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2016 (9) TMI 403 - ITAT BANGALORE

2016 (9) TMI 403 - ITAT BANGALORE - TMI - Transfer pricing adjustment - whether the price determined under MAP mechanism can be adopted even in respect of non- MAP transactions? - Held that:- We are of the considered opinion that this issue can be decided only by the TPO after undertaking FAR analysis of non-US transactions with a view to find out whether there is any distinction in the factors influencing the price between US and non-US transactions. Even in the decision relied on by the learne .....

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re, we are of the considered opinion that the matter be restored to the file of the TPO/AO for fresh analysis on the lines between US and non-US transactions and if it is found that factors influencing the price are similar between US and non- US transaction, the price adopted for US transactions may be adopted for non-Us transactions also. - Before we part with, we must make it clear that it is open to the TPO to examine the validity of the proposition that price adopted under MAP mechanism .....

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reduce the telecommunication expenses from the export turnover as well as the turnover while computing deduction u/s 10A of the Act. - IT(TP)A No.1302/Bang/2010 - Dated:- 22-7-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri K.R.Vasudevan, Advocate. For The Respondent : Shri P.Chandrashekar. CIT(DR). ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee directed against the order of assessment order passed u/s 14 .....

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roviders differ from that of the appellant. b) The Honourable DRP and the learned AO have erred in rejecting CUP data on the grounds that the employee cost to sales ratio of the third party service providers differ from that of the appellant. c) The Honourable DRP and the learned AO have failed to appreciate the fact that for the applicability of CUP method the nature of services and the price of the transactions should be compared and not the margins earned by the parties. d) The Honourable DRP .....

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AO grossly erred in not appreciating the fact that the services rendered by the appellant and the third party service providers are identical. g) The Honourable DRP and the learned AO have erred in not appreciating the existence of comparability between the services rendered by the appellant and the independent unrelated third party service providers. h) The Honourable DRP and the learned AO have erred in not appreciating the fact that all the relevant copies of the agreements, contracts, etc w .....

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ntre services segment. Notwithstanding the above, a supplementary analysis has been carried out by the appellant using the Transaction Net Margin method (hereinafter referred to as "TNMM") as an alternative method to test the international transactions. The following common conceptual objections arises Common Conceptual Objections - for both segments The Honourable DRP and the learned AO grossly erred in upholding the income adjustment proposed by the learned TPO in arriving at the ALP .....

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ct that the appellant has conducted an exhaustive and elaborate benchmarking analysis, to arrive at a set of companies that are broadly comparable with the appellant in respect of functions performed, assets employed and risks assumed, and benchmarked the average net margins earned by the independent comparables with the net margins earned by the appellant. b) The learned TPO has not shared the NASSCOM reports, studies undertaken by audit firms of repute, and other articles in the print media to .....

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ntradictory statements in the Transfer Pricing Order). a) The Honourable DRP and the learned AO have erred in upholding TPO's contention of accepting the following companies with fluctuating profits. Cosmis Global Ltd. Asit C Mehta Financial Services Ltd Goldstone Infratech Ltd Ace Software Exports 3. The powers bestowed under Section 133(6) should be employed judiciously and in compliance with the principles of natural justice a) The Honourable DRP and the learned AO ought to have appreciat .....

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have grossly erred in completely ignored the fact that the learned TPO has placed substantial reliance on the information obtained through the 133(6) route to reject or accept a company without relying on the information available in the Annual report, a document that forms part of the public domain. d) The Honourable DRP and the learned AO erred in selecting comparables with different year ending selected by the TPO based on the financial information received pertaining to the period from 1st .....

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for the purposes of accepting/eliminating companies as comparables b) The TPO has erred in selecting the aforementioned threshold limit in purely arbitrary, and ad hoc manner, and without any reasonable basis. c) The Honourable DRP and the learned AO have erred in upholding the TPO's threshold limit of 25%, without taking into consideration the tenets laid down in the judicial decisions on the same grounds as issued by the Honourable Benches of the Delhi and Bangalore ITATs in the cases of .....

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he ruling of Delhi Tribunal in the case of Sony India that the RPT filter could be relaxed in the event there are not sufficient comparable companies for comparability purposes. f) The Honourable DRP and the learned AO have erred in not rejecting the following comparables proposed by the learned TPO If 0 percent is chosen as the threshold limit for RPT filter as provided in the Philips case: No. Company Name RPT % 1 Aditya Birla Minacs Worldwide Ltd 1.83% 2 Allsec Technologies Ltd 6.99% 3 Ace So .....

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R Systems International Ltd 15.39% 5. Use of contemporaneous data a) The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report. b) The Honourable DRP and the learned AO erred in interpreting the word "Shall" in Rule lOB (4) to mean that data for the same Financial Year in which the international transaction was actually entered into is a mandatory requirement. Also the Honou .....

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ination of transfer price. 6. Market Risk Adjustment should be allowed a) The Honourable DRP and the learned AO have grossly erred in accepting the learned TPO's rejection of market risk adjustment submitted by the appellant based on the Capital Asset Pricing Model (CAPM) model. b) The Honourable DRP and the learned AO have erred in not appreciating the difference in the functional profile that exists between the appellant who functions in the role of a captive service provider vis-a-vis the .....

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ation of +-5% Arm's length range a) The Honorable DRP and the learned AO have erred in supporting the learned TPO's assertion that the amended provision regarding the provision of the arm's length range as per the Finance Act 2009 was applicable to the financial year (FY) 2005-06 as well. b) The Honorable DRP and the learned AO ought to have considered the fact that the amendment introduced was with effect from 1st October 2009 and the said amendment was not retrospective in nature. .....

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needs to be applied by the TPO b) The learned DRP as well as the learned AO failed to appreciate the fact that the logic of application of this filter to the IT segment should have been extended to the ITES segment as well as even in the ITES segment, employees constitute the predominant asset. c) The Honorable DRP and the learned AU have erred in not eliminating the following comparables: • Cosmic Global Ltd • Vishal Information Technologies Ltd • Asit C Mehta Financial Services .....

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that the learned TPU failed to be consistent in his approach by not issuing the requisite notices under the provisions of Section 133(6) of the Act notices to these companies as well. 10. Datamatics Financial Services Ltd (Datamatics) should be Rejected a) The Honourable DRP and the learned AU have erred in accepting the learned TPU's contention of taking Datamatics as a comparable ignoring the submission made by the appellant. b) The Honourable DRP and the learned AU ought to have apprecia .....

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l is a comparable company on the following grounds: The company depicts a wildly fluctuating trend in revenue Employee cost as a percentage of revenue stands at 23.47% whereas the threshold limit of acceptance of a company is 25% of the revenues. 12. Vishal Information (Vishal Information) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Vishal Information is a comparable company on account of the following reason: Employee co .....

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Merged)" and is to be rejected on the basis of lack of data availability. Trend analysis of the revenue depicts an abnormal/supernormal growth for the financial year ended 31st March 2006 vis-à-vis 31st March 2005 and 31st March 2004. Percentage of employee cost to revenue is 12.22%, which is below the qualifying percentage of 25% 14. Goldstone Infratech Limited (Goldstone) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contenti .....

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abnormal fluctuations on a year-on-year basis. Percentage of employee cost to revenue is 8.68%, which is below the qualifying percentage of 25% 15. Spanco Limited (Spanco) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that Spanco Limited is a comparable company on account of the following reasons: Recourse to the provisions of Section 133 (6) of the Act and such data was not available in public domain. BPO segment comprises of .....

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tware Exports Limited (ACE Software) should be Rejected The Honourable DRP and the learned AO have erred in upholding the learned TPO's contention that ACE Software Exports Limited is a comparable company on account of the following reasons: Trend analysis conducted on the profit margins of the company depicted a wildly fluctuating trend. The Company does not qualify the employee cost filter as the personnel expenditure as a percentage of revenue for the financial year ended 31st March 2006 .....

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al report was not available for the YE 2006 and also that a notice under Sec 133(6) could not be served on the company.. b) The Honourable DRP ought to have appreciated that the learned TPO failed to be consistent in his approach by failing to issue the concerned Notice under Section 133(6) to the this company. 18. Cameo Corporate Services Limited (Cameo) should be accepted as a comparable: a) The Honourable DRP and the learned AO grossly erred in accepting the contention of the learned TPO that .....

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in considering the entire telecommunication charges as attributable to the delivery of computer software outside India although it was submitted that no part of the expenditure relating to telecommunication was incurred in delivery of computer software outside India and the provision of technical services outside India. The Honourable DRP and the learned AO have erred in not considering the contention of the appellant that the telecommunication charges are incurred for obtaining the specific ban .....

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above, the Honourable DRP and the learned AO further erred in not considering that should a portion of the telecommunication expenses be reduced from the export turnover, such expenses should also be reduced from the total turnover in arriving at the deduction under section 1OA of the Act. The Honourable DRP and the learned AO have erred in not taking cognizance of the decision of the jurisdictional Income Tax Appellate Tribunal, Bangalore in the appellant's own case on an identical issue f .....

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ion, freight and insurance expenses are reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 1OA The Honourable DRP and the learned AO erred in not placing reliance on the below mentioned judicial precedents wherein it was held that should the telecommunication, freight and insurance expenses be reduced from the export turnover then the same would also have to be reduced from the total turnover in ord .....

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T - ITA No. 30/Bang/2008 - Bangalore Tribunal; KPIT Cummins Infosystems (Bangalore)(P) Ltd. V. ACIT - 26 SOT 529 - Bangalore tribunal; ACIT v. Honeywell Technology Solutions Lab. Pvt. Ltd (ITA No. 344 & 345 Bang./2009) - Bangalore Tribunal; i2 Technologies India Private Limited v. ACIT - ITA No. 277 / Bang / 2009 - Bangalore Tribunal The appellant craves leave to add, alter and modify the above grounds during the course of the appeal. For the above and any other grounds which may be raised a .....

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declaring total loss of ₹ 14,65,65,062/-. The return of income was taken up for scrutiny assessment by issuing required statutory notice u/s 143(2) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee-company had entered into international transactions of call centre and share services with its AE located both in US and non US countries, therefore, referred th .....

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The Hon ble DRP had disposed of the objections. The AO finally passed the assessment order u/s 143(3) r.w.s.144C of the Act vide order dated 20/09/2010 incorporating the directions of the Hon ble DRP. 4. Being aggrieved, the assessee-company came in the present appeal before us. 5. While matter stood thus, the assessee-company opted for mechanism or mutual agreement procedure pursuant to Article 25 of the India-US Double Tax Avoidance Agreement with respect to TP adjustment made to revenue earn .....

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ing the grounds challenging the TP adjustment in respect of its transactions with its AE of US country. 6. Now, the assessee-company contends that even in respect of TP adjustment made in respect of non US entities AEs, same price should be adopted. In this connection, learned counsel for the assessee relied on the decision of the co-ordinate bench (Mumbai) in the case of J.P.Morgan Services P.Ltd. vs. DCIT in ITA No.8987/Mum/2010 & 7822/Mum/2011 dated 30/11/2015 wherein the co-ordinate benc .....

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between the 'US' entities and 'non-US' entities. It was further submitted that although the assessee can very well contest these additions, but this concession has come from the assessee's side with a view to bury the litigation, notwithstanding the facts that no addition should have been made as the case of the assessee falls within +/- 5% range. It was also submitted that the assessee reserves its right to contest the levy of any kind of penalty, as and when initiated, if .....

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t applicable under MAP, and therefore, no ALP was determined under MAP, and therefore, assessee cannot claim to take any benefit of the mark-up reached under MAP i.e. @ of 14.38%. Accordingly to him, the ALP should be computed freshly and independently for the remaining 4% transactions, and for this purpose this issue can be sent back to the lower authorities . 7. The assessee-company also raised the following additional grounds of appeal and submitted that the additional grounds of appeal may b .....

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d in Section I OA for claiming deduction 3. The enhanced income determined under MAID will not be covered by Proviso to Sec 92C (4), as it is applicable only to computation of income under that section. Computation of Income under MAP process will not be covered under that section, 4. Since the assessee had embarked on the MAP procedure and its acceptance of the resolution terms IS voluntary (it had the option to disregard the MAP resolution), it is in the nature of suo motu adjustment to income .....

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m) 9. We heard rival submissions and perused the material on record. The issue in appeal is whether the price determined under MAP mechanism can be adopted even in respect of non- MAP transactions. It is the submission of the assessee-company that the same price fixed under MAP in respect of US AEs can be adopted even in respect of non-US AEs. We are of the considered opinion that this issue can be decided only by the TPO after undertaking FAR analysis of non-US transactions with a view to find .....

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non-US transactions. In the absence of this analysis, comparability may not be in terms of the provisions of rule 10B(1)(2) of the IT Rules, 1962. Therefore, we are of the considered opinion that the matter be restored to the file of the TPO/AO for fresh analysis on the lines between US and non-US transactions and if it is found that factors influencing the price are similar between US and non- US transaction, the price adopted for US transactions may be adopted for non-Us transactions also. 10. .....

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