TMI Blog2016 (2) TMI 382X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the orders of the authorities below or in the submissions of the assessee. In view of the above discussions, we are not inclined to uphold the assessee’s grievance with respect to denial of adjustment for capacity underutilization. Inclusion of three comparables, namely (a) Crossdomain Solutions Ltd (b) Maple eSolutions, and (c) Vishal Information Tech Ltd. challenge by assessee - Held that:- As evident from the working even if all the three comparables agitated by the assessee are excluded, the ALP adjustment worked out on the basis of the revised margin will be much more than the revenue realized from the non AE. Since, in terms of the DRP directions, the ALP of the international transactions is required to be restricted to the revenue realized from the non AE, i.e. ₹ 12,13,50,108, it is wholly academic whether the ALP on the basis of the comparables adopted by the assessee is ₹ 12,50,03,640, on the basis of comparables agreed to by the assessee, or is ₹ 13,46,20,929 as worked out by the TPO, on the basis of comparables adopted by him. In either of the situations, the ALP adjustment will be restricted to the difference between the transaction value (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee is engaged in the business of providing information technology enabled services in the areas of insurance claim processing, mortgage loan processing and document processing services. During the year under consideration, the assessee entered into transactions in respect of information technology enabled services, amounting to ₹ 10,39,29,814, with its associated enterprises- namely Fortune Infotech (USA) Inc (Fortune US, in short). The assessee also entered into international transactions, aggregating to ₹ 13,90,58,591, with Fidelity Information Services Inc, USA (Fidelity US, in short)- a company which was, so far as material point of time is concerned, not an associated enterprises. The assessee s contention was that since the margins earned by the assessee on its transactions with non-AE are lower than the margins earned by the assessee on its transactions with the AE, the transactions with the AE should be treated at an arm s length price. The PLI of the AE comparable (non-AE segment) was arrived at (-) 3.82% on cost, whereas PLI of non-AE segment was arrived at (-) 21.75% . The TPO was of the view that as far as benchmarking on internal TNMM is concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customers , the DRP did direct the TPO to restrict the quantum of adjustment to the amount actually received by the AE from the third parties . Accordingly, even though the ALP determined by the TPO was ₹ 13,46,20,929 as against the transaction value of ₹ 10,39,29,814, the Assessing Officer restricted the ALP to ₹ 12,13,50,108, i.e. the ultimate sale revenue received by the AE from the end customer, and made the ALP adjustment of ₹ 1,74,20,294 (i.e. ₹ 12,13,50,108 minus ₹ 10,39,29,814). The assessee is not satisfied by this action of the Assessing Officer, as he contends that any adjustment beyond the actual income earned by the AE would result in attributing to the appellant higher than the global profit earned by the group as a whole which is against the basic fundamental of transfer pricing. On this issue also thus, not satisfied by the orders of the authorities below, the assessee is in appeal before us. 9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 10. We have noted that during the course of the hearing before us, learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CUP, as long as transactions are established to be bonafide, could be slightly different. There are no yardsticks of universal application. However, the mandate of Section 92C(1), read with rule 10C, is unambiguous. A method selected for benchmarking must be a permissible method to be included in the consideration zone, but even it s presence in the consideration zone is not good enough to justify its application for benchmarking the international transactions on the facts of a particular case because such a method has to be not only a permissible method but also most appropriate method having regard to all the material factors, including availability, coverage and reliability of data necessary for application of such a method. The method selected for benchmarking must not only be a permissible method but it also be the most appropriate method on the facts and circumstances of that case and vis- -vis the other methods which can be applied on the facts of that case. The selection of most appropriate method is not simply deciding a question as to what is permissible and what is not permissible, because, as is elementary, everything permissible in law, as indeed in all walks of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f adjudication at the assessment as well as appellate stage. The TPO has a right, as indeed duty, to examine whether a particular method adopted by the assessee is indeed most appropriate method of determining arm s length price on the facts of a particular case. One of the important factors governing the decision on as to what will constitute the most appropriate method, as set out in rule 10C(1)(c) above, is the availability, coverage and reliability of data necessary for application of the method . The availability of data, with respect to a particular method vis-a-vis other methods of determining the ALP, is thus one of the crucial factors in deciding whether that particular method of determining the ALP is most appropriate method of determining ALP on the facts of that case, or not. When only one comparable is available for application of a particular method, this serious limitation on the availability of data, in our considered view, certainly relegates its appropriateness vis-a-vis other alternate methods available, such as external TNMM, in respect of which sufficient, and essentially reliable, data is available. For this short reason alone, the internal TNMM is certainl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee, however, is not content with this. He contends that since the AE has incurred certain expenses to earn this revenue, the expenses so incurred by the AE should also be reduced from the revenue, so realized by the AE, to arrive at the correct arm s length price of the service. The underlying conceptual justification for this proposition is that the ALP adjustment should be restricted to the overall profits of the group as a whole. In support of this proposition, the written submissions filed by the assessee sets out the following reasoning: The Appellant submits that the Fortune group as a whole has incurred loss and if the Appellant had directly entered into agreements with the ultimate customers it would have incurred more losses. The group has incurred losses on account of fall in the overall revenues of the business which shows that no profits have been shifted from the Appellant to its AE. The Appellant further submits that, since the Hon ble DRP has directed the learned TPO to restrict the quantum of adjustment of the Appellant to the price received by the AE from its third party, the expenditure incurred by the AE should also be allowed as a reduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if Fortune USA i.e. the AE incurs such expenditure on behalf of the Appellant, the AE should be adequately remunerated for the same. Since, the group has not been able to make profit out of the transaction, in a worst case scenario all the revenues may be attributed to the Appellant India; however, that would mean that the AE which has played a dominant role in obtaining business is not even reimbursed for the expenditure it has incurred on obtaining business; effectively, the AE will have to pay this amount of expenditure from its internal resources which is an absurd proposition envisaged in the decision of Global Vantedge (supra). An alternate way of looking at this is if the AE was not in picture and the Appellant was required to perform the marketing and business development function, the Appellant would have to incur this expenditure by itself. No doubt in such cases, all the revenues would have also accrued to the Appellant as is purported to be interpreted of the decision of Global Vantedge. But since, the expenditure would have also been incurred by the Appellant to earn entire revenues, the net benefit to the Appellant would have been only the profit and not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India should not suffer due to the adjustment of price for goods or services between the related enterprises. The contention of the learned Authorised Representative that the entire exercise of determining ALP of the transactions between the two enterprises is useless as the price charged or paid by one enterprise to another AE is tax-neutral on totality, therefore, is sans merit. The payment of tax by the AE abroad does not contribute anything to the Indian Exchequer. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. If we agree with this submission of the learned Authorised Representative that as the ultimate tax liability of the assessee together with its AE does not vary even if the lower price is charged inter se and hence the exercise done by the TPO be held as fruitless, then the provisions of ss. 92 to 92F would become redundant 14. Oblivious of this development, another coordinate bench, in the case of Global Vantedge Pvt Ltd Vs DCIT and vice versa [(2010) 37 SOT 1 (Del)] touched a different chord. That was a case in which, as it appears from the limited facts stated in the body of this decision, there was a line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken by the CIT (Appeals). It is in these circumstances that the Tribunal concurred with the view taken by the CIT (Appeals) In these circumstances, we do not find any substantial question of law which arises for our consideration in these appeals. Hon ble Supreme Court, vide order dated 2nd January 2014, dismissed the special leave petition filed against this judgment of Hon ble Delhi High Court. The matter has thus reached finality. 16. These somewhat parallel developments, even as these developments have quite different approaches, do not lead to any conflict and both of these decisions deserve utmost respect from us. Clearly, there is a meeting ground. In our humble understanding, these two decisions are distinct in approaches but then these decisions, for all practical purposes, cover two different set of circumstances. In Gharda s case (supra), the coordinate bench was dealing with a situation in which the global profits of the assessee, as a whole, were a negative figure, and it was for this reason that the assessee contended that the arm s length price adjustment cannot be made in respect of the international transactions on which losses are incurred and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of CIT vs. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], a judicial precedent is only an authority for what it actually decides and not what may come to follow from some observations which find place therein . That apart, what is being relied upon is not even an observation of the coordinate bench but an observation in an order of the lower judicial forum conclusions of which have been approved by the coordinate bench. 17. In the case of App Lab Technologies Pvt Ltd Vs DCIT [(2014)149 ITD 99 (Hyd)], however, it was noted by the Tribunal that the Dispute Resolution Panel has gone a step further and held that we concur with the assessee on this issue that the adjustments, if any, cannot exceed the global profits earned by the group from those transactions . Taking note of these directions of the DRP, and the fact that the Assessing Officer has not giving proper effect to these directions, the coordinate bench remitted the matter to the file of the Assessing Officer. While doing so, the coordinate bench has also observed as follows: 10. On a plain reading of the aforesaid extracted portion (of the DRP s order), it is very much clear that the DRP has held that adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses in his line of commercial activity, are less than the transaction value, or within 5% range of the same, the same will have to be accepted as an arm s length price by the Assessing Officer. The functional profile of the AE, as also other related factors such as weightage to this functional profile in terms of the revenue allocation, will also have to be examined. As the matter is being remitted to the file of the Assessing Officer for fresh adjudication de novo in the above light, we also consider it appropriate to leave it open to the assessee to raise any such legal or factual issues, with respect to this aspect of the matter, as he may be advised to, and the Assessing Officer will be deal with the same by way of a speaking order, in accordance with the law and after giving due opportunity of hearing to the assessee. 21. As we remit the matter to the file of the Assessing Officer for fresh adjudication on the above issue and in terms of our specific directions set out earlier in this order, we may also deal with the two factual grievances of the assessee. Coming back to the factual aspects, the assessee s twin grievances are with respect to the selection of comparables and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. We have heard the rival contentions, perused the material on record and duly perused the material on record in the light of the applicable legal position. 25. In our considered view, merely because the employee costs of the assessee are higher, it does, in our considered view, lead to the conclusion that there is an underutilization of capacity. It is also a matter of record, as noted by the assessee in the written submissions, that the underutilization is much more in the case of non AE transactions inasmuch as the employee costs to turnover ratio in AE segment is 76% whereas in non-AE segment it is 97% . There is no specific submission and quantification on the fact, if at all, of the underutilization of capacity. The factual elements embedded in the submissions are not at all established. There is no room for vague generalities and over simplifications, as the impact of underutilized capacity is to be, with reasonable precision, quantified and then only it can be adjusted. The exercise of quantifying the capacity underutilization has not been carried out at all. There is not even whisper of a discussion, on this aspect of the matter, in the orders of the authorities bel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment . There is no, and cannot be any, quarrel with this proposition but that does not advance the case of the assessee either. The same is the position with respect to the decision of another coordinate bench in the case of DCIT Vs Petro Araldite Pvt Ltd [(2013) 1145 ITD 185 (Bom)]. This decision was in the context of depreciation and it had nothing to do with this also does not deal with a situation in which higher employee cost in percentage terms, by itself, leads to the conclusion that there is an underutilization of capacity. The judicial precedents cited before us donot thus support the case of the assessee. 28. In view of the above discussions, we are not inclined to uphold the assessee s grievance with respect to denial of adjustment for capacity underutilization. 29. That leaves us with the assessee s grievance against the inclusion of three comparables, namely (a) Crossdomain Solutions Ltd (b) Maple eSolutions, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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