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2016 (6) TMI 172

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..... d 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 - Decided in favour of assessee in part Disallowance made u/s. 14A - Held that:- Provision of Rule 8D cannot be applied for the year under appeal, as held by the Hon’ble Bombay High Court as in the case of Godrej Boyce Mfg Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT ). However, a reasonable disallowance could be made. It is a fact that the assessee had made investment in the AE. s. , that the AO had not proved that interest free funds were used by the assessee to m .....

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..... ssee-company is a wholly owned subsidiary of VALCON, which is part of the AC Nielsen group. It is engaged in the business of providing customised market research services including quantitative and qualitative consumer studies, print media measurement services and retail measurement services 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 ₹ 18. 12 crores. The AO completed the assessment on 24/10/2011, determining the income of the assessee at ₹ 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 ₹ 11. 14 crores to its AE, that the said paymen .....

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..... t no one would pay any amount without knowing the actual basis and also the actual allocation figures in a third-party situation, that the assessee had its own client/server system, that total allocation could not be accepted to be India specific. He held that adjustment had to be made in the TP order. Accordingly, he made an adjustment of ₹ 4. 50 crores (50% of ₹ 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 ₹ 21. 77 crores, its operating costs were ₹ 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 b .....

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..... odhtree Consulting Ltd. (Seg. ) 2. 94 29. 58% 8. Caliber Point Business solutions Ltd. 39. 30 21. 26% 9. Cosmic Global Ltd. 4. 28 12. 40% 10. Datamatics Financial Services Ltd. (Seg. ) 2. 92 5. 07% 11. Eclerx Services Ltd. 86. 12 103. 72% 12. Flextronics Software Systems Ltd. (Seg. ) 21. 41 14. 54% 13. Genesys International Corporation Ltd. 19. 17 13. 35% 14. HCL Comnet System Services Ltd. (Seg. ) 260. 18 44. 99% 15. ICRA Techno Analytics Ltd. (Seg. ) 7. 23 12. 24% 16. Informed Technologies India Ltd. 4. 08 35. 56% 17. Infosys BPO Ltd. 649. 56 66. 14% 18. IServices India Pvt. Ltd. 16. 29 50. .....

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..... laim hundred percent deduction of its profits under section 10 A of the Act. After considering the available material, the DRP held that during the TP proceedings it had to be seen that whether the charges paid by the assessee for intra-group services were at arm s-length under comparable circu -mstances, that it had to be seen whether the assessee would get any economic or commercial value, that the expected benefit had to be sufficiently direct and substantial, that the taxpayer had to prove that the services were rendered, that one important aspect of intra group services was the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived therefrom to conform to the arm's length principle, that the arm's length charge was not only a function of the price at which a supplier was prepared to perform the service (or the cost of providing the service)but was also a function of the value the recipient of the service, that the determination of an arm's length charge must take into consideration the amount that an arm's length entity would be prepared to pay for such a service in comparable circumstances, that if the serv .....

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..... nce on the price for margin in the current year, that the TPO was correct in using the data pertaining to FY. 2006-07, that he had correctly applied threshold limit of 25% in applying related party transactions filter. Finally, the DRP upheld the order of the TPO/AO. With regard to BPO services the DRP held that the cost allocation was not correctly placed before him, that the segmental accounts furnished by the assessee were not reconciled, that he proceeded to determine the ALP for the BPO segment on the basis of TNMM, that as compared to 25 comparables he determined the average PLI of 33. 09%, that upward adjustment of ₹ 4. 87 crores, made with regard to BPO services payment received, was justifiable. 2. 5. Before us, the AR argued that the AO had failed to appreciate that the existence of a inter-group agreement, cost-allocation report and maintenance of a contemporaneous documentation provided good supporting to demonstrate arm's length nature of the service charges, that the assessee had maintained all relevant documents, correspondence, back-up calculations including invoices / debit notes, reconciliation statement for India, that the ratio analysis of region wi .....

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..... iii). communica-tion, iv). humanresources, v). client service and vi). legal from the AE, that it had submitted evidence in connection with the various services received and key benefits derived from the email correspondence(Pg. 684-1012 of the PB), that it had made detailed presentation before the DRP(Pg. 583-600 of the PB). After mentioning the facts about BPO, we would further deliberate upon the issue of filing of evidences by the assessee during the TP and DRP-hearing. Coming back to facts of the case we want to mention that the TPO disallowed 50% of the region allocation expenses amounting to ₹ 4. 50 crores on the ground that there was no proper basis of allocation and backup calculations were not shared, that the DRP had increased the disallowance to hundred percent of the regional allocation expenses. 2. 7. With regard to BPO services, we find that the assessee had set up an In- House Regional Resource Centre(RCC) division in Mumbai to standardise the office processes, that one more division i. e. EUREKA was set up in Baroda in year 2005, that it became operational from the year 2006, that the RCC division would provide services to its AE. s such as data-proces .....

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..... served by assessee with the support of Regional client service team and thus proves as to how the services received from the regional center benefitted the assessee. We find that while making submissions before the DRP on 29. 06. 2011, the assessee had filed Annexure 1 and it had furnished the details of rendering of services. Therefore, we do not agree with the TPO/DRP that details of actual services rendered were not made available. In the submission made on12. 10. 2010 and 29. 06. 2011 details of actual expenditure incurred by AC Nieslen Corp under Regional Area GSA charges were furnished to the Departmental authorities. 2. 8. It is not denied by the TPO/DRP that expenses incurred by ACNielsen Corporation were not allocated to all the group entities on the basis of revenue. The assessee had made a claim that ACNielsen Asia Pacific has prepared a master file to determine an arm's length mark-up to be charged for the intra-group services. Both the authorities has not commented upon the said evidence and alleged errors, if any, of the method approved by the Group. In short, the assessee had proved with documentary evidences that charges paid by the assessee were at arm s l .....

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..... is is the domain of the busi nessman and the Transfer Pricing Officer has no say in the matter. As held by the Supreme Court in S. A. Builders Ltd. v. CIT (Appeals) [2007] 289 ITR 26 (SC) the Revenue cannot justifiably claim to place itself in the arm chair of businessman or in the position of the board of directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case. 22. Even rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of rule 10B. Whether or not to enter into the transaction is for the assessee to decide. . . . . . . . So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the Transfer Pricing Officer to disallow the same on any extraneous reason .....

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..... hey were direct or indirect fixed or variable, managerial or financial, that the disallowance was to be made as per provisions of Sec. 14A r. w. r 8D of the Income tax Rules (Rules). He made disallowance of ₹ 2. 78 lakhs towards expenditure in relation to income not includible in the total income, in the draft order. 3. 1. Aggrieved by the order of the AO the assessee filed objections before the DRP. Before it, the assessee argued that it had not invested borrowed funds for making investments, that disallowance made by the AO was not as per the provisions of law. Without prejudice, it was contended that disallowance under Rule 8D should be restricted to ₹ 28, 880/- and not to 0. 5% of the entire investment. The DRP held that the AO had duly followed the procedure laid down under Rule 8D, that no interference was required in the matter. 3. 2. Before us, the AR stated that provisions of Rule 8D were not applicable in the year under consideration, that investment was made in the four AE. s, that the strategic investment made by the assessee was not considered by the AO. He referred to the matter of Strides Arcoled Ltd. (138ITD323). The DR left the issue to the discre .....

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