TMI Blog2017 (5) TMI 1632X X X X Extracts X X X X X X X X Extracts X X X X ..... ions / products. The assessee had Domestic Tariff Area unit for manufacturing capacitors and low end resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are exported to overseas group entities, thus companies functionally dissimilar with that of assessee need to be deselected. Assessee has applied the filter and rejected the concern whose turnover from capacitors and resistors was less than 75% of the total turnover. Non-exclusion of depreciation while calculating Profit Level Indicator of the assessee as well as the comparable companies arose before the Tribunal - Held that:- the assessee had made submissions for differential depreciation adjustment which was without prejudice to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transfer pricing documentation and non-consideration of the comparability analysis as documented in the transfer pricing study report. Erred on facts and in law by rejecting the transfer pricing documentation maintained by the Appellant and also not considering the data provided in the transfer pricing study report for benchmarking analysis. 3. Non consideration of contemporaneous data Erred on facts and in law by conducting an analysis based on information currently available for determining arms' length price but which was not available at the time of complying with the regulations. 4. Use of single year data Erred in considering the operating margins earned by the companies identified as comparable based on the financial data pertaining to the financial year ended 31 March 2008 only and rejecting the financial data of such companies for prior two years for determining the arms length price of international transactions. 5. Non- consideration of +/-5% range Erred in computing the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stead of adjustment attributable to the value of international transactions Erred on facts and in law by computing the transfer pricing adjustment with reference to total turnover instead of computing and restricting the same with reference to value of international transactions In connection with back-office activity 12. Selection of certain inappropriate qualitative filters and applying certain filters on selective basis Erred on facts and in law by selecting following inappropriate qualitative filters and also applying certain filters on selective basis: - Use of diminishing revenue filter; - Use of different accounting year filter for comparability analysis; - Rejection of loss making companies; and - Rejection of companies with peculiar circumstances. 13 . Rejection of turnover criteria applied by the Appellant Erred on facts and in law by not considering the turnover filter applied by the Appellant of INR 25 crores (ie rejecting companies having turnover exceeding INR 25 crores) as a comparable selection criteria and considering the turnover range of INR 1 cr to INR 200 cr for selecting the comparable companies. 14 . Accepting companies havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for identifying the comparable companies, interpretation of provisions of law, etc 22. Erroneous levy of interest under section 234B of the Act Erred in law and on facts in levying interest under section 2348 of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustment and corporate tax related matters without considering the fact that shortfall in advance tax resulted in view of the proposed additions to total income, which are unanticipated in nature. Without prejudice to the above, the learned Assessing Officer, erred in computing the interest under 234B of the Act. 3. The learned Authorized Representative for the assessee at the outset pointed out that many of the issues raised in the present appeal are covered by the order of Tribunal in assessee s own case relating to assessment year 2007-08 in ITA No.1712/PUN/2011, order dated 10.02.2017. 4. Briefly, in the facts of the case, the assessee had e-filed the return of income declaring Nil Income. The Assessing Officer made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23,84,10,000 - Total 133,19,39,301 5. The assessee had entered into various international transactions with its associated enterprises and the TPO passed an order under section 92CA(3) of the Act proposing an upward adjustment of ₹ 24,95,94,449/- in manufacturing segment and ITES segment. The TPO did not allow the risk adjustment in the hands of assessee. The Assessing Officer passed draft assessment order, against which the assessee filed the objections before the Dispute Resolution Panel (DRP), which gave certain directions to the Assessing Officer vide its order dated 05.09.2012. The Assessing Officer therefore, referred back the matter to the TPO and worked out the adjustment of ₹ 1,30,97,557/- in the international transactions pertaining to IT Enabled Services of the assessee and ₹ 18,63,66,207/- in manufacturing segment. The Assessing Officer made the said adnustment. Another addition made by the Assessing Officer was on account of stock written off at ₹ 1,26,57,145/-. 6. The assessee is in appeal against the order of Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the standard deduction under the proviso to section 92C(2) of the Act. However, where transfer pricing adjustment is within +/-5% range, then the assessee is entitled to the said benefit. Accordingly, the ground of appeal No.5 is dismissed. 10. The issue in ground of appeal No.6 raised by the assessee is against rejection of Keltron Group as comparable and adoption of Gujarat Poly-Avx Electronics Ltd. as comparable. The assessee is aggrieved by incoherent approach of the TPO in rejecting Keltron Group on certain criteria and not applying similar criteria / rationale while accepting Gujarat Poly-Avx Electronics Ltd. Similar issue of selection / rejection of both the Gujarat Poly-Avx Electronics Ltd. and Keltron Group arose before the Tribunal in assessment year 2007-08 and vide order dated 10.02.2017, the said issue was decided vide paras 18 and 22 at pages 18 to 22 of the order and the Tribunal held that the claim of assessee is to be verified as to whether Keltron Group and Gujarat Poly-Avx Electronics Ltd. were persistent loss making concerns; if so, then both the concerns are to be excluded from the final set of comparables while benchmarking international transactions in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Company Ltd., which as per the TPO also, it is functionally comparable to the assessee. The plea of assessee before us is that the said concern is also engaged in sale of capacitors and its sale is 59.25% of the manufacturing segment and hence, the said concern be included in the final list of comparables. The learned Departmental Representative for the Revenue on the other hand, has pointed out that the assessee while selecting the comparables had applied certain filters and had rejected the companies which were undertaking significantly different functions i.e. companies engaged primarily in trading activity or manufacturing different products or turnover from capacitors and resistors is less than 75% of the total turnover. In other words, one of the filters applied by the assessee that the concern whose turnover from capacitors and resistors was less than 75% of the total turnover, then the margins of said concerns were not applied while benchmarking international transactions of the assessee. The TPO has pointed out that in the case of K Dhandapani and Company Ltd., the sale of capacitors was to the extent of 51%; on the other hand, the assessee claimed the same at 59.25% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Hon ble High Court of Delhi in Pr. CIT Vs. Ameriprise India Pvt. Ltd. in ITA No.206/2016, judgment dated 23.03.2016. 16. The learned Departmental Representative for the Revenue fairly admitted that if the assessee was following similar practice of recognizing the income / cost, then the adjustment can be allowed in the hands of comparables also. 17. We have heard the rival contentions and perused the record. The issue which arises by way of ground of appeal No.8 is in respect of determination of operating margins of Tibrewala Electronics Ltd. The plea of assessee is that the cost towards currency options are to be considered as part of operating cost of the company and not as part of financial expenses in the Profit and Loss Account, being non-operating in nature. The assessee pleaded that where foreign exchange gain is part of operating income, then the expenses incurred are also to be included as part of operating cost. The Hon ble High Court of Delhi in Pr. CIT Vs. Ameriprise India Pvt. Ltd. (supra) has held that foreign exchange loss was to be considered as part of operating cost. The learned Departmental Representative for the Revenue has also fairly agreed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea of the assessee in this regard. 44. In the written note filed, the assessee had made submissions for differential depreciation adjustment which was without prejudice to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to be made in the hands of comparables and not in the hands of tested party. We dismiss the plea of the assessee in this regard. However, in case the assessee is able to establish that there is material difference in the claim of depreciation by the assessee vis- -vis comparables, then suitable adjustment may be allowed in the hands of comparables after due verification by the Assessing Officer / TPO. 19. Following the same parity of reasoning and since the issue raised in the present ground of appeal is identical to the issue before the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concerns which were picked up by the assessee in its transfer pricing study analysis i.e. Ace Software Exports Ltd., R Systems International Ltd., Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd., the learned Authorized Representative for the assessee pointed out that the margins of said concerns should be included to benchmark the assessee s ITES segment. The main plea of assessee in respect of the concerns Accentia Technologies Ltd. was that the said concern was functionally different as it was involved in on-site development as against back office services provided by the assessee. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) in ITA No.784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016. We find merit in the plea of assessee since the assessee is engaged in ITES segment and Accentia Technologies Ltd. is engaged in the business of medical prescription services, which is functionally different from the services provided by the assessee. Accordingly, we hold that the said concern Accentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is engaged in BPO services as per the ratio laid down by the Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra). Accordingly, we hold so. 31. The second plea of the assessee that the said concern does not fulfill the turnover filter does not stand since we have already held in the paras hereinabove that the turnover filter of ₹ 1-200 crores is to be applied while benchmarking the international transactions of the assessee. Further, it may be pointed out herein that the Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) in addition to drawing difference between the BPO and KPO services had also deliberated upon the exclusion of concerns on the ground that the companies had shown super normal profits. The Hon ble High Court held that In our view, it would not be opposite to exclude comparables only for the reason that their profits are high, as the same is not provided for in the Statute framework. The OECD guidelines suggest that quartile method be adopted which excludes entities that fall in the extreme quartiles for comparability. However, neither Chapter X of the Act nor the Rules made by CBDT provide for exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. The Hon ble High Court further held that the mandate of Rule 10B of the Rules could not be ignored even if the difference was only of three months, since no such liberty was granted in terms of the said Rule. Following the principle laid down by the Jurisdictional High Court, we hold that where the assessee is following financial year ending with 31.03.2008 and the said concern had different financial year, then the same is not comparable and hence, it cannot be included in the final list of comparables. We uphold the order of TPO in this regard. 37. The next concern which was excluded by the TPO is Ace Software Exports Ltd. The said concern was excluded by the TPO since it was consistently loss making concern. The TPO applied the proposition laid down by in the case of Sony India Pvt. Ltd. in ITA NO.1187/Del/2005 and others. The DRP upheld the order of TPO and observed that the said concern had sold its investments and profit on sale of investment of ₹ 3.84 crores was shown, which shows that the assessee has restructured its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he KPO business carried on by the said concern though the DRP says that it is a BPO but the Directors Report shows different functions. 42. The learned Authorized Representative for the assessee on the other hand, pointed out that the said concern was multi tasking but it was accepted as comparable in the last year which was objected by the learned Authorized Representative for the assessee. The learned Authorized Representative for the assessee further pointed out that the said concern was accepted as comparable in assessment year 2009-10 in CIT Vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra). Further, the learned Authorized Representative for the ITA No.341/PUN/2013 assessee fairly pointed out that the financial data for assessment year 2009-10 in respect of Aditya Birla Minacs Worldwide Ltd. are not available. 43. We have already held in the paras hereinabove and following the ratio laid down by the Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) that the concerns which are engaged in providing KPO services are not functionally comparable to the concerns which are providing BPO services and have directed the TPO to exclude the same. Applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:- Particular % Average prime lending rate during AY 2008-09 (A) 12.93 percent Average bank rate during AY 2008-09 (B) 6.00 percent Difference between the prime lending rate and bank rate C = (A-B) 6.93 percent Risk Adjustment (C) 6.93 percent 33. Further, the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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