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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI SANJAY GARG & SHRI OM PRAKASH KANT
This appeal by the assessee is directed against the order dated 30.01.2015 passed by the Ld. Assistant Commissioner of Income- Tax, Circle-11(3)-1, Mumbai (in short ‘the Ld. Assessing Officer’) for assessment year 2010-11 pursuant to the order of the Ld. Dispute
Tower Watson India Private Limited 2 ITA no. 1140/M/2015 Resolution Panel (‘DRP’). The grounds raised by the assessee are reproduced as under :
On the facts and in the circumstances of the case and in law, the Learned AO/ Transfer Pricing Officer ('Learned TPO'), based on the directions of the Hon'ble DRP has: General Ground
erred in assessing the total income of the Appellant at Rs 8,18,56,105 against Nil as computed by the Appellant in its return of income; A. Transfer Pricing Grounds 2. erred in making a transfer pricing adjustment of Rs 5,49,11,098 under Section 92C(4) of the Act to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises ('AEs') were not at arm's length; Reference made to the Learned TPO
3. erred in making a reference of the Appellant's case to the TPO under Section 92CA(1) of the Act, without satisfying the conditions specified therein; Rejection of benchmarking analysis undertaken by the Appellant
4. erred in rejecting the benchmarking analysis undertaken by the Appellant for the provision of consultancy services; Rejection of the Comparable Uncontrolled Price (CUP)) method as the most appropriate method
5. erred in rejecting the CUP method applied by the Appellant as the most appropriate method, without giving cogent reasons, for benchmarking the Tower Watson India Private Limited 3 ITA no. 1140/M/2015
transactions with AEs for international transaction pertaining to provision of consultancy services; Application of the Transactional Net Margin Method (‘TNMM') as the most appropriate method
6. erred in applying the TNMM as the most appropriate method, for benchmarking the transactions with Es for international transaction pertaining to provision of consultancy services, Use of single year data for computing operating margins of comparables
7. erred in using single year data (i.e. for AY 2010-11) in computing the operating margin on operating cost of the comparable selected; Inappropriate allocation of costs between AEs and non-AEs
8. erred in not appreciating the nature of subsidy received by the Appellant from its AB and thereby inappropriately allocating costs between Es vis-à-vis non-AEs, taking such subsidy as a part of turnover pertaining to transaction with AEs and allocating the entire costs on the basis of that turnover; Non-consideration of miscellaneous income as operationg in nature
The Hon 'ble DRP has erred in not adjudicating upon the Appellant's objection that the miscellaneous income of Rs 2,77,67,845 (which is nothing but reversal of operating expenditure) earned by the Appellant should be considered as operating in nature while calculating the operating margin of the Appellant; 10. Selecting companies as com parables for benchmarking without providing the search process erred in selecting a set of comparable companies without providing the Appellant with the detailed search process, thereby violating the principles of natural justice;
Tower Watson India Private Limited 4 ITA no. 1140/M/2015 Companies considered as comparable for benchmarking
11. erred in determining the arm's length operating margin to be 29.49% on operating costs under TNMM, by considering companies which are functionally different from the Appellant as comparable companies; 12. The Hon'ble DRP has erred in failing to adjudicate on the validity of Future Capital Holdings Limited as a comparable company; Incorrect computation of margins of comparables
erred in computing the operating margins of the comparable companies selected by him for benchmarking the international transaction of rendering consultancy services; B. Corporate Tax Grounds Not setting off eligible brought forward business losses and unabsorbed depreciation
erred in not setting off the eligible brought forward business losses and unabsorbed depreciation available for set off against business income of the year under consideration; Incorrectly considering the amount already refunded to the Appellant while computing the demand payable
erred in considering the amount already refunded to the Appellant as Rs 45,20,400 instead of the actual amount of Rs 39,26,781 refunded to it for the year under consideration, while computing the demand payable; Levying interest under Section 234B of the Act
The Learned AO has erred in levying interest under Section 234B of the Act; Levying interest under Section 234D of the Act
Tower Watson India Private Limited 5 ITA no. 1140/M/2015
The Learned AO has erred in levying interest under Section 234D of the Act; 18. Without prejudice, the Learned AO erred in computing the interest under Section 234D on the basis of a factually incorrect amount refunded to the Appellant (i.e. Rs 45,20,400 instead of Rs 39,26,781) for the year under consideration and in applying an incorrect rate of 1% for every month and part thereof; Penalty Proceedings 19. erred in initiating penalty proceedings under Section 271(1) (c) of the Act. Each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, to alter, to amend or to delete any or all of the above grounds of appeal
, at or prior to hearing of the appeal.
2. Briefly stated, facts of the case are that the assessee-company is a wholly own subsidiary of Towers Watson Group, a global consulting firm focused on human capital consultancy and actuarial consultancy. For the year under consideration, the assessee filed return of income declaring loss of Rs.(-)62,18,857/- on 30.09.2010. The case was selected for scrutiny and statutory notices under the Income-Tax Act, 1961 (in short ‘the Act’) were issued and complied with. In view of the international transactions carried out by the assesseee, the Assessing Officer referred the matter of determination of Arm’s Length Price of those international
Tower Watson India Private Limited 6 ITA no. 1140/M/2015 transactions with the Associated Enterprises (AEs) to Ld. Transfer Pricing Officer (TPO). The Ld. Transfer Pricing Officer proposed adjustment of Rs.9,43,89,339/- to the value of international transactions declared by the assessee. In view of the adjustment proposed by the Ld. TPO, the Assessing Officer issued draft assessment order to the assessee incorporating the adjustment proposed by the Ld. TPO and also made disallowance of interest on TDR amounting to Rs.4,38,503/-. On the objection raised by the assessee, the Ld. DRP issued direction to the Assessing Officer. Pursuant to the direction, the Assessing Officer has passed this final assessment order, against which assessee is in appeal before the Tribunal, raising the grounds as reproduced above.
We have heard the rival submissions of the parties on the issue-in-dispute and perused the relevant material on record. The Ground No. 1 raised by the assessee is general in nature and we are not required to adjudicate upon specifically.
Tower Watson India Private Limited 7 ITA no. 1140/M/2015
The Ground No. 2 to Ground No. 13 of the appeal relates to transfer pricing adjustment. Before us, the Ld. counsel of the assessee submitted that Ground No. 4, 5 and 6 are related to selection of most appropriate method. He submitted that assessee selected Comparable Uncontrolled Price (CUP) method as the most appropriate method however same was rejected by the Ld. Assessing Officer. In final assessment order, the Transactional Net Margin Method (TNMM) has been applied as most appropriate method for determining the Arm’s Length Price of the transaction. He submitted that in assessment year 2011-12 in the Tribunal has upheld the selection of CUP method (internal) by the assessee. He further submitted that in the year under consideration also facts and circumstances being identical and CUP method followed, the issue-in-dispute is covered in favour of the assessee. He further submitted that if Ground No. 4 to 6 of the appeal are allowed in favour of the assessee, the other grounds raised in respect of transfer pricing would not required to Tower Watson India Private Limited 8 ITA no. 1140/M/2015 be adjudicated. The Ld. DR also admitted that issue-in-dispute of selection of the appropriate method has been adjudicated by the Tribunal in favour of the assessee.
4.1 We find that regarding the international transaction of consultancy services, the Tribunal (supra) in assessment year 2011- 12 has observed and held as under :
“19. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. Facts on record reveal that the time is recorded on rate per hour methodology. The AEs are charged on the basis of hours spent on services rendered to them. Though the UREs are also charged on hourly rate basis, but due to cut-throat competition in this line, pre- determined fixed rate is billed and if the hourly rate is higher than the pre-determined fixed rate, then difference is written off. In our considered opinion, this is a standard practice followed by the enterprises providing similar consultancy services. Further, we find that the assessee has to assume total risk when it is providing services to the UREs whereas when the services are provided to AEs, the risk is that of the AEs whose client has been serviced.
We do not find any force in the contention that the evidences are not brought on record. The invoices raised to AEs and non AEs are exhibited in the paper book. Whether the same person is Tower Watson India Private Limited 9 ITA no. 1140/M/2015
providing service to both the AEs and non AEs is irrelevant, so as long as the evidences of services provided are available. The services are provided by different set of personnel, having different qualification and it would not be justifiable to ask for invoices of the same person who has provided service to AEs and also to non AEs.
Moreover, considering the nature of services provided by the assessee, we do not find the geographical locations relevant because the consulting services provided by the assessee would remain the same whether the service receiver is located in 'X' country or 'Y' country as long as service provider is in India. Our view is fortified by the fact that the price charged to non AEs, [irrespective of geographical location] is comparable to the price that is charged to Indian entities. Moreover, rate per hour for consultant, once decided, does not change irrespective of country and whether it is related or unrelated entity.
As mentioned elsewhere, risk and responsibility to the client is direct in Indian non AEs and for AEs the overall responsibility to the client is of the AE itself. In this line, work is assigned to different team members [whether relating to AE or non AE] based on the specific job skill-set requirement, available resources and overall deliverable expected, meaning thereby, that if the work requires more time of a junior consultant, he/she is assigned that work whereas if a senior's assistance is required, they devote time. Accordingly, a proper team composition is there to take care of the nature and technical difficulties of the project. Even the OECD Guidelines of July 2010 preferred internal
Tower Watson India Private Limited 10 ITA no. 1140/M/2015 CUP over other methods, since it bears a more direct and closer relationship to the transaction under review.
Considering the totality of the facts in the light of invoices relating to AEs and non AEs exhibited in the paper book, we are of the considered opinion that CUP is the MAM and has been rightly adopted by the assessee to bench mark its transactions for provision of consulting services rendered. This grievance is, accordingly, allowed.” 4.2 Since in the year under consideration also determination of Arm’s Length Price of transaction of consulting is involved, following finding of the Tribunal (supra) selection of CUP method by the assessee as most appropriate method for determination of Arm’s Length Price of the international transaction, is accepted. The Ground No. 4 to 6 of the appeal of the assessee are accordingly are allowed and the remaining grounds are being not adjudicated as not pressed in view of relief on Ground No. 4 to 6, thus the remaining grounds are accordingly held as infructuous.
Tower Watson India Private Limited 11 ITA no. 1140/M/2015
In ground No. 14, the assessee has sought setting off of the eligible brought forward business losses and unabsorbed expenditure. The Ld. DRP has held as under :
12.3 Discussion and directions of the DRP: The DRP has considered the matter. The A,O. has observed that brought forward business losses and unabsorbed depreciation cannot be set off against the assessed income for AY 2010-11 since the same have already been adjusted against the assessed incomes for AY 2007-08 and AY 2009-10. Such a factual statement has not been denied by the assessee. The pendency of appeals in respect of the demand of preceding years does not protect an assessee from the carried forward losses being adjusted against the assessed income. Unless, the appellate orders are pronounced in favour of the assessee and the effects to appeal orders are given, the assessee cannot claim benefit of any unabsorbed depreciation/ brought-forward loss since these amounts have been adjusted and do not exist. Hence, the arguments of the assessee are liable to rejection and the objection is dismissed.
We have heard the rival submissions of the parties and the issue-in-dispute, we find that the issue is of verification of the claim of the assessee that he has not been allowed adjustment of the unabsorbed depreciation/brought forward losses. Both the parties
Tower Watson India Private Limited 12 ITA no. 1140/M/2015 agreed that matter may be sent to the Assessing Officer for verification and allowed in accordance with provisions of law. Accordingly, we restore this issue back to the file of the Assessing Officer for allowing in accordance with law after necessary verification of the claim of the assessee. The Ground No. 14 of the appeal is accordingly allowed for statistical purposes.
In ground No. 15, the Ld. counsel submitted that the assessee has already got relief under rectification and therefore ground was not pressed before us. Accordingly, the ground is dismissed as not pressed.
The ground No. 16 being consequential is dismissed as infructuous.
Ground No. 17 and 18 were also not pressed by the Ld. counsel of the assessee and therefore accordingly dismissed as infructuous.
Tower Watson India Private Limited 13 ITA no. 1140/M/2015
In ground No. 19 relating to initiation of the penalty proceedings u/s 274 of the Act which is premature at this stage before us and therefore accordingly it is dismissed as infructuous.
In the result, the appeal of the assessee is partly allowed for statistical purposes.