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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI A.K. GARODIA & SHRI VIJAY PAL RAO
O R D E R Per Vijay Pal Rao, Judicial Member These cross appeals are directed against the order dated 24.01.2013 of CIT(A) for the assessment year 2008-09.
The assessee is wholly owned subsidiary of Huawei Tech. Investment Company Limited (Huawei Hong Kong) which is in turn a subsidiary of Huawei Technologies Company Limited (‘Huawei China’). The assessee provided software development services to its AE at Hong Kong as well as China under the Master Services Agreement entered into with these two companies. The financial results and international transactions reported by the assessee are as under:
FINANCIAL RESULTS Software Development Description Services Operating Revenue Rs. 1,784,290,768/- Operating Cost Rs. 1,621,513,567/- Operating Profit (PBIT) Rs.162,777,201/- Operating Profit to Cost 10.04% Ratio
IT(TP)A Nos. 395 & 459/Bang/2013 Page 3 of 8 INTERNATIONAL TRANSACTIONS Receipts for Software 1. Rs. 1,784,290,768/- Development Services
2. Purchase of fixed assets Rs. 385,38,532
To bench mark its international transaction the assessee selected 16 companies in its TP study analysis having mean margin at 12%.
Therefore, the assessee claimed its international transactions at arms length being within the tolerance range of +5% of the comparable price.
The TPO rejected the TP study analysis and carried out a fresh search.
The TPO selected 20 companies in the final set of comparables having mean margin of 23.65% and after allowing working capital adjustment of 1.87% the adjusted mean margin was arrived at 21.78%. Accordingly, the TPO proposed an adjustment u/s. 92CA of Rs. 19,03,88,454/-. The assessee challenged the action of the TPO before the CIT(A) and disputed the functional comparability of the companies selected by the TPO. The CIT(A) applied turnover filter of Rs. 1 crore to 200 crores and thereby excluded 7 companies from the set of comparables selected by the TPO.
The CIT(A) has also excluded one company on the ground of high profit margin apart from 2 companies were found as functionally not comparable and directed to be excluded. Thus the CIT(A) rejected the 10 companies from the set of 20 selected by the TPO. Therefore both
IT(TP)A Nos. 395 & 459/Bang/2013 Page 4 of 8 assessee as well as revenue are aggrieved by the order of CIT(A) on the issue of transfer pricing and raised the following grounds.
Grounds raised by the assessee:-
IT(TP)A Nos. 395 & 459/Bang/2013 Page 5 of 8 Grounds raised by the Revenue:-
IT(TP)A Nos. 395 & 459/Bang/2013 Page 6 of 8 4. As regards the turnover filter of Rs. 1 crore to 200 crores applied by the CIT(A) we find that the Tribunal has taken a consistent view that applying a turnover filter of a slab Rs. 1 to 200 crores is not proper as it gives unacceptable results. Therefore the Tribunal has considered a tolerance range of turnover as ten times of turnover of the tested party on both sides higher as well as low.
As regards the high profit margin as a ground for exclusion of a comparable company it is well settled proposition that high profit margin or loss cannot be a ground or criteria for exclusion or inclusion of a company in the set of comparable though an abnormal or an extraordinary event resulting in abnormal high profit can be a criteria for exclusion of a particular company from the set of comparables. Therefore abnormal circumstances or extraordinary event can be a reason for exclusion and not the high profit margin alone.
The assessee is seeking exclusion of 12 companies from the set of comparables selected by the TPO whereas the revenue is seeking restoration of the companies which were rejected by the CIT(A) and particularly by applying the turnover filter and high profit margin. Therefore except two companies the CIT(A) did not examine the functional comparability of 8 companies rejected by it. Hence in the facts
IT(TP)A Nos. 395 & 459/Bang/2013 Page 7 of 8 and circumstances of the case we set aside the entire issue of determination of arms length price and consequential transfer pricing adjustment to the record of the CIT(A) for deciding the functional comparability of all the companies objected by the assessee. Needless to say the assessee be given an appropriate opportunity of hearing before passing the fresh order on this issue.
The department has also raised the issue under ground no. 7 regarding exclusion of the expenditure incurred in foreign currency from export turnover as well as total turnover while computing the deduction u/s. 10A of the Act. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. At the outset we note that this issue is covered by the decision of Hon’ble jurisdictional High Court in case of CIT Vs Tata Elxsi Ltd. (349 ITR 98). We note that the CIT(A) has decided this issue by following the decision of Hon’ble jurisdictional High Court in case of CIT Vs Tata Elxsi Ltd. (supra). Accordingly we do not find any error or illegality in the impugned order of the CIT(A) qua this issue the same is rejected.
IT(TP)A Nos. 395 & 459/Bang/2013 Page 8 of 8 8. In the result the assessee’s appeal is allowed for statistical purposes and the revenue’s appeal is partly allowed for statistical purposes.
Pronounced in the open court on this 31st day of May, 2017.