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TMI Blog2022 (3) TMI 1528X X X X Extracts X X X X X X X X Extracts X X X X ..... restricting TP adjustment in the manufacturing segment to Rs.10,13,12,220, thereby reducing the aggregate TP adjustment to Rs.11,96,99,769. The A.O. passed rectification order u/s 154 of the I.T. Act giving effect to the revised directions of the DRP. An appeal has been filed before the Tribunal against the order u/s 154 of the I.T. Act also. 3. The learned AR during the course of hearing submitted that IT(TP)A No.790/Bang/2019 (arising out of 154 order) may be dismissed as infructuous. In view of the submissions of the learned AR, IT(TP)A No.790/Bang/2019 is dismissed as infructuous. Though the assessee has raised 40 grounds in its memorandum of appeal in IT(TP)A No.103/Bang/2019, the learned AR confined his submissions to the following issues:- (i) Manufacturing segment (Grounds 4 to 13) (ii) Management fees (Ground 14 to 22) [This adjustment was not proposed by the TPO but was unilaterally added by the DRP) (iii) ITES segment (Grounds 23 to 34) (iv) Management fee (Grounds 35 to 37) [This addition was unilaterally added by the DRP as a protective addition] We shall adjudicate the above issues as under:- (i) Manufacturing segment (Grounds 4 to 13) (Transfer Pricing Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P adjustment in the manufacturing segment, the assessee filed objections before the DRP. The DRP rejected the objections of the assessee and confirmed the TPO's order. Pursuant to the DRP's directions, the final assessment order was passed. 4.4 Aggrieved by the final assessment order, the assessee has raised this issue before the Tribunal. The assessee has filed a paper book enclosing therein the TP study, the financials etc. The learned AR has filed a brief written submission. The contentions raised are summarized as follows:- (i) The learned AR submitted that the TPO has disregarded the AE and non-AE segment details given by the assessee and clubbed both the segments into one revised the segment and made additions. The assessee has also argued that the TP adjustment should be restricted only to the international transactions. The learned AR submitted that the TPO has erred in computing the transfer pricing adjustment for the total manufacturing segment costs. The learned AR submitted that the transaction with non-AE cannot be subject matter of determination of ALP because section 92 of the I.T. Act clearly speaks of determination of ALP only in respect of transactions with AE. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and perused the material on record. On the issue of segmental financials and TP adjustment to be restricted to AE transactions, we find that the TPO has rejected the segmental profit and loss account given by the assessee and reworked the segmental profit and loss account. The TPO has not given any reason for rejecting the segmental profit and loss account given by the assessee. Further, we find that the TPO has redrawn the segmental profit and loss account on pages 6 to 8 of the order u/s 92CA. However, no basis of allocation has been given in the order. The assessee has rightly contended that section 92 of the Act can be applied only in respect of international transactions, i.e., transactions with AE. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee. We are of the view that in the given facts and circumstances of the case, it would be just and appropriate to set aside the impugned order on this issue and remand the issue to the TO / TPO to verify the segmental profit and loss account given by the assessee. The assessee shall pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the given six methods and in the manner as is prescribed in Rule 10B of the Rules. Rule 10B in turn states that the most appropriate method would be one which inter alia provides the most reliable measure of ALP, and one of the important factors to be taken into account herein is the ability to make reliable and accurate adjustments. 26. The OECD Guidelines on this aspect is as follows:- Para 1.35 of the OECD Guidelines states as follows: "Where there are differences between the situations being compared that could materially affect the comparison, comparability adjustments must be made, where possible, to improve the reliability of the comparison. Therefore, in no event can unadjusted industry average returns themselves establish arm's length conditions" Para 1.36 of the OECD Guidelines states as follows: ".... material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm's length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of M/s. Mando India Steering Systems Private Limited vs Assistant Commissioner of Income Tax, [I.T.A. No. 2092/Mds 12012], the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. .......... We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii) In the ruling of DCIT Vs Panasonic AVC Networks India Co Ltd (I.T.A. No.: 462 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments. With these directions, the appeal of the assessee is disposed of." 30. The reliability and accuracy of adjustments would largely depend on availability of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 31. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making "reasonably accurate adjustments" for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act :" 34. In this regard, we find that the Mumbai ITAT in case of M/s Kiara Jewellery P.Ltd. (I.T.A. No. 8109/Mum/2011), has directed the AO/ TPO to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard." (Emphasis Supplied) 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has made general observation that TNMM requires broadly similar comparables and exactly similar companies are not required. This is not proper reason and TPO / DRP are duty bound to specifically analyse the comparables submitted by the assessee and the assessee's objection to the comparable selected by the TPO. The assessee is also duty bound to file the annual reports and make specific submissions with respect to the comparables. Therefore, the entire TP adjustment made by the TPO in management segment is set aside. The TPO shall undertake a fresh TP analysis and make necessary TP adjustment in accordance with law, after affording reasonable opportunity of hearing to the assessee. It is ordered accordingly. 4.6.6 In the result, ground 4 to 13 is allowed for statistical purposes. Management Fees (Grounds 14 to 22) (TP Adjustment) 5. Brief facts in relation to the above issue are as follows: The assessee had applied TNMM method as the Most Appropriate Method for justifying the ALP of the transaction of management fees paid. In the TP documentation, the assessee had performed searches using external databases, the results of which are provided below:- Associated Enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trarily, without calling for any details and without affording opportunity of hearing, the assessee has submitted additional evidence regarding the management fee, with a request to admit the same and consider the details submitted. 5.3 The learned Departmental Representative supported the orders of the DRP. 5.4 We have heard rival submissions and perused the material on record. This adjustment was not proposed by the TPO but was unilaterally added by the DRP. During the course of hearing before the DRP, the assessee was not requested to furnish any information / documents. The DRP suo moto determined the ALP of this transaction as NIL in the DRP's directions. We find that the DRP has not adhered to the process prescribed under Rule 10B of the T.P. Regulations and no benchmarking analysis has been done by the DRP. The management charges was part of the cost base while computing the adjustment for manufacturing segment under the TNMM. The question whether the transaction of payment of management fees can be aggregated with the international transaction under the manufacturing segment also requires a fresh look in the light of the submissions made by the learned AR (since manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies (ground 23) - (i) M/s.Infosys BPO Limited & (ii) Microland Limited. (i) M/s.Infosys BPO Limited 6.2 This company Infosys BPO Limited was selected as a comparable company by the TPO. The assessee objected to its inclusion both before the TPO as well as the DRP, but both the authorities below rejected the assessee's objections to its inclusion. 6.2.1 The assessee objected to the inclusion of this company, on the following grounds:- (a) Functionally diversified - Provides high end and end-to-end outsourcing services in the nature of business process management. Engaged in providing cloud based services such as `E-Discover' as well as services in relation to compliance in Health, Safety and Environment. (b) Different business model - consultancy expenses in the nature of sub-contracting charges. (c) Presence of intangible assets and intellectual properties. (d) Significant brand value and performs brand building functions. (e) Higher scale of operations. 6.2.2 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of M/s.Ocwen Financial Solutions Private Limited (supra), had excluded M/s.In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Infosys BPO Ltd., stands on a totally different footing from a company engaged in rendering routine back office ITES; being both functionally different and having brand value and therefore is to be excluded from the final set of comparables. We hold and direct accordingly." 6.2.3 Since the profile of the assessee-company and the profile of the assessee in the case of M/s.Ocwen Financial Solutions Pvt. Ltd.(supra) being similar and the assessment year also being the same, i.e. A.Y. 2014-2015, we hold that the finding of the co-ordinate Bench order in the case of M/s.Ocwen Financial Solutions Pvt. Ltd. (supra) will have application to the facts of the instant case. Therefore, we direct the AO/TPO to exclude Infosys BPO Limited from the list of comparables. It is ordered accordingly. Microland Ltd., ('Microland') 7. This company 'Microland' was selected as a comparable company by the TPO despite the objections to its inclusion in the final list of comparables both before the TPO and DRP. 7.1 The assessee has objected to the inclusion of this company 'Microland' on the following grounds:- (a) Erroneous computation of margin - ought to have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stinct segment from the ITES. 8.4.3 From an appraisal of the details submitted, it is seen that the services rendered by 'Microland' under Infrastructure Management services are Server Management, Database Management, storage management, Archival Management, Network Management, etc., which has been classified as different from the back office processing services rendered by companies like the assessee in the case on hand. In our view, there is no basis for the TPO to contend that the aforesaid services rendered by 'Microland' are ITES, when the company itself has classified these services as different from ITES and characterized the same as a different business segment. In these factual circumstances, we are inclined to concur with the contention of the learned AR that the Infrastructure Management services segment of 'Microland' is different and distinct with ITES as has been classified by the company in its Annual Report for the year under consideration. We also observe that the TPO himself has reached the same conclusion n the subsequent Assessment Year 2015-16; that the Infrastructure segment services segment is not comparable to ITES. 8.4.4 At page 97 of the Annual Repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing as an ITES provider. A perusal of the TPO's order also indicates that the TPO has not disputed that this company is functionally comparable to the assessee in the case on hand; which is rendering back office ITES. From a perusal of the profit and loss account at page 30 of the Annual Report of 'Informed' it is seen that the total revenue is shown as Rs.3,81,38,665/- and 'other income' of Rs.1,22,85,303/-. As can be seen from Schedule 19 on page 40 of the Annual Report, the 'other income' comprises of non-operating income, interest, dividend, sale of current investments and miscellaneous income and evidently these incomes cannot be considered as operating income. The percentage of 67.7% worked out by the TPO is after considering these "other income" as service income; which is factually incorrect. It is evident from a perusal of the profit and loss account of 'Informed' that the service income is Rs.2,58,53,362/- which is entirely the revenue from operations and therefore in our considered view, the service income filter of 75% of service income to be from ITES as applied by the TPO, is satisfied in this case. In view of this factual finding rendered in the matter, we hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate Bench of the Tribunal, we hold that the AO/TPO is not justified in excluding the above company from the list of comparable companies. Accordingly, we direct the AO/TPO to include Crystal Voxx Limited in the list of comparables. (iii) Jindal Intellicom Limited (`Jindal') 10. The assessee has objected to the exclusion of this company Jindal Intellicon Limited for the following reasons:- (a) Call center services would be classified under ITeS. (b) As the company is operating in only one segment - ITeS, no segmental data is required. 10.2 The learned AR relied on the order of the ITAT in the case of M/s.Ocwen Financial Solutions Private Limited (supra). 10.3 We have heard rival submissions and perused the material on record. The Bangalore Bench of the Tribunal in the case of M/s.Ocwen Financial Solutions Private Limited (supra), had included Jindal Intellicon Limited in the list of comparable company. The relevant finding of the Bangalore Bench of the Tribunal, reads as follows:- "12.4.1 We have considered the rival contentions / submissions put forth and perused the material on record. We have also perused the Annual Report of this company, 'Jindal'; which is placed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company 'Jindal Intellicom Ltd.,' in the final set of comparables." 10.3.1 In the light of the order of the co-ordinate Bench of the Tribunal, we hold that the AO/TPO is not justified in excluding the above company from the list of comparable companies. Accordingly, we direct the AO/TPO to include Jindal Intellicom Limited in the list of comparables. 10.3.2 In the result, ground 24 is partly allowed. Working Capital Adjustment (Ground 26) 11. The next grievance of the assessee in the ITeS segment is in respect of not granting of working capital adjustment. 11.1 We have considered the rival submissions and perused the material on record, including the judicial pronouncement cited. We find that the assessee has filed the computation of working capital adjustment before the DRP; but the DRP has not considered the same. We also find that the Co-ordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. 101 taxmann.com 313 has discussed all the reasons on the issue and held that working capital shall be allowed; holding as under at paras 10 to 18 thereof- "10. The next grievance projected by the Assessee in its appeal is with regard to the action o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions: (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in. or the profit arising from, such transactions in the open market; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential com parables, with an assumption that the difference should be reflected in profits. The underlyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013]38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 108(l)(e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be 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 not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 108(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the dif ..... X X X X Extracts X X X X X X X X Extracts X X X X
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