TMI Blog2018 (3) TMI 1695X X X X Extracts X X X X X X X X Extracts X X X X ..... er adjustment on account of comparables is to be made except the economic adjustments asked for. Accordingly, we direct the Assessing Officer to compute the margins of comparables and also to exclude the concern which we have so held in the paras hereinabove and compute the TP adjustment, if any, in the hands of assessee. Adjustment on account of capacity utilization - Held that:- As decided in assessee's own case it is evident that the capacity utilization adjustment has to be granted where there has been under utilization or lower utilization of the capacity. In the facts of the present case, we deem it appropriate to remit the issue back to the file of Assessing Officer to decide this issue afresh after considering the submissions of the assessee, documents on record and decisions of the Tribunal. Accordingly, ground no. 2 raised in the appeal is allowed for statistical purpose. Re-computing PLI of assessee by including expenses recovered as part of operating income and operating expenses; such re-working of PLI was in respect of margins of assessee and no such exercise was carried out in respect of margins of comparables finally selected - Held that:- While applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2009-10 against order passed under section 143(3) of Income Tax Act 1961 (in short the Act ). 2. The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No.1788/PUN/2014 has raised the following grounds of appeal:- On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has: I. In respect of transfer pricing grounds 1. General ground challenging the transfer pricing adjustment of ₹ 9,77,11,928 consequential to non consideration / non-acceptance of analysis documented in the transfer pricing study report Erred on facts and in law by making the transfer pricing adjustment to its international transactions in connection with provision of call centre services and not considering/not accepting the comparability analysis documented in the transfer pricing study report for benchmarking purpose. Erred in facts and in law by changing the Profit Level Indicator ('PLI') of Ventura India by including expenses recovered by Ventura India from its AEs (ierecovery of expenses) as part of operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for lower utilisation of capacity or higher fixed costs of the Appellant at the time of computing its operating margin. 10. Non-consideration of adjustment for companies identified as comparable to factor differences on account of risk undertaken by such companies Erred on facts and in law by comparing full-fledged risk bearing entities with the Appellant's operations without undertaking any risk adjustment. 11. Treating the recovery of expenses as part of operating income and operating cost Erred on facts and in law in treating the recovery of expenses from Club 24 and NEXT Plc in respect of payments made by the Appellant on their behalf as part of operating income and operating cost and re-computing the operating margin of the Appellant. II. Other Grounds 12. Erroneous levy of interest under section 234B of the Act Erred on facts and in law by levying interest under section 234B of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustment without providing any cogent reasons for the same and disregarding the submissions of the Appellant. 13. Initiation of penalty proceedings under section 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee from its associated enterprises as part of operating income and operating cost, for the purpose of computing operating margins. The learned Authorized Representative for the assessee at the outset pointed out that certain grounds of appeal are not pressed by the assessee i.e. grounds of appeal No.2, 3, 5, 7 and 10. Hence these grounds of appeal are dismissed as not pressed. Further, the ground of appeal No.12 against levy of interest under section 234B of the Act is consequential, hence the same is dismissed. The issue in ground of appeal No.13 against initiation of penalty proceedings under section 271(1)(c) of the Act is premature and the same is also dismissed. 7. Vide additional ground of appeal, the assessee is aggrieved by inclusion of Cosmic Global Ltd. and Vishal Technologies Ltd. as functionally comparable to assessee, which were originally part of transfer pricing study report but were subsequently, identified to be not functionally comparable. The assessee by way of ground of appeal No.4 is aggrieved by the selection criteria applied by the TPO. The assessee is also aggrieved by the directions to the TPO to compute operating margins of comparable companies usi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the average margins of said comparables by adopting PLI of OP/OC worked out to 15.47%. The assessee after fresh search rejected two comparables earlier selected and proposed selection of three more comparables and the final set of comparables are enlisted under para 7 of the order of TPO. The TPO however, rejected submissions made by the assessee and drew up list of final set of comparables which is reproduced under para 20. The assessee filed objections to the final list of comparables prepared by the TPO on the ground that some of the concerns were showing super normal profits during the year and the same were not comparable. However, the plea of assessee for rejection of Cosmic Global Ltd. showing revised margins of 48.59% was not accepted by the TPO since the same concern was selected by the assessee in the original TP study report. The assessee further asked for capacity adjustment and other risk adjustments. The TPO in the final analysis drew up list of ten companies to be comparable to the assessee and worked out the mean margins of said comparables after working capital adjustment of 26.46%. The assessee had shown margins of 11.59% and accordingly, the TPO proposed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015, judgment dated 10.08.2015; ii) Vishay Components Pvt. Ltd. Vs. ACIT in ITA No.341/PUN/2013, relating to assessment year 2008-09, order dated 31.05.2017. 13. The issue of exclusion of the concern engaged in KPO services has been decided by the Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. CIT (supra) and it has been held that there are different factors which have to be judged with reference to service / product characterization and the same could not be undermined by using broad classification of ITES. The Hon ble High Court of Delhi drew the distinction between BPO service provider and the KPO service provider and held that where the controlled transactions were in the nature of lower end ITeS such as Call Centres, etc. for rendering data processing not involving domain knowledge, in such circumstances inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. The Hon ble High Court therefore, directed the exclusion of Vishal Information Technology Ltd., which is subsequently known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This comparison has to be done between like companies and requires carrying out of FAR analysis to find the same. Moreover, the Assessee‟s submission in arriving at the ALP is not final. It is for the TPO to examine and find out the companies listed as comparables which are, in fact comparable. The impugned order has on FAR analysis found that M/s. Indowind Energy Ltd. and B.F. Utilities Ltd. are not comparable. They are in a different area i.e. wind energy while the Respondent-Assessee is in the field of solar energy. 18. Now, coming to the exclusion of Cosmic Global Limited and Vishal Information Technologies Limited. The financial statements of the said concerns reflect that Cosmic Global Ltd. is engaged in translation and prescription of data which is entirely different from the functions performed by the assessee. Further, the said concern has been rejected by the TPO himself in the TP assessment proceedings for assessment year 2012-13, in turn, relying on the ratio laid down by the Pune Bench of Tribunal in PTC Software (India) Private Limited Vs. DCIT in ITA No.336/PN/2014, relating to assessment year 2009-10, order dated 31.10.2014 and Principal Global Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parting, we also refer to one concern which the assessee wanted to be included i.e. CG VAK Software and Exports Ltd. The assessee pointed out that it is not a persistent loss making concern and hence, the same should not be excluded from final set of comparables. We have already decided similar issue of inclusion of CG VAK Software and Exports Ltd. on the same ground of not being persistent loss making in Starent Networks (India) Pvt. Ltd. Vs. ACIT in ITA No.164/PUN/2013, relating to assessment year 2008-09, order dated 09.02.2018 and have held as under:- 25. Now, coming to the concern CG VAK Software Exports Ltd. and SIP Technologies Exports Ltd. which were excluded on the ground that they were persistent loss making concerns. 26. The learned Authorized Representative for the assessee pointed out that CG VAK Software Exports Ltd. was not persistent loss making concern. In this regard, he pointed out that the margins of said concern in the earlier two years was positive and only in the year under consideration, there was loss of 1.97%. He further stressed that segmental details were available in respect of revenue from software development and revenue from BPO service. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion would not reflect a normal business situation. In the present case, the comparable in question has incurred a loss; notably, incurrence of loss in business operations is a normal incident of business and there is nothing to suggest in the present case that it has been incurred in any abnormal situation. It is also not the case of the Revenue that the said concern is a consistently loss making concern. Therefore, the said concern cannot be excluded merely because of incurrence of loss in this year, especially when the said loss has not been established to be an abnormal business condition and more so in the context that the said concern is not denied to be functionally comparable to the assessee. Therefore, on this aspect, we uphold the plea of the assessee for including the said concern in the final set of comparables in order to determine the arm's length price of the international transaction. Thus, on this aspect, assessee succeeds. 29. Accordingly, we allow the ground of appeal raised by the assessee and hold that CG VAK Software Exports Ltd. is to be included in the final list of comparables. 22. Accordingly, we hold that CG VAK Software Exports Ltd. is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 of the appeal relates to capacity utilization. We find that TPO has not accepted the adjustment made by the assessee on account of under utilization of its employees and under absorption of its overheads, primarily on the ground that the assessee company is a captive unit of its AE. The entire capacity increased by the assessee is for the purpose of business of its holding AE. Thus, there cannot be any possibility of under utilization of capacity. The DRP made a detailed discussion in its order in respect of under utilization of manpower and under absorption of overheads. However, after the elaborate discussion we find that DRP has not given any findings on this issue. The ld. AR of the assessee has placed on record a copy of the order of Tribunal in assessee‟s own case for the assessment year 2004-05, wherein the identical issue was considered. The relevant extract of the findings of the Tribunal are reproduced here-in-below: 7. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance to support his submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax have denied the capacity utilization adjustment on the ground that the assessee company is a captive unit of its AE. It is presumed that the orders/business are assured 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sty Bite Eatables Limited Vs. ACIT (supra) while dealing with the issue of capacity under utilization placed reliance on the decision of Mumbai Bench of the Tribunal in the case of ACIT Vs. M/s. Fiat India 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- -vis that of comparables and resultantly claimed that its increased profit as a result of such reduced operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm‟s length price in relation to the international transaction. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs incurred by a comparable (say, B) are ₹ 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of 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 ₹ 50 (Rs.100 into 25/50) as against the actually incurred fixed cost by it at ₹ 100. When we compute operating profit of B by substituting the fixed costs at ₹ 50 with the actually incurred at ₹ 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. 31. Brief facts relating to the issue are that the assessee claimed that expenses which are incurred by it also include the recovery of expenses incurred on behalf of Club 24 and NEXT Plc which are not routed through Profit and Loss Account. Accordingly, the said expenses which are recovered on cost without any mark up should not be considered as part of operating income and operating cost of Ventura India. 32. The assessee is aggrieved by the order of TPO in re-computing PLI of assessee by including expenses recovered as part of operating income and operating expenses; such re-working of PLI was in respect of margins of assessee and no such exercise was carried out in respect of margins of comparables finally selected. The assessee is aggrieved by such an approach of TPO in adopting different methodology for computing operating margins of assessee and hence, the ground of appeal No.11 raised by the assessee. While applying the transfer pricing adjustment, the endeavour is to compare like with like and hence, the said exercise should be carried out not only in spirit but in actual fact. In the facts of the present case before us, the assessee is aggrieved by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it needs to be confirmed whether the said concern was persistent loss making. In case it is so, then the same is to be excluded but in case it is not so, then the same is to be included. Accordingly, we direct the Assessing Officer/ TPO to carry out necessary verification in this regard. The ground of appeal No.1 raised by the Revenue is thus, allowed for statistical purposes. 37. The ground of appeal No.3 raised by Revenue is in respect of working capital adjustment. 38. The Revenue is aggrieved in this regard by directions of CIT(A) to the Assessing Officer / TPO to examine the working capital adjustment as computed by the assessee and re-work the adjustment by considering the advance receivable for computing net working capital of assessee as the same was considered in computation of working capital of comparable companies. The TPO had not taken into consideration the advance from customers while computing net current assets. The plea of assessee is that where the assessee had received advances from its customers which were reflected in the financial statements, hence the same needed to be considered while computing net current assets, which was not accepted by the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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