds. Some of the grounds were not pressed. We will deal with the surviving issues one .....

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4. The assessee is engaged in providing information research and related support services to its Associated Enterprises (AE). It undertakes back office support for some research activities. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the international transactions reported by the assessee. Apart from one international transaction of Reimbursement of expenses , on which there is no dispute, the assessee reported another internation .....

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ed at 19.37% as against the assessee s OP/TC computed by the TPO at 7.84%. That is how, a transfer pricing adjustment of ₹ 57,33,902/- was proposed, which was eventually made by the AO in the final assessment order. 5. The dispute is about the calculation of the operating profit margin of M/s Educational Consultants (India) Ltd. (Technical Assistance segment) determined by the TPO at 26.45%. The ld. AR submitted that this calculation done by the TPO is incorrect inasmuch as this percentage .....

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in the order of the TPO resulting into the determination of OP/TC at 26.45%. When there is a specific challenge to the calculation of OP/TC of the relevant segment of this company and the TPO has not mentioned how he determined this percentage of profit, we are helpless to evaluate the contention of the ld. AR. Under such circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is sent back to t .....

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determine the arm s length price (ALP) of the international transaction. 6. Similar is the position regarding working of OP/TC of M/s Agricultural Finance Corporation Ltd. The TPO computed PLI of this company at 7.43%. The ld. AR contends that this figure is incorrect. No relevant details leading to the computation of this profit rate are available in the TPO s order, which position has been admitted by the ld. DR as well. Following the view taken hereinabove, we set aside the impugned order to .....

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g year before the start of actual business activity, which amount was capitalized as deferred revenue expenditure, to be written off in five years. He submitted that 20% of such expenditure was written off in the preceding year by way of a debit to the Profit & Loss Account and equal amount of ₹ 14.37 lac was debited to the Profit & Loss Account for the current year. The ld. AR pointed out that the TPO, while computing operating profit margin of the assessee for the year in questio .....

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the assessee company was incorporated on 4.3.2004. The case of the assessee is that albeit it entered into an agreement with its AE for rendering of services on 10th March, 2005, but, it actually started providing services from 1st January, 2005. A copy of the Inter company service agreement has been placed on record, which provides that: CEB India, has, since January 1, 2005, assisted ……….. in providing such services to CEB ……… It, therefore, transpire .....

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alia, includes Salary of ₹ 24.76 lac, Rent of ₹ 10.78 lac, Depreciation of ₹ 2.41 lac. All the expenses in this list are otherwise of operating nature, except Preliminary expenses amounting to ₹ 25,498/-, which full amount has been treated by the TPO himself as non-operating. The ld. AR argued that such expenses were incurred prior to the rendering of services to the AE and hence should not have been considered as operating expenses in the computation of operating profit .....

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facts of the case, we find that such expenses capitalized by the assessee as deferred revenue expenses, except preliminary expenses, are in the nature of operating expenses. As such, it becomes crucial to find out the dates on which such expenses were incurred, so as to find out if these were incurred before or after the date of start of rendering the services to its AEs. If such date is prior to the start date of rendering services to the AE, then it needs to be found out whether the incurring .....

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g expense. If on the other hand, such expenses are incurred either after the start of rendering services to the AE or before that but are in relation to such services, then they become operating expenses. The most vital point in such a latter scenario which assumes significance is to find out the relation of such expenses with the year in which corresponding revenue is received from the AE. If the revenue arising from incurring of such expenses is linked with the preceding year, then the claim o .....

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e expenses, though capitalized as deferred revenue expenditure, are available on record nor there is any record to link these expenses with the earning of revenue from the AE. In the absence of the necessary details of these two factors relevant for deciding the question as to whether or not these should be treated as operating cost of the year and then their extent, we consider it appropriate to send the matter back to the file of the AO/TPO. We order accordingly and direct him to make necessar .....

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PO is that 80% of ₹ 25,498 which was not debited to the Profit and loss account also got treated as nonoperating expense, which position is not correct. In the fresh exercise of finding out the amount to be treated as operating or non-operating out of total deferred revenue expenses, the TPO will also take the aspect of Preliminary expenses into consideration. 11. Ex consequenti, the impugned order is set aside on this score and the matter is sent back to the file of the AO/TPO for a fresh .....

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DR raised an objection to this argument by contending that since the assessee itself had chosen this company as comparable, now it cannot resile from its original stand. 13. Having heard the rival submissions and perused the relevant material on record, we are unable to countenance the preliminary objection raised by the ld. DR. In our considered opinion, there can be no embargo on the assessee in advancing a claim for treating a particular company as incomparable, which was inadvertently consi .....

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