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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal filed by the assessee against the order of AO u/s. 143(3)/144C dated 31.12.2013 on the following grounds :
“1. That on the facts and in the circumstances of the case, Order passed by the Ld. TPO/Ld. AO is without jurisdiction and bad in law and void ab initio.
2. The Ld.AO/DRP erred in sustaining the addition of made by the Ld. TPO/AO by way of adjustment to Arm length Price of Rs 32,649,699/-
3. The Ld.TPO erred in selecting certain comparables in final set of comparables which are functionally dissimilar.
4. The Ld. AO/DRP erred in law, not making adjustment to the net margin of the comparables on account of 'risk'.
5. The Ld. TPO erred in rejection the comparability analysis conducted by the appellant for determining the impugned arm Length price on the basis of wrong and subjective assumptions.
6. The Ld. AO/DRP erred in law and on facts and circumstances of the case by not considering gains losses arising out of foreign Exchange fluctuation for the purpose of computing the operating margin of the Assessee as well as comparable companies.
7. The Ld. AO/DRP erred in law by arbitrary rejecting certain comparables by applying lower turnover filter without considering upper range of the turnover.
8. The Ld. AO/ DRP erred in arbitrarily applying qualitative filters on ad hoc basis resulting exclusion of appropriate comparable.
9. The Ld. AO/DRP erred in not providing appropriate adjustments to account for difference in Working Capital requirement.
The Ld. AO/DRP erred in selecting certain comparables in which as per information subsequently in public domain, bulk of operation activities are outsourced and are the refer not comparable to the Appellant.
The Ld. AO / DRP has erred in law and on facts, by initiating penalty proceedings under section 271(1) (c) of the Act.”
The assessee filed its return of income declaring taxable income of Rs.8888/-.The case was selected for scrutiny u/s. 143(3) and statutory notices were issued. During the scrutiny proceedings, the Assessing Officer noted that there is international transactions involved, therefore, he referred the case to the Transfer Pricing Officer (TPO) after obtaining the approval from the CIT for determining the Arm’s length price (ALP) u/s. 92CA(3) in respect of international transactions entered into by the assessee. The learned TPO, after receiving the reference for determination of ALP, asked the assessee to submit all necessary details. In compliance to the notice, the assessee submitted the details as per table below and other details as required by the TPO :
Nature of international Method selected Amount (In INR) transaction Provision of IT enabled services TNMM 240,933,502 and data management Reimbursement of expenses - 3,237,291 Recovery of expenses - 14,653,636 M/s. Vaildor Capital India Pvt. Ltd. is formerly known as M/s. HFO Services India Pvt. Ltd. (HFO India) which was incorporated in India as a private limited company under the Companies Act, 1956 on March 27, 2007. The Company obtained approval from the Development Commissioner of Special Economic Zone for setting of a unit in Special Economic Zone under the provisions of Special Economic Act, 2005. The terms of the approval were amended by letter dated January 15, 2008 to provide for rendering of IT enabled Services.
HFO India has entered into the following international transactions during the financial year ended 31.03.2009 with its associate enterprise and the following functions were performed :
(i). Provision of IT enabled services
(ii). Reimbursement of expenses (iii). Recovery of expenses The assessee submitted TP study report regarding international transactions undertaken during the year in respect of the provisions of IT enabled services, reimbursement of expenses and recovery of expenses, for which he submitted 24 comparable companies before the TPO which are as under :
Company Name Weighted Average NCP (percent) C M S Computers Ltd. 4.60 C M C Limited 19.88 Cosmic Global Limited 13.36 Datamatics Technologies Limited 6.58 ERP Soft Systems Ltd. 16.59 Firstsource Solutions Limited 13.17 Flextronics Software Systems Limited 14.58 ICRA Online Limited 32.72 Indus Networks Limited 22.55 Informed Technologies India Limited 3.71 IServices India Pvt. Ltd. 17.03 Macmillan India Limited 16.66 Maple esolutions Limited 17.49 Nittany Outsourcing Services Pvt Ltd. 49.73 R Systems International Limited 4.60 Religare Technova Global Solutions Limited 19.88 Shreejal Info Hubs Limited 13.36 Spanco Telesystems and Solutions Limited 6.58 Sparsh BPO Services Ltd. 16.59 Sundaram Business Services Ltd. 13.17 Tansworks Information Services Limited 14.58 Twinstar Software Exports Limited 32.72 vCustomer Services India Pvt Limited 22.55 Vishal Information Technologies Limited 3.71 Arithmetic Mean 13.67 The appellant has adopted TNMM for determining the ALP and accordingly calculated arithmetic mean at 13.67% and the appellant has taken himself as the tested party and calculated the OP/TC at 17.99%. The learned TPO accepted four comparables out of 24 submitted by appellant and calculated the OP/TC at average 33.93% as under :
Sl. No. Name OP/TC (%) 1 Cosmic Global Ltd. 48.2 2 Informed Technologies India Ltd 23.13 3 Transworks Information Services Ltd 25.7 (Aditya Birla Minacs Worlwide Ltd.) 4 Vishal Information Technologies Ltd 38.69 Average 33.93 The arm’s length price of the international transaction related to the provision of IT enabled services is recalculated as below : Total cost Rs.204,273,278 Arm’s length price at a margin of 33.93% Rs.273,583,201 Price received Rs.240,933,502 Adjustment u/s 92CA Rs.32,649,699
The TPO accordingly passed the order dated 07.08.2012 for proposing the adjustment u/s. 92CA by Rs.3,26,49,699/- as calculated above. The AO passed his order on 28.02.2013 accordingly. Aggrieved by the above order, the assessee carried the matter before the DRP. The ld. DRP after considering the objections of the assessee, directed the Assessing Officer to pass the order in view of the directions given by the DRP. The ld. Assessing Officer, accordingly passed order and determined the ALP at Rs.3,30,17,391/- by making addition of Rs.3,67,692/-.
Aggrieved by this order, the assessee is in appeal before the Tribunal.
During the course of hearing, the appellant raised additional ground of appeal for inclusion of two more companies as comparables which reads as under :
“That on the facts and in circumstances of the case the following comparables having similar functional profile be included.
CG – VAK 2. Microgenetics Systems Ltd.”
In support of admission of additional ground, the appellant relied upon the following case laws :
(i). Kedarnath Jute Mfg. Co. Ltd. vs. CIT, 82 ITR 363 (SC) (ii). CWT vs. Mettles (P) Ltd.. 156 ITR 569 (Del.) (iii). CIT vs. Mrs. V. Chandra, 245 ITR 610 (Del.) (iv). DIT(Inv.) vs. Pooran Mall & Sons, 96 ITR 390 (SC) (v). PV Doshi vs. CIT, 113 ITR 22 (Guj) (vi). CIT vs. Continental Commercial Corp. , 110 ITR 170 (Mad) (vii). Pullangode Rubber Produce Co. Ltd. Vs. State of Kerala, 91 ITR 18 (SC) (viii). CIT vs. Mahalaxmi Textile Mills, 66 ITR 710 (SC) (ix). NTPC vs. CIT 229 ITR 383 (SC) (x). Stream International Services (P) Ltd. vs. ADIT, ITA 8997/Mum/2010 (xi). GE BE (P) Ltd., 164 TTJ 40 (Bang) (xii). Navisite India Private Limited (ITA No. 5329/De./2012) (xiii). Panasonic AVC Networks India Co. Ltd. (ITA 4620/Del./2011) (xiv). Verizon India Pvt. Ltd. (ITA No. 2766/Del./2010) (xv). Lubrizol Advanced Materials India Pvt. Ltd.(ITA No. 3320/Ahd/2010) (xvi). MCI Com India Pvt Ltd. (ITA No. 4187/Del./2010)
The ld. DR vehemently objected the admission of additional ground at this stage. It was submitted that the appellant could not submit it before the TPO either through TP study report or at the time of hearing. He relied on the judgment in the case of CIT vs. Babulal Nim, 47 ITR 864 (MP).
After hearing both the parties and perusing the material available on record, we find that the appellant has submitted the additional ground of appeal before the Tribunal first time by his application 11.04.2016 for inclusion of two more companies as comparables to determine the arm’s length price but it was not produced before the TPO. In the interest of justice, we set aside the whole issue back to the AO/TPO with direction to examine the correctness of the claim for inclusion or otherwise of CG – VK and Microgenetics Systems Ltd. in accordance with settled principles of comparability and then to decide the ALP of the transactions. The assessee is also directed to justify before the AO/TPO as to why these companies were not included in its transfer pricing study report by looking at their accept/reject matrix. It would also be the obligation of the assessee to demonstrate before the AO/TPO about comparability of FAR of these comparables. Needless to say that request for admission of addition ground is accepted/allowed with respect to the decision of Hon’ble Delhi High Court in case of Chryscapital investment Advertisements (India) Pvt. Ltd., 376 ITR 183 & Techbooks International Pvt. Ltd. (ITA No. 240/Del./2015 (Delhi Tribunal). It would also be the obligation of the assessee to justify the exclusion of above two comparables originally and now required to include them without there being any change in the facts and circumstances. With that view, we have adjudicated the additional ground filed by the assessee in favour of the assessee with the above directions.
As we have admitted the additional ground of appeal, it will need to fresh comparability analysis and determination of ALP afresh in accordance with law.
Therefore, it would be premature to decide other grounds of appeal, as the comparability analysis if falls within plus minus 5% range, then their adjudication would be only academic. Therefore, all other grounds of appeal are not adjudicated. Accordingly, the appeal of the assessee deserves to be partly allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 26.12.2016.