TMI Blog2016 (11) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into account for determining the ALP of the international transaction undertaken by the assessee, the size of some of the companies in the whole lot of comparable companies, becomes meaningless. Averaging of the profit rates of the whole lot of functionally similar companies of different sizes, viz., some having higher while some others having lower turnover vis-à-vis the assessee, irons out the effect of such differences. The Hon’ble jurisdictional High Court in the case of ChrysVapital Investment Advisors (India) Pvt. Ltd. vs. DCIT (2015 (4) TMI 949 - DELHI HIGH COURT ) has held that high profit/turnover cannot be a criteria to exclude an otherwise comparable company. This issue being no more res integra, does not deserve the acceptance by us of the argument advanced on behalf of the assessee. We, therefore, hold that the TPO was justified in applying this filter. Companies who have less than 25% of the revenues as export sales were excluded - Held that:- the assessee’s export revenue is roughly 21% of total revenue. If we apply the filter of excluding the companies having less than 25% of the revenue’s from export sales, it would tend to eliminate the companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO. Disallowance of adjustment on account of idle capacity - Held that:- The effect of differences between the international transaction and comparable uncontrolled transactions is always given in the net operating profit margin of the comparable uncontrolled transactions. There is no mandate for adjusting the assessee’s profit margin under the provisions of Rule 10B(1)(e). The assessee’s contention that its operating costs should be reduced to the extent its employees remained idle is, ergo, incapable of acceptance. The adjustment, if any, could have been allowed, if the assessee had demonstrated that the comparable companies had more under-utilization of their labour force vis-à-vis the assessee. The onus to prove such under-utilization of employees of the comparables, for claiming adjustment, squarely lies on the assessee. On a specific query, the ld. AR could not point out that the utilization of employees by the comparable companies was less than the assessee. Under such circumstances, we are of the considered opinion that no such adjustment can be granted. We, therefore, approve the view taken by the authorities on this issue. - ITA No. 6446/Del/2012 - - - Dated:- 21-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence profit on such sales is not includible in assessee's computation of total income. Similar view has been taken in Ram Lal Bechairam VS. CIT (1946) 14 ITR 1 (All). 6. Coming to the context of transfer pricing provisions, it is noticed that section 92B(1) defines `International transaction to mean a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or provision of services. Going by this definition, there can be an international transaction only between two or more associated enterprises (AEs). Since branch office is not a separate enterprise, there can be no question of treating transaction between head office and branch office as an international transaction. At this juncture, it is pertinent to note that section 92F(iii) defines enterprise to mean `a person (including a permanent establishment of such person) who is .. engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods ..of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights .. whether such activity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereby no separately identifiable income on account of this transaction. This can be understood with the help of a simple example. Suppose the Indian head office purchases goods worth ₹ 95 and transfers the same to foreign branch office at ₹ 100, which are in turn sold by the branch office for a sum of ₹ 120. The profit of the head office will be ₹ 5 (Rs.100 minus ₹ 95) and the profit of the branch office will be ₹ 20 (Rs.120 minus ₹ 100). The Indian general enterprise will be chargeable to tax in India on its world income of ₹ 25 (Rs.5 plus ₹ 20). If for a moment, it is presumed that the ALP of the goods transferred to the branch office is ₹ 110 and not ₹ 100 and the figure is accordingly altered, the profit of the head office will become ₹ 15 (Rs.110 minus ₹ 95) and that of the branch office at ₹ 10 (Rs.120 minus ₹ 110). Again the Indian general enterprise will be chargeable to tax in India on its world income of ₹ 25 (Rs.15 plus ₹ 10). There can never be any reason for an Indian enterprise to over or under invoice the goods or services to its foreign branch office because by vir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and its branch office in India are also determined at ALP so that the Indian tax kitty is not deprived of the rightful amount of tax due to it. Thus, the definition of `enterprise as per section 92F(iii) as also including its permanent establishment for the transfer pricing provisions is confined only in respect of a foreign general enterprise having a branch office in India and not vice versa. 8. Adverting to the facts of the instant case, we find that the extant assessee is also an Indian resident and as such is liable for tax in respect of the income earned in India (through its Head office in India) and also the income accruing from outside India (through its Branch office in Canada). The assessee has rightly offered income for taxation not only the amount earned by the Indian head office, but also whole of the income earned by Canada branch office. This position can be ascertained from the Annual accounts of the assessee, whose copy has been placed on record. Page C-6 of the paper book is copy of the Profit Loss Account of the assessee, which gives a figure of Revenue from services rendered. This figure has been depicted at ₹ 45.42 crore. Its break-up is availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.03.2008, were rejected. Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. Companies whose onsite income is more than 75% of the export revenues were excluded. Companies that are functionally different from that of taxpayer. 10. By applying the above filters, the list of comparables drawn by the assessee underwent change inasmuch as the TPO inducted certain new companies as comparable and also disqualified some of the companies which were considered as comparable by the assessee. The TPO computed arithmetical mean of the finally selected companies (after allowing working capital adjustment) at 24.66%. This arm s length margin was applied to determine the transfer pricing adjustment amounting to ₹ 3.09 crore. The assessee objected to the calculation made by the TPO before the Dispute Resolution Panel (DRP). The DRP vide its order dated 24.9.2012 issued certain directions. Giving effect to the direction given by the DRP, the TPO passed the consequential order on 9.10.2012 down scaling the amount of transfer pricing adjustment to ₹ 2.59 crore by way of revision in the arithmetical mean of OP/TC a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otherwise comparable company. This issue being no more res integra, does not deserve the acceptance by us of the argument advanced on behalf of the assessee. We, therefore, hold that the TPO was justified in applying this filter. (ii) Companies who have less than 25% of the revenues as export sales were excluded. 12. After considering the rival submissions and perusing the relevant material on record, we find that the assessee s export sales are ₹ 9.49 crore as against the total sales of ₹ 45.42 crore. This shows that the assessee s export revenue is roughly 21% of total revenue. If we apply the filter of excluding the companies having less than 25% of the revenue s from export sales, it would tend to eliminate the companies which are similarly placed as the assessee. In our considered opinion, this filter should not have been applied by the TPO, which has actually upset the selection process. Both the sides agreed that if, in the given circumstances, the filter of excluding the companies with export sales of more than 30% of the total revenue is applied, that would serve the purpose. In our considered opinion, this proposition put forth by the ld. AR and as acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scussed above. (iv) Companies who have diminishing revenues/persistent losses for the period under consideration were excluded. 14.1. The TPO applied this filter for excluding the companies from the final set of comparables which were having diminishing revenues or persistent losses. The ld. AR argued that this filter ought not to have been applied. This was controverted by the ld. DR who submitted that the Delhi Bench of the Tribunal in the case of Navisite India has approved this filter. 14.2. After considering the rival submissions and perusing the relevant material on record, we find the position of profit/loss earned by the assessee during the period relevant to the assessment year under consideration and six earlier years is as under:- Financial Year Profit/loss (as per Audited Financials) 2001-02 2,81,18,307 2002-03 -5,58,88,557 2003-04 -7,62,57,307 2004-05 -4,85,47,772 2005-06 -1,32,74,909 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices. However, this proposition could be substantiated partly as only 2-3 copies of agreements entered into by the branch office, Canada with its clients were furnished as against numerous clients. If the argument of the ld. AR is correct that its foreign branch earned only onsite services income, then, the filter applied by the TPO excluding the companies whose onsite income is more than 75% of the export revenues, becomes meaningless. In such a situation, the companies whose onsite income is more than 75% of the export limit should be rather included. Since the necessary complete information is not available with the ld. AR for verifying the veracity of the contention of the foreign branch earning 100% onsite services, we consider it expedient to direct the TPO/AO to examine the break-up of the revenues earned by branch office, Canada, for seeing if the same is from onsite/offsite services. The application of the filter will be then decided accordingly by the TPO. 16. Having discussed the applicability or otherwise of the filters applied by the TPO as challenged before us, we now set aside the impugned order and remit the matter to the file of TPO/AO for considering the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the net profit margin realized by the enterprise from an international transaction is computed in relation to the costs incurred or sales effected, etc. Sub-clause (ii) talks of determining the net profit margin realized from comparable uncontrolled transactions. Sub-clause (iii) speaks of adjusting the net profit margin realized from comparable uncontrolled transactions determined in sub-clause (ii) by taking into account the differences, if any, between the international transaction and the comparable uncontrolled transactions. It is obvious from sub-clause (i) that the net profit margin actually realized by the assessee is always taken as such without any adjustment. The effect of differences between the international transaction and comparable uncontrolled transactions is always given in the net operating profit margin of the comparable uncontrolled transactions. There is no mandate for adjusting the assessee s profit margin under the provisions of Rule 10B(1)(e). The assessee s contention that its operating costs should be reduced to the extent its employees remained idle is, ergo, incapable of acceptance. The adjustment, if any, could have been allowed, if the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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