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TMI Blog2016 (6) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... vices which includes retail tracking, modeling and analytics and category manage - ment. It filed its return of income on 29/10/2007, declaring total income at Rs. 18. 12 crores. The AO completed the assessment on 24/10/2011, determining the income of the assessee at Rs. 33. 77 crores. 2. 1. During the assessment proceedings, the AO found that the assessee had entered into 36 International Transactions (IT. s) with its Associated Enterprises (AE. s). The IT. s pertained to market research service to AE, receipt of market research service from the AE, BPO services rendered to AE and payment of General Services Agreement(GCA). To determine the Arm's Length Price (ALP), he made a reference to the Transfer Pricing Officer (TPO), as per the provisions of section 92 of the Act. 2. 2. The TPO found that during the year the assessee had paid Rs. 11. 14 crores to its AE, that the said payment was made in view of business support services received from the AE. It was claimed that above-mentioned payment was in the nature of intra-group services payment. The assessee submitted to General services agreements before the TPO. He found that the first was signed on 02/06/203 and its specified a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, he made an adjustment of Rs. 4. 50 crores (50% of Rs. 9. 01 crores). He calculated the ALP as under: Payment of GSS charges -Rs. 11. 14 crores Adjustment -Rs. 4. 50 crores Arm's length value of GSA -Rs. 6. 63 crores. 2. 3. In response to the show cause regarding BPO services bench-marking, the assessee stated that during the year under review the turnover from RRC and Eureka division was Rs. 21. 77 crores, its operating costs were Rs. 13. 24 crores, that the resultant operating profit was 8. 53 crores, that the operating profit/ operating cost was 64. 39%. The TPO furnished the assessee the details of compu -tation of Margins(PLI)-ITES conducted by the Department wherein Everest operating profit/operating cost was worked out at 33. 09%. Referring to the competition of margin, the assessee contended that operating profit/operating cost, shown by it, was far more favourable in comparison to the 33. 09%, that no addition was called for to the income from BPO operations. The TPO observed that the assessee had not provided segmental data with supporting evidences. He did not accept the cost allocation between various segments. He observed that the computation of operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 113. 49% 21. R Systems International Ltd. (Seg. ) 17. 34 20. 18% 22. Spanco Ltd. (Seg. ) 35. 00 25. 81% 23. Triton Corp Ltd. 53. 37 34. 93% 24. Vishal Information Technologies Ltd. 30. 60 51. 19% 25. Wipro Ltd. (Seg. ) 939. 78 29. 70% Average 33. 09% He reworked the IT, in the BPO segment as under : Particulars Amount(Rs. ) Total operating cost of the assessee company 1, 248, 591, 404 Operating cost as it pertains to BPO segment(#) 192, 012, 762 Arm's length operating margin ratio 33. 09% Arm's length operating margin 63, 537, 023 Arm's length sales value in respect of BPO services 255, 549, 786 Actual sales value in BPO segment 206, 750, 103 Adjustment required 48, 799, 683 Thus, he proposed an adjustment of Rs. 9. 38crores(Rs. 4. 50crores and Rs. 4. 87 crores) to the total income of the assessee. The AO included the above figure in the draft order. 2. 4. Aggrieved by the order of the AO and the draft order of the AO, the assessee objections before the Dispute Resolution Panel (DRP). Before it, the assessee contended that the assessee had filed segmental accounts before the TPO though same were not audited. On 29/0/2011, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup the same should not be charged, that unless it was shown that tangible and direct benefit was derived by such payment or that the payment made was commensurate with the benefit that was derived or expected to be derived when parties would deal with each other at arm's length the APL of such payment for intra group services would be treated as either Nil or to the extent it was shown that the benefit actually derived from such payment, that the assessee did not prove before the TPO or before the DRP that the paymeny, for the so called services rendered by the AEs, would be at arm's length, that the TPO was liberal and had allowed 50% as ALP in respect of regional cost allocation, that no services were rendered during the FY. 2006-07, that the ALP should have been Rs. Nil, that the assessee had its own client service team and, that no details of specific allocation had been provided, that the allocation of cost could not be accepted to be India specific. With regard to Regional Client Service team, the DRP observed that India had its own client service team, that there was no rationale for making the payment. Finally, the DRP held that no administrative services were ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee and that he rejected the audited segmental accounts, that the TPO' s approach of allocating cost based on revenue is not justified, that he erred in applying the search filters and hence the comparable companies proposed by him were not acceptable, that the BPO Services rendered by assessee were adequately remunerated. . He referred to the Pg. 207-214, 471-484, 488-89, 493, 684-1012 of the PB. The DR supported the order of the DRP and contended that IT. s were to be analysed separately. 2. 6. We have heard the rival submissions and perused the material before us. We find that the assessee had filed, before the TPO, details of GSA fees, debit-notes based on projected revenue and true calculation based on actual revenue and the invoices copies raised by the AE. s, vide its letter dated 24/09/2010 (Pg. 363-65 of the PB), that the cost allocation report(Pg. 373-470 of the PB)was also furnished, that the detailed breakup of GSA charges, service-wise, was also made available to the TPO, that the cost allocation methodology was explained in details. With regard to Pass-through-cost (PTC) it is found that no markup was charged, that markup was charged for non-pas-through-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earlier paragraph, now would like to discuss the details that were furnished in addition to the documents mentioned at paragraph no. 2. 6. We find that details of influencer survey carried out by the AE in case of Wipro Infotech was shared with the assessee along with the details of other projects undertaken by the it for companies like P&G Cadbury (Regional AAC). Details of service provided under the head finance included Installation of Hyperion Smartview for HFM training, Discussions regarding HFM training and account mapping, Discussions regarding budgeting, Communications regarding HFM Migration and elimination of month lag and HFM training materials, Communication of updated AP user list for HFM/CCU3 application and discussion on client concerns, design recommendations/changes, technology constraints, financials for the staffing approvals for GBS India. In the field of Legal services the AE provided services including advice for query relating to database building, Reviewing and suggesting changes for Coke(India)Tradesampling agreement, Revie - wing and suggesting changes for a draft MOU between India plaza (earlier Fabmall)and ACNOM, Review of draft ACN-Eikona Contract for m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the argument of both the authorities that if the assessee had its own client service team then why costs of client service teams was included. According to us, it is gross violation of the 'Laman-Rekha' drawn by the basic and fundamental taxation jurisprudence. No authority is required to hold that the jurisdiction of the AO u/s. 37 of the Act and that of the TPO u/s. 92CA are distinct. The authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether or not there is a service from which the assessee benefits. So, when the TPO holds that the assessee did not benefit from these services it amounts to disallowing expenditure. Such a decision is outside the authority of the TPO. The decision as to whether the expenditure was "laid out or expended wholly and exclusively for the purposes of the business" is a fact determination or verification and that exercise is to be undertaken by the AO. That determination is not and cannot be made by the TPO. The Hon'ble Delhi High Court in the case of Ekl Appliances Ltd. (345 ITR 241) has held as under: "It is not open to the Transfer Pricing Officer to question the judgment of the assessee as to how it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables selected by the TPO(Pg. 601-10 of the PB). We do not find even a single word about the objection of the assessee with regard to the comparables. The TPO is authorized to select the comparables, but it is his duty not only to mention the methodology of selection process and to meet the objections raised by the assessee about the selection process or the selected comparables. Considering the above, we hold that the assessee had produced all the necessary documents and that the TPO and the DRP did not consider the same while passing/issuing the order/Directions. Therefore, in the interest of justice, we are of the opinion that the matter should be restored back to the file of the DRP who would decide the both the issues afresh after affording a reasonable opportunity of hearing to the assessee. Objections raised by the assessee, with regard to comparables have to be dealt case by case. Effective ground dealing with TP adjustments(GOA 1&2)are decided in favour of the assessee, in part. 3. The next ground of appeal is about disallowance made u/s. 14A of the Act. During the assessment proceedings, the AO found that the assessee had shown investment in shares of Rs. 5. 55crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0lakhs. During the assessment proceedings, the AO handed over a copy of AIR information, as generated from the system and asked it to reconcile the account. As per the AO the assessee was able to reconcile all the items except one item of Rs. 17, 32, 053/- received under the head rent. The AO added the amount in question to the total income of the assessee while preparing the draft order. The assessee filed objections before the DRP in that regard. The DRP upheld the order of the AO. 4. 1. Before us, the AR stated that assessee had not made any transaction with the parties in the AIR. He relied upon the cases of ANS Law Associates (ITA/5181/M/2012 dt. 5. 12. 14), S. Ganesh(ITA527/Mum/10 AY06-07), Thread Needle Investment Fund ICVC Asia Fund (27 taxmann321). The DR stated that the issue could be decided on merits. 4. 2. We have heard the rival submissions and perused the material before us. We find that in this case the addition was made only on the basis of AIR report, that the assessee had specifically mentioned that the entries did not pertain to it. In our opinion, the AO should have made further investigation before making the addition. If the disputed amount pertained to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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