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Income Tax Appellate Tribunal, “K Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya (AM) : On appeal here is Revenue’s against order of the learned CIT(A) for assessment year 2005-06 and another appeal by the assessee against the order of Assessing Officer pursuant to order of learned Dispute Resolution Panel for A.Y. 2012-13. Since appeals were heard together, these are being disposed of by consolidated order, for the sake of convenience.
Revenue’s appeal for A.Y. 2005-06 Though various grounds are raised, the issues arising are dealt with as under:-
2 Frost & Sullivan (India) Private Limited One issue relates to adjustment u/s. 92CA(4) of the Act of Rs. 2,14,25,160/-in respect of international transactions entered with the Associated Enterprise (AE).
Brief facts on this issue are that the assessee is a private limited company engaged in the business of providing market analysis and consultancy services to its clients and sometime also to clients of other FS group subsidiaries. In addition to above, it also provides low end back office support services to its AE. During the financial year 2004-05, GIC division of the assessee provided low end back office services to FS-USA and invoiced of Rs. 152,049,523/- on the basis of cost plus 10% mark up. The Transfer Pricing Officer (TPO) proceeded to make a new search. Accordingly, fresh search process resulted in twenty one comparable companies which were proposed to be adopted by the TPO by a show-cause notice. However, later on without providing any reason whatsoever the TPO selected only twelve out of the same. He computed average OP/TC at 27.8% and also provided marketing expenses at 2.30% and thereafter computed upwards transfer pricing adjustment of Rs. 2,14,25,160/-.
Upon assessee’s appeal, learned CIT(A) accepted the plea that the TPO resorted to cherry picking having selected twenty one companies after applying his own filter. For no reason, he rejected nine of them and selected twelve only. Hence, learned CIT(A) directed that these nine companies should also be included. Furthermore, learned CIT(A) directed that he was accepting the assessee’s submission that as per same search process as done by the TPO in applying the same qualitative and quantitative filters company namely ‘Nittany Outsourcing Limited’ found in this re-run should be allowed to be included in the set of the comparables. Learned CIT(A) observed that as entire proceeding is based on TPO’s fresh search, it was clear and proper to accept this prayer of the assessee. Further learned CIT(A) directed that the TPO did not expressly reject the company ‘Crisil Marketwire Limited’. Hence he noted that this company is also being considered as comparable company. Learned CIT(A)
3 Frost & Sullivan (India) Private Limited further accepted assessee’s submission that five of the companies selected by the TPO should be rejected.
Finally, learned CIT(A) came up to seventeen comparables list as under:-
Sr.No. Company name OPM margin (OP/TC) Allsec Technologies Limited 1 30.49% Ace Software Exports Limited 2 15.46% 3 Cosmic Global Limited 19.08% 4 Goldstone Teleservices Limited (Seg) 15.95% 5 Saffron Global 24.89% Transworks Information Services Limited 6 2.87% Apex Advanced Technology Private Limited 7 13.45% 8 MCS Limited 23.27% 9 R Systems International Limited (Seg) 5.46% 10 Spanco Telesystems & Solutions Ltd (Seg) 13.56% Apex Knowledge Solutions Private Limited 11 0.53% First Source Solutions Limited 12 3.56% 13 Ranklin Solutions Limited 5.80% 14 Triton Corporation Limited 1.09% 15 ICRA Online Limited 10.18% Nittany Outsourcing Limited 16 7.18% Crisil Marketwire Limited 17 4.60% Arithmetic Mean 9.24% Less : Adjustment Granted by TPO for 2.30% marketing expenses ALP Margin 6.94%
Thereafter he also directed that the adjustment for marketing expense allowed by the TPO should be done and finally he found that resultant margin compared favourably. Against this order, the Revenue is in appeal before us.
We have heard both the counsel and perused the records. We note that the TPO has done fresh search process in applying his own filter and came up with twenty one comparables. Out of these nine comparables were rejected without giving any reason whatsoever. We agree with learned Counsel of the assessee that this act of the TPO is classical act of cherry picking. There is no justification whatsoever as to why nine of the comparables selected by the TPO
4 Frost & Sullivan (India) Private Limited himself by applying filters selected by him only should be rejected. Hence, we uphold the order of learned CIT(A), wherein nine comparables were directed to be included in comparable search.
As regards direction of learned CIT(A) that company namely ‘Nittany Outsourcing Limited’ came out of the same re-run of the search process is also acceptable. However, we find that learned CIT(A) has directed that the TPO did not expressly reject the company ‘Crisil Marketwire Limited’ which appeared as comparable company in set of comparables in assessee’s transfer pricing study and hence he also directed this should be included in comparables. This direction of learned CIT(A) in our considered opinion is not sustainable. When learned CIT(A) is accepting that search process of twenty one comparables selected by the TPO should be adopted, then learned CIT(A) again cannot blow hot and cold and insist that one of the comparable appearing in the assessee’s original transfer pricing study should be included. This act in fact, is cherry picking by learned CIT(A) himself and the same is not sustainable.
As regards direction of learned CIT(A) to disregard five of the comparables coming out of TPO’s fresh search process, we note that learned Counsel of the assessee has not made any argument in support. Learned Counsel of the assessee only confined his argument about the rejection of nine comparables and cherry picking done by the TPO. Accordingly, we direct that comparable analysis should be done on the basis of twenty one companies selected by the TPO and one more added by learned CIT(A) namely ‘Nittany Outsourcing Limited’. Marketing support adjustment of 2.30% may also be granted.
Another issue raised is that learned CIT(A) erred in deleting the addition of Rs. 3,54,40,407/- made by the Assessing Officer on account of advance received by the assessee from its holding company, which was treated as ‘income’ by the Assessing Officer.
5 Frost & Sullivan (India) Private Limited
At the outset, on this issue learned Counsel of the assessee submitted that identical issue has been remitted by the ITAT in assessee’s own case in A.Y. 2004-05 vide order dated 24.4.2012 to the file of the Assessing Officer. Accordingly, he prayed that this issue should also be remitted to the file of the Assessing Officer with same direction. Operating portion of the Tribunal order read as under :-
16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the Ld. CIT(A) and the paper book filed on behalf of the assessee. In our opinion, the matter requires verification at the level of the AO. Although, the assessee in Schedule F of the Balance Sheet had mentioned that the Sundry Creditors and others include advance received from Frost & Sullivan Inc. against capital expenditure of Rs. 1,13,84,034/-, we find during the course of assessment proceedings the assessee has given a statement that it has received advance towards market research analysis services rendered during the year. Therefore, the details given in the balance sheet and the submissions made during the course of assessment proceedings are contradictory to each other. Neither the AO nor the Ld. CIT(A) has gone into this aspect. Therefore, when it was proposed that the issue needs verification at the level of the AO, both the parties fairly agreed that they have no objection if the matter is restored to the file of the AO. We, therefore, deem it proper to restore the issue to the file of the AO with a direction to give one more opportunity to the assessee to substantiate its claim with evidence to the satisfaction of the AO regarding the nature of advance received, its purpose and utilization and how the same has subsequently been adjusted from the bills raised by the assessee. The AO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This ground raised by the Revenue is accordingly allowed for statistical purpose.”
Respectfully following the precedent, we set aside the issue to the file of the Assessing Officer with similar direction.
In the result, Revenue’s appeal is partly allowed as above. : Assessee’s appeal for A.Y. 2012-13 14. Various grounds have been raised by the assessee but the only issue that has been pressed by learned Counsel of the assessee is that the TPO erred
6 Frost & Sullivan (India) Private Limited in upward transfer pricing adjustment of Rs. 4,61,413/-being notional interest on export receivable by the assessee from its AE.
On this issue transfer pricing assessment was made for the delay in payment by the AE. Learned counsel on this issue submitted that this issue is covered in favour of the assessee in as much as no interest is charged in respect of outstanding receivable from AE as well as non-AE. Hence, there cannot be any occasion to make arm’s length price adjustment for notional interest in this regard. Learned counsel placed reliance on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Indo American Jewellery Ltd. (44 taxmann.com 310). It was held in this decision that where there was complete uniformity in the act of the assessee in not charging interest from both AE and non-AE debtors for delay in realisation of export proceeds, the Tribunal was right in deleting the addition of notional interest on outstanding amount of export proceeds. Citing above said decision, learned counsel stated that this decision is squarely applicable in this case as the assessee has not charged interest from non-AEs also, adjustment made by the TPO is not sustainable.
Learned Departmental Representative could not make any rebuttal in this regard.
Accordingly, respectfully following the precedent as above, we decide this issue in favour of the assessee.
In the result, assessee’s appeal is partly allowed as above. Order has been pronounced in the Court on 18.6.2019.