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Income Tax Appellate Tribunal, DELHI BENCH ‘I’ : NEW DELHI
Before: SHRI B.P. JAIN & SHRI KULDIP SINGH
(PAN : AAHCS9583J) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri G.C. Srivastava, Divyanshu Aggarwal & Suvinay Kumar Dash, Advocates REVENUE BY : Shri Neeraj Kumar, Senior DR Date of Hearing : 14.11.2017 Date of Order : 14.12.2017 O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
1. The Appellant, M/s. M/s. CSR Technology (India) Private Limited (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 27.01.2017, passed by the AO in consonance with the orders passed by the ld. CIT (A)/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2012-13 on the grounds inter alia that :-
“I. Transfer Pricing
The grounds mentioned hereinafter are without prejudice to one another.
The learned Assessing Officer ('learned AO'), learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in determining an adjustment of INR 2,82,48,956/- with respect to the international transaction rendered by the taxpayer U/S 92CA of the Income-tax Act, 1961.
The learned AO/TPO/DRP while proposing the adjustment has erred in:
• Ignoring the business model followed by the Assessee for the services rendered to Associated Enterprise ("AE") vis-a-vis Non-AEs;
• Disregarding the segmental results of the Assessee and thereby proceeding to consider the margin of the Assessee at the entity level for the transfer pricing analysis.
3. Without prejudice to the other contentions of the Appellant, the Ld. AO/Ld. TPO has failed to appreciate that the international transactions are arm's length even based on the fresh comparability analysis as per the directions of Hon'ble Dispute Resolution Panel ("DRP"), if segmental result pertaining to AE transactions is considered.
4. The learned AO / learned TPO / Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act.
5. The learned AOI learned TPO/ Hon'ble DRP erred in rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters while determining the Arm's Length Price ('ALP').
6. The learned AO/learned TPO erred in applying additional filters and rejecting/modifying filters applied by the Appellant for determination of the arm's length price while carrying out a fresh comparability analysis
7. The learned AO/ learned TPOI Hon'ble DRP erred in not considering the previous two years financial data of the comparable companies while determining the ALP.
The learned AO/ learned TPOI Hon'ble DRP erred in applying different financial year ending filter while selecting the comparable companies.
9. The learned AO/ learned TPOI Hon'ble DRP erred in not considering the fact that the relevant data for the concerned financial year could be deduced from the information available on public domain.
10. The learned AO/learned TPO/Hon'ble DRP erred in applying export earning filter of 75% instead of 25% of the total sales, leading to a narrower comparable set.
11. The learned AOI learned TPO/ Hon'ble DRP has erred in considering 25% as the threshold limit for Related Party Transactions ('RPT') filter, without giving any cogent reason.
12. The learned AOI learned TPO/ Hon'ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies.
13. The learned AO/learned TPO/ Hon'ble DRP erred in not appreciating the fact that since the lower limit on turnover has already been applied mutually by the Appellant as well as the learned TPO while carrying out their respective comparability analysis, upper limit
on turnover should also have been provided based on the similar principle. 14. The learned AO/ learned TPO/ Hon'ble DRP erred in accepting companies that do not qualify the comparability criteria and ought to have been rejected:
• Infosys Ltd. • Celstream Technologies Ltd. • Thirdware Solutions Ltd. • Tata Elxsi Ltd. • Zylog Systems (India) Ltd. • Lucid Software Ltd. • Persistent Systems Ltd. • Larsen & Toubro Ltd. • Spry Resources Pvt. Ltd.
15. The learned AOI learned TPOI Hon'ble DRP erred in rejecting companies that ought to have been accepted as comparable:
• CAT Technologies Ltd. • Helios & Matheson Information Technology Ltd.
16. The learned AOI learned TPOI Hon'ble DRP erred in not allowing appropriate adjustment towards the risk difference between the Appellant vis-a-vis the comparable companies.” 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : CSR Technology India (Private)
Limi8ted, the taxpayer, earlier known as SIRF Technology India Private Limited is a subsidiary of CSR Inc., a group company of CSR, engaged in the provision of software development services to CSR Inc. Under a research & development agreement with CSR Inc., CSR Technology undertakes software development services exclusively for CSR Inc. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :-
S.No. Type of Method Selected Total value international of MAM PLI transaction transaction (Rs.) i. Provision for Transactional Operating 98,789,879 software Net Margin profit/ development Method Operating services (TNMM) Cost (OP/OC) ii. Payment in TNMM OP/OC 396,052 respect of Import of capital goods iii. Reimbursement TNMM OP/OC 529,616 of expenses
Transfer Pricing Officer (TPO) found the function of the taxpayer and its AE as explained in the TP report by the taxpayer in order. The taxpayer used Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM), Operating Profit/ Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and calculated its margin at 16.88%. TPO has not disputed the TNMM method adopted by the taxpayer. However, TPO noticed that the taxpayer has bifurcated its function in AE and non-AE segment while calculating the margin whereas transaction with non-AE segment is minuscule as against AE transaction and hence, recast the account at entity level and calculated the OP/OC at minus 9.92% by adopting TNMM as the most appropriate method.
TPO proposed to take 17 comparables having average of 20.92%.
After considering the objections raised by the taxpayer, ultimately TPO selected 12 comparables having average of 18.18% and proposed the proportionate adjustment of Rs.30,815,175,17.
The taxpayer carried the matter by way of raising objections before the ld. DRP, which have been disposed off. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
At the very outset, the ld. AR for the taxpayer contended that Ground No.2 is the only effective ground and rest of the grounds would become academic.
GROUND NO.2
First contention raised by ld. AR for the taxpayer that the TPO has ignored the business model of the taxpayer while providing services to both AE and non-AE and thereafter erred in disregarding the segmental result of the taxpayer and proceeded to consider the margin of the taxpayer at the entity level for TP analysis. TPO in principle has not rejected twin fold business model of the taxpayer : one, in case of AE, fixed cost plus mark up is assured for the services rendered whereas in case of non-AE, no assured profit for the taxpayer is there for providing services. TPO has rejected the segmental information of the taxpayer merely on the ground that transaction with non-AE is minuscule. TPO has not raised any query as to segmental result nor has considered the reply filed by the taxpayer giving complete detail, which were also before the ld. DRP. Ld. AR relied upon the decisions rendered by the coordinate Bench of the Tribunal in LG Electronics India Private Ltd. vs. ACIT in and Honeywell Electrical Devices & Systems India Ltd. vs. ACIT – (2014) 29 ITR (T) 347 (Chennai – Trib.) 8. However, the ld. DR for the Revenue in order to repel the contention raised by the taxpayer supported the decision of AO/TPO/DRP in disregarding the segmental result of the taxpayer contended inter alia that when the taxpayer is providing similar services to the AE as well as non-AE, there cannot be any non- allocation key and the taxpayer has made artificial bifurcation only to raise the profit; that when the taxpayer is doing same business with AE and non-AE, only logical conclusion is that same employees are doing work for providing services to AE and non- AE; that no audited account with detail has been given; that decision rendered by the coordinate Bench of the Tribunal in LG Electronics India Private Ltd. and Honeywell Electrical Devices & Systems India Ltd. (supra) are not applicable to the facts and circumstances of the case.
In the backdrop of the aforesaid facts and circumstances of the case, the first question arises for determination in this case is:-
“as to whether TPO/DRP have erred in disregarding the segmental information provided by the taxpayer for the reason that the same is not audited one?”
When we seek the answer of the aforesaid question in the light of the fact that there is no dispute in applying the TNMM as the most appropriate method and there is no need to go into the comparables, the identical question has already been determined by the Special Bench of the Tribunal in case cited as M/s. LG. Electronics India Private Limited (supra) in favour of the assessee by returning the following findings :-
“21.5 . It is undisputed that under the TNMM, it is always the operating profit from the concerned international transaction that is viewed in relation to the total cost, sales or capital employed etc. of that international transaction. It is not as if the percentage of the margin is to be determined by considering the net profit of the entity in relation to the total sales of the entity. When we consider operating profit to total costs of an international transaction, all the items of non- operating expenses and non-operating income qua such international transaction are liable to be excluded. The correct approach under the TNMM is to consider the operating profit from each international transaction in relation to the total cost or sales or capital employed etc. of such international transaction and not the net profit, total costs, sales, capital employed of the assessee as a whole on entity level. Section 92C unequivocally provides that the ALP in relation to 'an' international transaction shall be determined by any of the prescribed methods. In turn, rule 10B(1)(e) also talks of the net profit margin realized by the enterprise from 'an' international transaction. When the mandate of the section and the relevant rule is unambiguous so as to apply on each transaction, as is apparent from the use of the article 'an', then the computation of the ALP of 'an' international transaction on the entity level is inappropriate. Our conclusion that each international transaction is required to be separately scrutinized under Chapter-X also becomes apparent from the language of section 92(3) as discussed infra. Thus, it is clear that the sanction is for applying the TNMM only on a transactional level and not on entity level. Of course, the TNMM can be correctly applied on entity level if all the international transactions are of sale by the assessee to its foreign AE and there is no other transaction of sale to any outsider and also there is no other international transaction. But if there are several unrelated international transactions, as is the case before us and the assessee or the TPO has applied the TNMM in a wrong manner on entity level for testing any of such transactions, then the remedy lies in correcting such mistake rather than drawing legally unsustainable conclusions by taking such mistake as a correct legal position.”
However, coordinate Bench of the Tribunal in as M/s. LG.
Electronics India Private Limited (supra) case held that the sanction is for applying the TNMM only at transactional level and not on entity level. It is further held that TNMM can be correctly applied on entity level if the international transactions are on sale by the taxpayer to its foreign AE and there is no other international transaction of sale to any outsider and also there is no other international transaction. In the instant case, undisputedly, there is no other international transaction. The taxpayer has only minuscule transaction with non-AE, the bifurcation of which has been given at pages 566 & 567 of the paper book. Detail available at page 567 of the paper book includes inter alia the name of the employees, the month-wise payment for the work exclusively done for non-AE/domestic enterprises. All these details were available before ld. TPO who has not raised any query. This detail was also available before the DRP but has not been considered in the right perspective.
Now, the next question arises for determination is :-
“as to whether segmental results can be rejected for non auditing the same?”
In case cited as Honeywell Electrical Devices & Systems India Ltd. (supra), the coordinate Bench of the Tribunal by relying upon the case of 3i Infotec Ltd. vs. ITO – (2013) 35 txmann.com 582 (Chennai) rendered by the Tribunal held that even if such segmental results are not shown in the audited financial accounts, they have to be accepted. The coordinate Bench of the Tribunal in 3i Infotec Ltd. (supra) held as under :-
“29. …..Before us also, the ld. CIT/DR could not point out any specific defect in this working of the assessee. The only argument of the Department is that the segment wise working made by the assessee is not audited. In our considered view, there is no legal requirement that the segment wise working submitted before the TPO should be audited by the Assessee’s CA. Moreover, it is not open to the Revenue to reject the working prepared by the assessee…”
Coordinate Bench of the Tribunal in case cited as Lummus Technology Heat Transfer BV (ITA No.6227/Del/2012), available at page 441 of the paper book, also held that segmental results cannot be rejected on the ground that the same are not audited.
TPO/DRP was required to examine the same if the same were maintained in the ordinary course of business.
More so, the TPO was having complete opportunity to examine the segmental result otherwise available at page 564 of the paper book giving complete financial of AE and non-AE but the TPO has simply rejected the segmental result by citing reason that transaction with non-AE is minuscule. So, we are of the considered view that segmental bifurcation need not be audited rather it is for the TPO to examine the same particularly when submitted in detail by the taxpayer. Moreover entity level profit cannot be taken for TP analysis unless all the transactions are with AE.
Coordinate Bench of the Tribunal in Sysarris Software (India) Pvt. Ltd. (IT(TP)A.No.639/Bang/2012), available at page 441 of the paper book, while deciding the identical issue held that when there are international transactions of the taxpayer with AE only international transactions are to be adjusted for ALP adjustment. In the instant case also, transaction of the taxpayer with non-AE with which it is operating on different model are not to be taken for benchmarking the international transaction.
In view of what has been discussed above, we are of the considered view that AO/TPO/DRP have erred in disregarding the segmental result of the taxpayer by proceeding to consider the margin of the taxpayer at the entity level for the transfer pricing analysis. So, by accepting the TNMM as the most appropriate method and in the face of the fact that the taxpayer was having separate international transaction with its AE, the ALP of the same is to be determined whereas ALP of the other transactions of the taxpayer with non-AE is not to be considered.
Even otherwise, TP adjustment is not possible without taking into account the segmental result. As such, TPO/DRP cannot unilaterally adopt entity level result in determining the ALP of international transaction. So, in these circumstances, TP adjustment made by the AO/TPO/DRP by taking the margin of the taxpayer at entry level for TP adjustment is not sustainable, so we hereby remand back the case to the TPO to decide afresh after considering segmental result of the taxpayer for TP analysis.
Resultantly, the appeal filed by the taxpayer is allowed for statistical purposes. Order pronounced in open court on this 14th day of December, 2017.