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M/s. Paradigm Geophysical (I) Pvt. Ltd. Versus The DCIT, Circle 9 (2) , Mumbai

2016 (7) TMI 1364 - ITAT MUMBAI

TPA - selection of comparable - selection criteria - bench marking international transactions - Held that:- Assessee provides computer aided software solutions, maintenance and imaging services to its AE which provided services to oil and gas companies operating in India and was granted permission for setting up 100% EOU under STPI scheme. The assessee was categorized as ITES service provider. - When the assessee has furnished segmental profits, the entity level profits cannot be considered .....

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g the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication in view of the fact that no proper opportunity was given by the TPO. Therefore, we direct the TPO to complete the denovo assessments keeping in view the decisions of the Jurisdictional High Court and various other Tribunals in rejecting various comparables selected by the TPO after providing adequate opportunity of being heard to the assessee. - Upward adjustme .....

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ssessment Year 2009-10 but not in both Assessment Years since it amounts to double taxation. The Assessing Officer shall consider and decide accordingly. - Addition made on account of remission of liability - Held that:- We restore this issue to the file of the Assessing Officer who shall pass necessary order keeping in view of the fact that this amount was already taxed in the Assessment Year 2008-09 against which appeal is pending and if assessee succeeds in Assessment Year 2008-09, the As .....

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L MEMBER For The Appellant : Shri Niraj Sheth, Shri Ayush Rajani For The Respondent : Shri N.K. Chand ORDER PER C.N. PRASAD, JM: This appeal is filed by the assessee against the Direction of the DRP-III, Mumbai dated 11.12.2013 pertaining to assessment year 2009-10. 2. The assessee has raised following grounds of appeal in respect of Transfer Pricing Adjustment in its appeal: 1. The impugned order passed by the learned Assessing Officer u/s. 143(3) of the Act and the impugned directions issued b .....

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king the transfer pricing addition without providing an adequate opportunity of being heard and in complete disregard of principle of natural justice. Rejection of audited segmental results and following an entity level approach and not making additions only to international transactions 4.1. The learned AO/ Hon'ble DRP erred in law and in facts, by confirming the addition of ₹ 26,13,95,031/-made by the TPO being transfer pricing adjustment by completely disregarding the signed segment .....

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be part of Appellant's annual accounts. 4.3. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the adoption of entity level approach to determine the ALP of international transactions undertaken by the Appellant with its associated enterprises and not appreciating the fact that under the TNMM method, comparison of net profit margin realized from international transactions or aggregate of international transactions is required and not comparison of operating margins of .....

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9;ble DRP erred on the facts and circumstances of the case and in law, in confirming the TPO's stand of rejecting the search process methodology followed by the Appellant as per the provisions of law and conducting a new search process. 5.2. The learned AO / Hon'ble DRP erred, in law and in facts, by confirming the TPO's stand of rejecting the independent comparable companies selected by the Appellant in its transfer pricing study report without providing any cogent reasons or pointi .....

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fresh comparability analysis, the learned TPO has erred in using data which was not available as on the specified date {as defined in Section 92F{iv} of the Act}. 6.3. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding the selection of alleged comparable companies earning abnormally high profits/super profits by the TPO; 6.4. The learned AO/ Hon'ble DRP erred, in law and in facts, by upholding selection of alleged comparable companies which are functionally different / .....

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ded to AEs. During the financial year 2008-09, the assessee company had provided IT Enabled Services to its associated enterprises amounting to ₹ 3,70,55,707/-. The assessee has bench marked its international transaction under TNMM by using operating profit/operating cost as the Profit Level Indicator (PLI). The assessee identified a set of 25 comparable companies with arithmetic mean of 20.54%. The assessee arrived at its segment profitability in respect of IT enabled services at 27.54% a .....

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ssessee and arrived at operating profit to operating cost at 60.81%. 3.1. The TPO was of the view that since assessee s business does consists of providing computer aided exploration and production coupled with software products and services to the oil and gas industry which is a high end knowledge oriented IT enabled services and since assessee s set of comparables was not into such activates, the assessee s set of comparables was found not acceptable. A show cause notice dated 21.12.2012 was i .....

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ustment of ₹ 26,13,95,031/- by passing order u/s. 92CA(3) of the Act on 16.1.2013. 4. A Draft assessment order was passed on 12.3.2013 by the Assessing Officer proposing the adjustment in respect of arm s length price in relation to the international transactions with AE as computed by the TPO. The assessee filed objections before the DRP on 19.4.2013 contending that there is violation of principles of natural justice in rejecting segmental accounts submitted by the assessee, in adopting e .....

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ing to page-131 of the Paper Book submits that the TPO issued show-cause notice dated 21.12.2012 requiring the assessee to show cause by 3.1.2013 as to why an adjustment should not be made by bench marking the transaction with the 9 comparables in the field of Information Technology Enabled Services. The Ld. Counsel for the assessee submits that the 9 comparables proposed by the TPO are as under: S. No. Comparable Name 1. Accentia Tech. 2. Aditya Birla Minacs Worldwide Ltd. 3. Coral Hub Ltd. 4. .....

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15.1.2013 wherein rebuttals were raised against the comparables selected by the TPO. However, at the time of filing the said letter, the assessee s authorized representative was informed that the TP order has been issued and hence the said submission cannot be taken on record. Therefore, the Ld. Counsel for the assessee submits that no opportunity of being heard was given to the assessee for furnishing the detailed analysis of the alleged comparable companies selected by the TPO and the reasons .....

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the Software supply and support/maintenance services and imaging services to its associated enterprises namely Paradigm BV and Paradigm Australia aggregating to ₹ 3,70,55,707/- but the TPO proceeded to make an upward adjustment by considering entity level approach for determining the arm s length price of the international transactions and not appreciating the fact that, under TNMM method, the Transfer Pricing addition, if any, ought to be restricted to the international transactions only. .....

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loss of (60.81 %) on total cost, by considering entity level profits rather than restricting the adjustment only to the AE transactions thereby making an adjustment of of ₹ 26,13,95,031 at entity level. It is well settled that transfer pricing adjustment is warranted only qua the transactions with AEs and not non-AEs. Thus, the TPOI AO has grossly erred in making an addition of ₹ 26,13,95,031 which is 7 times or 705% of the international transaction value on entity level rather than .....

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of by the Hon'ble DRP vide its Directions dated 11 December 2013 passed under section 144C(5) of the Act, confirming the action of the TPO and AO and upheld the transfer pricing adjustment of ₹ 26,13,95,031. Being aggrieved by the order of the AO dated 31 December 2013 pursuant to the directions by the Hon'ble DRP passed under section 143(3) r.w.s. 144C(13) of the Act, the Appellant has filed an appeal with the ITA T. B. Appellant's contentions raised before the Hon'ble ben .....

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n law, it is humbly submitted that the learned TPO erred in not appreciating the fact that as per AS 17- Segmental Reporting and Clause 2(f) of the Companies (Accounting Standards) Rules 2006, pertaining to "Small and Medium Sized Company", in absence of any statutory requirements, the Appellant is not required to prepare segmental accounts as part of it's annual accounts. 3) It would also be appreciated that the segmental accounts were forming part of the TP documentation (as &quo .....

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s year. Considering that there is no change in circumstances and the segmental were accepted in previous year, the same ought to have been accepted for the year under consideration as such. B.1.2. No transfer pricing adjustment! minimal transfer pricing adjustment 1) Without prejudice to the other contentions raised by the Appellant and considering the facts of the circumstances and in law, the Appellant believes the audited segmental accounts filed before the TPO and the transfer pricing adjust .....

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a Pvt. Ltd. (ITA No. 2201 of2013) 6.1. The Ld. Counsel for the assessee further submits that out of 9 comparables taken by the TPO, 4 comparables were rejected by various benches of the Tribunal for the reason that either they are not into IT enabled services or rejected they are functionally different or they earned abnormal profits etc. The Ld. Counsel for the assessee submitted detailed reasons for exclusion of the alleged 4 comparable companies with decisions of various Tribunal s and Courts .....

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P. Ltd. (formerly 3Global Services P. Ltd) reported in [2014] 30 ITR(Tribunal) 218 The comparable company is engaged in Medical Transcription and software sales(KPO) which cannot be compared to the assessee being an ITeS service provider. Hence rejected on the basis that the said comparable is functionally different and cannot be considered to ITes provider. • Rampgreen Solutions Pvt. Ltd. reported in [2015] 377 ITR 533 • Equant Solutions India (P) Ltd. reported in [2016] (ITA No.1202/ .....

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yderabad ITAT) • Zavata India Pvt. Ltd. reported in [2013] 25 ITR (Tribunal) 504 (Hyderabad ITAT) 4 Eclerx Services Ltd KPO which cannot be compared to BPO and high turnover. • Rampgreen Solutions Pvt. Ltd. reported in [2015] 377 ITR 533-Delhi Tribunal • Rampgreen Solutions Pvt. Ltd. reported in [2015] 377 ITR 533-Delhi Tribunal • Maersk Global Centres • Maersk Global Centres • Avineon India Pvt. Ltd. reported in [2014] 29 ITR(Tribunal) 404 Hyderabad ITAT) • Co .....

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own as Transworks) 23.75% 3 Coral Hub Ltd. (formerly known as Vishal Information Technologies Ltd.) Ought to be excluded on functionally different 4 Cosmic Global Ltd 48.20% 5 Crossdomain Solutions Pvt. Ltd. 29.40% 6 Datamatics Global Services Ltd. 17.46% 7 Eclerx services Ltd. Ought to be excluded on high turnover 8 Excel Infoways Ltd. Ought to be excluded on functionally different and abnormally profits of 290.11% Average 29.70% Applicant s (OP/OC) ratio (considering segmental accounts) 27.54% .....

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ts that proper opportunity was given by the TPO for submission of information and infact the assessee has furnished details on 4.1.2013 as was recorded by the TPO except for the query as to why the 9 set of comparables should not be adopted for Benchmarking the international transactions. The Ld. Departmental Representative submits that he has no serious objection in setting aside the assessment for denovo consideration by the TPO and the AO. 8. We have heard the rival contentions, perused the o .....

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oresaid services only up to June 30, 2008 during the year under consideration. During the financial year ended March 31, 2009, the assessee had provided IT enabled Services viz. software supply and support / maintenance services and imaging services to its 'Associated Enterprises' (hereafter referred to as 'AE(s)') Paradigm BV and Paradigm Australia aggregating to ₹ 3,70,55,707/. These services were provided till the existence of the STPI unit i.e. for 3 months upto June 30 .....

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o 27.54% ,on its operating cost of ₹ 2,90,54,437/- applying Operating profit/Operating cost ('OP/OC') as the Profit Level Indicator ('PU'). The assessee identified a set of 25 comparable companies with arithmetic mean of 20.54 percent and accordingly the international transactions entered into between the assessee and its AE were considered to meet the arm s length test. The said segmentals were submitted before the lower authorities. 9. The learned TPO at para 5.1. of his .....

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only for a period of 3 months during the year under consideration i.e. from April 01, 2008 till June 30, 2008. The assessee contended that these transactions were a mere roll over of the same agreement and undertaken based on same terms and conditions and at the same rates which were applicable for prior year i.e. AY 2008- 09 wherein the international transactions were considered to be at ALP and the segmental accounts were also accepted by the then TPO. The adjustment suffered in prior year i.e .....

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s only. 10. The learned TPO rejected the TP documentation submitted by the assessee and undertook a fresh benchmarking and made an upward adjustment of ₹ 26,13,95,031/- by determining the arm's length margin at 69.76% vide order dated 16 January 2013 ("TP order") issued under section 92CA(3) of the Income-tax Act, 1961. The learned TPO also re-computed the operating profit 1 (loss) of the assessee at Rs. (12,17,40,195/-) i.e. loss of (60.81 %) on total cost, by considering en .....

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under review. 11. It is the contention of the Ld. Counsel for the assessee that the TPO has not given proper opportunity and sufficient time to furnish necessary details called for. The submission of the Ld. Counsel for the assessee was that a show cause notice was issued at the fag-end of December, 2012 i.e. on 21.12.2012 requiring the assessee to furnish the details by 3.1.2013. The assessee furnished some of the details on 4.1.2013 and approached the TPO for furnishing further details on 15. .....

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f proper opportunity and sufficient time provided to the assessee for furnishing requisite details, principles of natural justice were not adhered in completing the transfer pricing adjustment. Even on merits, we find that when the assessee has furnished segmental reports, the Transfer Pricing Officer should not have adopted the entity level reports for bench marking the international transaction. We are also at loss to understand how the Transfer Pricing adjustment can be made at ₹ 26.13 .....

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ified in coming to the conclusion that out of the total turnover of ₹ 117,45,35,364/- export turnover eligible as international transaction to ₹ 89.92 crores only, rest, ₹ 27.52 crores being domestic transaction was outside the scope of examination of ALP? (B): Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in coming to the conclusion that AO/TPO were not justified in excluding gain on foreign exchange fluctuation from the total .....

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ation in respect of its international transaction to arrive at the ALP on operating margin at 7.32%. The Assessing Officer passed final assessment order in accordance with the findings of the TPO for the subject Assessment Year. (c) Being aggrieved, the Respondent Assessee carried the issue in Appeal to the Tribunal. The Tribunal, by the impugned order, held that even if the operating margin at 7.32% arrived at by the TPO is acceptable, the same has to be loaded only in respect of the internatio .....

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aforesaid grievance of the Revenue is no longer res integra, as this Court has in CIT v/s M/s Tara Jewels Exports Pvt Ltd (Income Tax Appeal No.1814 of 2013) decided on 5th October, 2015 and CIT v/s Thyssen Krupp Industries India Pvt Ltd (Income Tax Appeal No.2201 of 2013) decided on 2nd December, 2015), has taken a view that the ALP adjustment arrived at is only to be restricted to the international transaction entered into by the Respondent and could not apply to transactions entered into with .....

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4.79% computed by the TPO under the TMM across all it s sales and not restricted only to the international transactions entered into by it with it s AE. The Tribunal by the impugned order held that the entire exercise of determining the ALP is done in accordance with Chapter X of the Act and in particular to Sec. 92A and 92B of the Act require the transfer pricing adjustment to be done only in respect of the transaction entered into between the respondent-assessee with it s AEs and not with the .....

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in of 4.79% is disputed before Tribunal or before us. We are unable to understand the grievance of the revenue as formulated in the proposed question. The respondent-assessee has not challenged the application of TNMM and arriving at the margin of 4.79% arrived at by the TPO to determine ALP. The grievance of the respondent-assessee before the Tribunal is only with the margin of 4.79% being applied in respect of all it s sales and not restricted to the international transactions entered into by .....

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e said decisions, we hold that the ALP of the assessee should be determined only on the international transactions and not on the entire transactions at entity level. We also find from various decisions that the four comparables selected by the TPO out of 9 have been rejected for various reasons like high turnover, functionally different, abnormal profits etc. Taking the totality of the facts and circumstances, we are of the view that this matter has to go back to the TPO for denovo adjudication .....

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of invoices raised on ONGC without appreciating that the same were pending acceptance/approval by ONGC. 15.1. It is the contention of the assessee that assessee had received the acceptance/approval by ONGC in the subsequent year i.e. Assessment Year 2010-11 and assessee recognized the said amount as its revenue and has been offered to tax accordingly. Therefore, it was the submission that since this amount is already offered to tax in the Assessment Year 2010-11, the same should not be taxed in .....

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e, we restore this issue to the file of the Assessing Officer for fresh adjudication. We make it clear that this amount should be taxed either in the Assessment Year 2010-11 or in the Assessment Year 2009-10 but not in both Assessment Years since it amounts to double taxation. The Assessing Officer shall consider and decide accordingly. 16. The last issue in the appeal of the assessee is in respect of the addition made on account of remission of liability. 16.1. It is the submission of the asses .....

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