9911796707
TMI Blog2016 (3) TMI 1121X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding two types of services to its Associated Enterprise (AE) i.e. Digitising Services and Data Conversion/Creation Services. Both the services fall under the ambit of IT enabled services. During the course of assessment proceedings, the Assessing Officer observed that the assessee has carried out international transactions of more than Rs. 5 Crores. Therefore, he referred the matter to the Transfer Pricing Officer (TPO) u/s. 92CA of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The assessee during the period relevant to the assessment year under consideration had shown total sales of Rs. 11,07,77,000/- out of which international transactions with its AE were to the tune of Rs. 11,07,46,207/-. Apart from the above said international transactions, there were transactions amounting to Rs. 1,31,701/- relating to import of consumables and spare items. All the transactions were relating to the activity of providing IT enabled services. For benchmarking the transactions and determining Arm's Length Price (ALP) the assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method. For applying TNMM the assessee used Profit Level Indicator (PLI) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has raised following grounds in appeal: "1. General: 1.1. The honorable CIT (A) erred in law and on the facts and in circumstances of the case in confirming to the transfer pricing adjustment to the value of international transactions pertaining to Information Technology (IT) Enabled services made by the learned TPO of Rs. 1,57,97,452 entered into by the Appellant by rejecting the analysis undertaken by the Appellant in the Transfer Pricing Report to determine the arm's length price for its international transactions pertaining to export of services. 2. Rejection of functional adjustment made to PLI of the Appellant 2.1 The honorable CIT (A) erred in law and on the facts and in circumstances of the case in rejecting the functional adjustment made by the Appellant to its Profit Level Indicator. 3. Rejection of two comparable companies from the Transfer Pricing analysis 3.1 The honorable CIT (A) erred on the facts and in circumstances of the case in confirming the rej ection of the independent comparable companies "F I Sofex Ltd." and Fortune Informatics Ltd. (now known as "Intense Technologies Ltd".) selected by the Appellant in its Transfer Pricing. 4. Transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is working on unit cost. The ld. AR referred to the contract between the CVJV Inc. USA and the assessee for the export of Embroidery Software design development effective from 01st April, 2003 at pages 226 to 228 of the paper book. The ld. AR also furnished revised PLI computation after adjusting the salary and employee cost of the assessee and the comparable companies. The ld. AR placed reliance on the following decisions of the Tribunal in support of his contentions that capacity utilization adjustment should be granted : i. Amdocs Business Services (P.) Ltd. Vs. DCIT, 54 SOT 46; ii. Genisys Integrating Systems (India) Pvt. Ltd. Vs. DCIT in ITA No. 1231/Bang/2010 decided on 05-08-2011; iii. Tasty Bite Eatables Limited Vs. ACIT in ITA No. 1682/PN/2011 decided on 10-06-2015. iv. DCIT Vs. Claas India Pvt. Ltd. in ITA No. 1783/Del/2011 decided on 12-08-2015. 4.1 The ld. AR further submitted that the authorities below have erred in excluding F I Sofex Limited and Fortune Informatics Limited from the list of comparables on the ground that they are loss making companies. Whereas a perusal of year wise details of operating margin ratio of both the entities at page 293 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evident that the claim of the assessee is not based on any acceptable norms and is merely a superficial calculations. In respect of rejection of two comparable companies the ld. DR contended that both the companies during the period relevant to the assessment year under consideration had substantial loss and were having negative operating margin. Therefore, they were rightly rejected by the TPO and the Commissioner of Income Tax (Appeals). The ld. DR submitted that as far as ground no. 4 raised in the appeal with regard to benefit of safe harbour +/- 5% is concerned the provisions of section 92C(2) have been amended by the Finance Act, 2012 with retrospective effect from 01-04-2002. Therefore, the assessee cannot claim the benefit of +/- 5%, if the difference between the ALP determined by the TPO and actual price charged is beyond the +/- 5% margin. 6. The ld. AR of the assessee controverting the submissions made on behalf of the Department submitted that under utilization capacity adjustment is to be made on comparables and not on the tested party. The ld. AR fairly admitted that ground no. 4 raised in the appeal relating to +/- 5% safe harbour has to be decided against the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d because the entire capacity created is for the purpose of business of the holding AE. The under utilization of the capacity can only be possible if the holding AE is not performing well. The fact that the assessee has increased the working capacity during the year has not been examined by the authorities below. The TPO and the Commissioner of Income Tax (Appeals) rejected the contentions of the assessee merely on the ground that the assessee is a captive unit of holding AE, therefore, the entire production capacity will be monitored and utilized by the holding company alone. The TPO and the Commissioner of Income Tax (Appeals) have erred in not examining the factual aspect of increase in output capacity before rejecting functional adjustment made to the PLI. The contention of the assessee is that it had increased the capacity in anticipation of new vistas. We do not concur with the view of Commissioner of Income Tax (Appeals) that future business demands can be predicted with accuracy by using modern business management tools. If that would be the case, no business venture would fail. The future is uncertain, market forces play a vital role in providing buoyancy to new business v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd. in ITA No. 1848/Mum/2009 decided on 30-04-2010 and in the case of Ariston Thermo India in ITA No. 1455/PN/2010 decided on 25-06-2013 and granted the benefit of low capacity utilization to the assessee. 11. The Delhi Bench of the Tribunal in the case of DCIT Vs. Claas India Pvt. Ltd. (supra) while dealing with the issue of capacity utilization in an elaborate manner bifurcated the issue in two parts i.e. capacity adjustment, allowable in whose hands and how to compute capacity adjustment under TNMM. The relevant extract of the order of Tribunal reads as under: "8. We have heard the rival submissions and perused the relevant material on record. Before embarking upon the question of allowability and extent of capacity adjustment under the TNMM, we want to make it clear that the assessee reduced its operating costs by considering its capacity utilization vis-à-vis that of comparables and resultantly claimed that its increased profit as a result of such reduced operating costs be compared with that of the comparables. The TPO has also agreed in principle with the otherwise availability of the capacity adjustment. The issue of allowing capacity adjustment before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction." 9.2. Sub-clause (i) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market.' It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used for the purposes of making comparison with the net profit margin realized by the assessee from its international transaction as per sub-clause (i). 9.3. Sub-rule (2) of Rule 10B provides that the comparability of an intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. ii. How to compute capacity utilization adjustment under TNMM: - 10.1. Under the TNMM, the ALP of an international transaction is determined by computing and comparing the percentage of operating profit margin realized by the assessee with that of the comparables. We have noticed above that the difference in the capacity utilizations is an important factor, which needs to be adjusted. No mechanism has been given under the Act or the rules for computing the amount of capacity utilization adjustment. 10.2. On an overall understanding, we feel that under the TNMM, the first step in granting capacity utilization adjustment is to ascertain the percentage of capacity utilization by the assessee and comparables. There c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling down the fixed costs incurred by B so as to make it fully comparable. This we can do by reducing the fixed costs of B to Rs. 50 (Rs.100 into 25/50) as against the actually incurred fixed cost by it at Rs. 100. When we compute operating profit of B by substituting the fixed costs at Rs. 50 with the actually incurred at Rs. 100, it would mean that the fixed costs incurred by the assessee and B are at the same capacity utilization level. 10.3. Turning to the facts of the instant case, we find that both the TPO as well as the ld. CIT(A) have proceeded on a wrong premise not only by allowing capacity utilization adjustment in the assessee's profit, which is contrary to the legal position as discussed above, but also by considering all the comparables as one unit with the average percentage of their respective capacity utilizations. It is further observed that in the calculation of such capacity utilization ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47.63 (42.02) 2001-02 (20.83) 3.74 2000-01 6.45 4.35 1999-00 48.70 29.11 13.2 The contention of the assessee is that the said companies cannot be rejected merely on the ground that in a particular year, the companies have incurred losses. We find merit in the contention of the ld. AR of the assessee. A comparable can be rejected only if it is a consistent loss making company and the consistent loss making company is one which sustains losses in the three consecutive financial years. The Pune Bench of the Tribunal in the case of M/s. Bobst India Private Limited Vs. DCIT (supra) has held as under: "5.4 Further, we find in the case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai 'K' Bench, wherein the TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. The Tribunal looked into the business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliminated, the entity should be included as a comparable." 15. In the case of Cummins Turbo Technologies Limited Vs. DDIT (International Taxation) (supra) the Co-ordinate Bench of the Tribunal observed that where the assessee has taken super loss making companies in the list of comparables. The burden is on the TPO to prove that such comparable companies are consistent loss making companies. The relevant extract of the findings of Tribunal are as under: "14. We find that in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s.92CA(3) of the Act. We accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
