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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’
Before: SHRI AK GARODIA & SHRI VIJAYPAL RAO
IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH ‘B’ BEFORE SHRI AK GARODIA, ACCOUNTANT MEMBER & SHRI VIJAYPAL RAO, JUDICIAL MEMBER
ITA No.1282/Bang/2011 Assessment year : 2007-08 AMD Far East Limited – Indian Branch office Vs. Joint Director of Income Tax (Since taken over by AMD India Private Ltd.), (international Taxation – I, Poddar Heritage building, Bangalore. 28 Cubbon Road, Bangalore – 560 001. PAN: AADCA 1739L APPELLANT RESPONDENT Appellant by : Shri P. C. Khincha, C.A. Respondent by : Ms Neera Malhotra, CIT(DR) Date of hearing : 26.04.2016 Date of Pronouncement : 29.04.2016
O R D E R PER SHRI AK GARODIA, ACCOUNTANT MEMBER :
This is an assessee’s appeal directed against the order of ld. CIT (Appeals)-V, Bengaluru dated 19.6.2014 for the assessment year 2006-07.
The grounds nos. 1 to 6 raised by the assessee are as under:-
(1) Assessment and reference to Transfer Pricing Officer are bad in law (a) The final assessment order8issued by the Joint Director of Income-tax (International Taxation) – I, [‘JDIT’ or ‘AO’], is bad on facts and in law,
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(b) and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to AMD Far East Limited – Indian Branch Office (‘the Appellant or ‘the Company’), a show cause notice, as per proviso to sec. 92C(3) of the Income-tax Act, 1961 [‘the Act’]. (c) The AO has erred in law in making a reference to the Asst. Director of Income-tax Transfer Pricing – IV [‘TPO’], inter alia, since he has not recorded an opinion that any of the conditions in sec. 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in sec. 92CA (1) of the Act. (2) The fresh comparable search undertaken by the TPO is bad in law (a) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the appellant’s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus the appellant prays that the fresh benchmarking analysis conducted by the TPO is liable to be quashed. (b) On the facts and in the circumstances of the case and in law, the TPO erred in not demonstrating that the motive of the appellant was to shift profits outside of India by manipulating the prices charged in its international transactions which are a pre-requisite condition to make any adjustment under the provisions of Chapter X of the Act.
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(3) Comparability Analysis adopted by the TPO for determination of arm’s length price (a) The AO/TPO grossly erred on facts in benchmarking the transactions of the captive marketing support services of the appellant with companies operating as fully fledged entrepreneurs without considering the differences in the functions performed, assets employed and risk undertaken by the appellant vis-vis comparable companies. (b) The AO/TPO erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study without considering the functional and risk analysis of the appellant. (c) The AO/TPO erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparable to be assessee, without functional comparability. (d) The AO/TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e other than 31 March 2007) and inconsistently applying such filter. (e) The AO/TPO grossly erred in law in deviating from the uncontrolled party transaction definition as pre the Income-tax Rules and arbitrarily applying a 25% related party criteria in accepting/rejecting comparables.
(f) The AO/TPO grossly erred on facts in arbitrarily rejecting companies having commission income less than 75% of total operating revenue.
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(g) The AO/TPO erred on facts in arbitrarily accepting companies having turnover between Rs.1 crore to Rs.100 crores. (h) The AO/TPO also erred on facts in arbitrarily rejecting companies based on their financial results without considering the functional comparability. (i) The AO/TPO erred on facts and in law in considering a set of ‘secret data’, i.e data which was not available in public domain, in arriving at a fresh set of companies using his power u/s 133(6), which is grossly unjustified. (j) The AO/TPO also erred on facts and in law in excluding the foreign exchange gain or loss while calculating the net margins of the comparable companies. (4) Erroneous data used by the AO/TPO (a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the assessee. (b) The AO/TPO erred in law in not applying the multiple- year data while computing the margin of alleged comparable companies. (5) Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) depreciation adjustments, (c) working capital adjustment and (d) risk profile between appellant and the comparable companies. (6) Variation of 5% from the arithmetic mean
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The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the appellant.
It was submitted by the learned AR of the assessee that Ground No. 1 is not pressed and Ground No. 6 is to be decided against the assessee in
view of insertion of section 2A in section 90 with retrospective effect from 01.04.2002. Accordingly, Ground Nos. 1 and 6 are rejected. Regarding Grounds Nos. 2 to 5, he submitted that the grievances of the assessee will be taken care of if three aspects of the matter are considered
and decided. First aspect as per him is exclusion of one comparable out of five comparables selected by the TPO i.e. ICC International Agencies Ltd. (Seg.). In support of this contention, he submitted that as per the tribunal
order rendered in the case of Logica (P) Ltd. vs. ACIT as reported in 36 Taxman.com 374 (Bangalore) and Autodesk India Pvt. Ltd. vs. DCIT as reported in TS-502-ITAT-2015(Bang)-TP, copy submitted, it was held by
the tribunal that this company is functionally dissimilar. He further submitted that the function of the present assessee and these two companies are similar and therefore, following these two tribunal orders,
in the present case also, this comparable should be excluded.
Second aspect as per him is this that operating margin on cost
considered by the TPO in respect of two companies i.e. Priya International
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Ltd. at 74.71 % and Access Global Solutions Ltd. at 5.40% is not correct and it should be 15.71% and 3.94 % respectively. In support of this
contention, he submitted that in another case i.e. in the case of M/s Electronics for Imaging India Pvt. Ltd. for A.Y. 2007 – 08, this claim was made before the TPO in that case and as per the order of TPO dated
27.10.2010 in that case, the TPO has worked out the margin ratio of these two companies being Operating profit to cost at 15.71 % and 3.94 % respectively. He submitted a copy of the TPO’s order in that case. He also submitted that on page 443 of the paper book being part of the tribunal
order rendered in the case of Logica (P.) Ltd. (Supra), the tribunal has also noted the percentage of operating profit to cost of these two companies at 15.71 % and 3.94 % respectively. He submitted that therefore, in the
present case also, the margin percentage of these two comparables should be adopted at 15.71 % and 3.94 % respectively.
Third aspect as per him is this that there should be adjustment in PLI on account of depreciation. He submitted that the assessee has applied straight line method (SLM) of depreciation and accordingly, the
depreciation charged by the assessee company is much higher than the depreciation charged by the comparables. He submitted that the percentage of depreciation to total assets in the present case is 28.47 %
whereas the average depreciation to total assets in the case of the
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comparables is only 15.32% and it also shows that the depreciation charged by the assessee company is on very higher side and therefore,
suitable adjustment is required. In support of this contention, he placed reliance on the following judicial pronouncements:- a) Egain Communication (P) Ltd. vs. ITO, 23 SOT 385 (Pune) Paper Book Pages 452 to 476. b) CIT vs. Rakhra Technologies (P.) Ltd., 15 Taxman.com 266 (P & H) Paper Book Pages 477 to 481. c) M/s ACI Worldwide Solutions (P.) Ltd. vs. DCIT in ITA No. 652/Bang/2012 dated 10.04.2015, Paper Book Pages 489 to 498.
Finally he submitted that if these three effects are given than the
PLI being Arithmetical Mean of the remaining four comparables will be 14.00% before adjustment of depreciation and 7.98 % after adjustment of depreciation as against the margin reported by the assessee company at
7.29% and since it is within 5% range, no TP adjustment is called for.
As against this, learned DR of the revenue submitted that regarding
exclusion of one comparable i.e. ICC International Agencies Ltd. (Seg.), she relies on the order of Assessing Officer/TPO. Regarding rectification in operating margins of two comparables and adjustment on account of
depreciation, she submitted that the matter may be restored to Assessing Officer/TPO for factual verifications. 8. In the rejoinder, it was submitted by the learned AR of the assessee
that he has no objection to restoring the matter back to Assessing
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Officer/TPO for factual verifications but the issues on principle should be decided by the tribunal.
We have considered the rival submissions. Regarding the first aspect i.e. exclusion of one comparable i.e. ICC International Agencies
Ltd. (Seg.), we find that in the case of Logica (P) Ltd. vs. ACIT (Supra), that assessee company was engaged in the business of rendering software development services and support services to its AE. In the present case also, the assessee company is rendering market support services to its AE.
Learned DR of the revenue also could not point out any difference in facts in the present case and in the case of Logica (P) Ltd. vs. ACIT (Supra). In this case i.e. in the case of Logica (P) Ltd. vs. ACIT (Supra), it was held
by the tribunal that keeping in mind the functions and risk analysis, it is not possible to compare that assessee with ICC International Agencies Ltd. The relevant Para of this tribunal order is Para No. 28 on page 445 of
the paper book and the same is reproduced below for ready reference:-
We have given a careful consideration to the rival submissions and are of the view that the plea put forth by the assessee deserves to be accepted. As can be seen from the functional profile of ICC International Agencies Ltd. given by the assessee, which is not disputed by the TPO, that it does trading and also acts as commission agent for machineries used textiles industry. As against
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this, the functional profile of the assessee, as we have already seen, is only giving support services. Keeping in mind the functions and risk analysis, it is not possible to compare the assessee with ICC International Agencies Ltd. If ICC International Agencies Ltd. is not taken as a comparable, then the margin of the assessee would be well within the OP/Cost PLI of the other comparable companies chosen by the TPO. We accordingly hold that in respect of the international transactions of rendering marketing support services, the price received by the assessee is at arms’ length and no adjustment is called for. Ground No.5 raised by the assessee is accordingly allowed.
By respectfully following this tribunal order in the absence of any
difference in facts having been pointed out by the learned DR of the revenue, we hold that this company i.e. ICC International Agencies Ltd. cannot be considered as a comparable in the present case because of
functional dissimilarity.
Regarding the remaining two aspects i.e. correct margin of two companies i.e. Priya International Ltd. and Access Global Solutions Ltd.
and adjustment on account of depreciation, we hold that in principle, these adjustments are approved because the margin of the comparable has to be correctly adopted and adjustment on account of depreciation is also
justified if excess/lesser depreciation is charged by the assessee because
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of adopting a different method of charging depreciation as compared to method of charging depreciation by the comparables. But for factual
verification of the correct margin of two companies i.e. Priya International Ltd. and Access Global Solutions Ltd. and adjustment required on account of depreciation, the matter is restored back to Assessing Officer/TPO.
Needless to say, before passing the order, adequate opportunity of being heard should be provided to the assessee. Grounds Nos. 2 to 5 are allowed for statistical purposes.
Ground No. 7 is as under:-
(7) Disallowance of expatriate cost (a) On the facts and in the circumstances of the case, the AO erred in making disallowance of Rs.13,512,070/- incurred towards expatriate costs, without appreciating the fact that the said expatriate costs are incurred in relation to the services rendered by expatriate employees.
(b) Without prejudice to the above, on the facts and in the circumstances of the case, the AO has erred in not excluding the aforesaid expatriate cost from the cost base of the appellant, which was considered by the TPO for determining the arm’s length margin.
It was submitted by the learned AR of the assessee that the objections on this issue raised by the assessee before DRP are on page 333 of the paper book. Main objections are that these expatriate employees of
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the HO were monitoring the marketing activities of the branch i.e. the present assessee and therefore, these expenses should be allowed. The next objection is this that this cost was included in the cost base of the branch on which mark up has been earned by the branch & offered for tax and TPO has not excluded this expenses from the cost base and therefore, the disallowance is not justified.
He also submitted that as per Para 4 & 5 of the draft assessment order, this was the objection of the A.O. that this expenses is not allowable under any section of the Income T. Act and learned AR of the assessee also could not point out the relevant section of the Income T. Act under which this expenses is allowable but in the remand report available on page 417 of the paper book having been reproduced by DRP, it was stated that this was disallowed u/s 37 of the Income T. Act. He further submitted that legally, the HO and branch are not distinct and therefore, even if it is an expense of the HO, it should be allowed. He also submitted that as per commercial expediency also, this should be allowed and in support of this contention, he placed reliance on a judgment of Hon’ble apex court rendered in the case of S. A. Builders as reported in 288 ITR 1.
As against this, learned DR of the revenue supported the order of A.O./TPO/DRP. She also submitted that regarding this contention that if this expenses is disallowed, the same should be excluded from expenses of the assessee company to work out operating profit of the assessee company for TP adjustment, she submitted that on this aspect,, the decision of DRP is this on page 419 of the paper book that since this cost was included for mark up earning, it cannot be excluded from cost for TP study. She supported this finding of DRP.
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We have considered the rival submissions and we find that a clear finding is given by DRP that the liability has been imposed by the HO and the assessee company has agreed to discharge this liability because of non – business consideration and learned AR of the assessee could not controvert this categorical finding of DRP. Regarding the argument of commercial expediency, we find that although this contention was raised but the AR of the assessee could not establish the commercial expediency for discharging this liability of the HO and hence, this contention and reliance on the judgment of Hon’ble apex court rendered in the case of S. A. Builders (Supra) are without any merit since commercial expediency is not established. Regarding the alternative plea of exclusion from cost for TP study also, we find no infirmity in the order of DRP. Accordingly, this ground is also rejected.
Ground No. 8 is as under:-
(8) Disallowance of creditor’s outstanding balance (a) On the facts and in the circumstances of the case, the AO has erred in making disallowance of Rs.749,172/- being part of the total outstanding balance in respect of one of the appellant’s creditor, namely Visualnet India Pvt. Ltd., considering the same as discrepancy. (b) Without prejudice to the above, on the facts and in the circumstances of the case, even if the AO is justified in making disallowance for mismatch in the outstanding balance of Visualnet India Pvt. Ltd., the mismatch amount should be Rs.127,603/- instead of Rs.749,172/-. (c) Without prejudice to the above, on the facts and in the circumstances of the case, the AO has erred in not excluding the aforesaid creditor’s balance from the cot base of the
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Branch, which was considered by the TPO for determining the arm’s length margin.
It was submitted by the learned AR of the assessee that as per the reply dated 13.12.2010 submitted to the A.O. as available on page 244 of the paper book, the actual difference is only Rs. 127,603/- being balance in assessee’s books of Rs. 30,59,733/-. He further submitted that it is not known as to from where, the A.O. has taken the figure of difference at Rs. 749,172/-. He submitted that the matter may be restored to the A.O. to arrive at correct difference first and then examine and decide the explanation of the assessee about the difference as explained on pages 262 to 265 of the paper book. As against this, learned DR of the revenue supported the orders of the lower authorities.
We have considered the rival submissions. Regarding this objection of the learned AR of the assessee that correct figure of difference is only Rs. 127,603/- and it is known as to from where, the A.O. has taken the figure of difference at Rs. 749,172/-, we find that on page 244 of the paper book itself, the assessee has noted two differences in accounts of this party. One difference is of Rs. 876,775/- and the second difference is of Rs. 127,603/- and we find that the figure of Rs. 749,172/- noted by the A.O. is after reducing the amount of Rs. 127,603/- from Rs. 876,775/-. Hence, the basis of the figure of Rs. 749,172/- noted by the A.O. is available and for this reason, it is not required to restore the matter to the A.O. However, we find that the matter should be restored to the file of the A.O. to consider and decide about various explanations given by the assessee in respect of these differences. We, therefore, restore this matter to the A.O. to decide the issue afresh after giving a finding about various explanations of the assessee after affording reasonable opportunity of
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being heard to the assessee. This ground is allowed for statistical purposes.
In the result, the appeal of the assessee stands partly allowed for statistical purposes.
Pronounced in the open court on the date mentioned at caption page.
Sd/- Sd/- (VIJAYPAL RAO) (AK GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Vms. Bangalore
Dated : 29/04/2016 Copy to : 1. The Assessee 2. The Revenue 3.The CIT concerned. 4.The CIT(A) concerned. 5.DR 6.GF By order
Asst. Registrar, ITAT, Bangalore.