TII BRIEF

20 More APAs entered into & a few with 'Rollback' provision ...

CASE LAWS

2016-TII-62-HC-P&H-TP

HONDA MOTORCYCLE AND SCOOTERS INDIA PVT LTD Vs ACIT: PUNJAB AND HARYANA HIGH COURT(Dated: August 26, 2016)

Income tax - Section 92C(1)

Keywords - discarding of permissible method & determination of ALP

Whether where the assessee had applied more than one of the permissible methods to determine the ALP as recognized u/s 92C(1), then qua each of the transactions, the TPO is required to give reasons as to why one of such methods is being preferred over the others - YES: HC

The assessee had entered into 14 international transactions comprising of purchaseof scooter parts, payment of export commission, payment of royalty, payment of technical knowhow fees, test support fee, service fee, reimbursement of expenses, etc and for determination of the ALP for these transactions at the hands of the TPO, it had applied both-the CUP method as well as TNMM. The TPO however discarded adoption of CUP method for nine out of total transactions without providing any justification for the same. On appeal, the Tribunal disallowed the adjustment of abnormal operating expenses while determining the net operating margins of assessee while applying the TNMM method. The Tribunal also remanded the issue relating to TP adjustment by holding that the TPO had not given any reasons for rejection of the CUP method.

Having heard the parties, the High Court held that,

+ as per Section 92-C, the ALP in relation to an international transaction is required to be determined by applying any of the methods provided in the Section, which include, amongst other methods, the CUP method as also the TNMM. When amongst others, both the above-referred methods are prescribed for determining the ALP and both have been applied by the assessee, then reasons as to why one over the other is being preferred, are required to be supplied by the TPO in the assessment order as the choice of one method over the other could work to the assessee's prejudice. Section 92-C(1) pertains to the determination of ALP in relation to "an" international transaction. Section 92-F (ii) defines ALP to mean a price, which is applied or proposed to be applied in "a" transaction between persons other than AEs, in uncontrolled conditions. If the assessee had applied more than one of the permissible methods to determine the ALP, as recognized u/s 92-C (1), then qua each of the transactions, the TPO is required to give reasons as to why one of such methods is being preferred over the others. In the case in hand, as observed earlier, for 09 of the 12 international transactions, the order of the TPO is completely silent as to why for determining ALP qua them, he has preferred to discard the CUP method, when the same had been applied by the assessee. For the remaining 03 international transactions also, the reasons so given are found by us to be vague and non-specific. In the light of the observations made above, the TPO was required to give reasons for discarding the CUP method qua each of the transactions as all the 12 international transactions entered into by the assessee were distinct. The order of the TPO, having been found to be lacking as above, we find no fault with the order of the Tribunal remitting the matter to the TPO for fresh assessment in accordance with law.

Assessee's appeal dismissed

2016-TII-61-HC-P&H-TP

CIT Vs MERCER CONSULTING INDIA PVT LTD: PUNJAB AND HARYANA HIGH COURT(Dated: August 24, 2016)

Income Tax - Sections 10A, 10B, 10AA, 92CA(3), 144C - rule 10B(4).

Keywords: determination of ALP - export sales turnover filter - Cherry picking - net profit realised - giant company - estoppel - human resource service - payroll service - medical transcription - onus of proof - working capital adjustment - 'derived from' - ITES.

Whether for determining ALP, there is no difficulty in permitting reasonable deviation so long as the deviation does not render the case incomparable and the extent of deviation that ought to be accepted would vary from case to case - YES: HC

Whether for the purpose of computing ALP, a captive unit having very low turnover cannot be compared with a giant company having very high turnover for the same BPO segment - YES: HC

Whether a company engaged in providing human resources services can be compared with that of a company involved in rendering geospatial services to its clients, considering them functionally comparable - NO: HC

Whether if the data relating to financial year in which the international transaction has been entered into is not directly available from the annual accounts of the comparable, in that case can it be held that such company has to be excluded as per the provisions of sub-rule(4) of rule 10B - NO: HC

Whether there can be no comparison between an enterprise that conducts its business activities itself with one that outsources its activities although the activities pertain to the same field - YES: HC

Whether for computing deduction u/s 10A, the export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator - YES: HC

The assessee is a wholly owned subsidiary of Mercer Mauritius Limited, Mauritius. It is engaged in rendering to its various AE's IT and IT enabled services such as in the nature of applicant development, quality assurance and application maintenance. The services were rendered to the clients of and for and on behalf of the assessees for which it was compensated on a cost plus basis. Assessee reported three types of international transactions in its audit report in Form 3CEB. AO referred the same to the TPO for the determination of the arm's length price thereof. The assessee submitted a transfer pricing study. Two types of transactions were accepted by the TPO to be at an ALP. The TPO by his order u/s 92(A)(3) proposed an adjustment of about Rs. 6.16 crores. AO served upon the assessee a draft assessment order. The assessee filed objections before the DRP. The AO was directed to complete the assessment proceedings according to the directions issued by the DRP u/s 144(C). The Tribunal on this issue allowed the assessee's appeal. There was no dispute regarding the filters as suggested by the assessee and as qualified by the TPO. It was the application of the filters that requires consideration.

Deductions u/s 10AA for communication expenses incurred in foreign currency

The assessee concern had claimed deduction u/s 10AA. As recorded in the order of the Tribunal, on behalf of the assessee the action of the Assessing Officer in reducing the amount of telecommunication charges from the export turn over was not challenged. However, it was contended that the amount ought to be reduced from the total turnover as well. The submission was accepted in view of the judgment of a Division Bench of Delhi High Court (wrongly referred to in the order of Tribunal as the jurisdictional High Court) in the case of Commissioner of Income Tax v. Genpact India 2011-TIOL-788-HC-DEL-IT. The Delhi High Court followed the judgment of the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. 2010-TIOL-456-HC-MUM-ITand of the Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. 2011-TIOL-684-HC-KAR-IT which had also followed the judgment of Bombay High Court. As the Delhi and the Karnataka High Courts followed the judgment of Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. we will refer to the judgment of Bombay High Court.

Having heard the matter, the High Court held that,

Alisec Technologies Limited

+ a minuscule difference cannot result in the rejection of the case if it is otherwise comparable. There is no difficulty in permitting reasonable deviation so long as the deviation does not render the case incomparable to the one in question. The extent of deviation that ought to be accepted would of necessity vary from case to case. In a given case a minor deviation may render the case incomparable. In another case a larger deviation may not affect the comparison and relevance of the case. The TPO must take all the factors into consideration and decide whether the deviation renders the case comparable to the one in question or not. The submission that by permitting a deviation the TPO is deprived of the opportunity of relying upon other comparables within that deviation is also not well founded. Indeed even the TPO would be entitled to refer to cases which deviate from the filter. The same test would apply even to the cases relied upon by the TPO. The DRP or the CIT (A) as the case may be, the ITAT and the Courts would apply the same test, namely, whether the deviation ought to be permitted or not. Nothing prevented the TPO from doing so. The appellant's contention that the case at Sr. No.2 is not comparable to the international transactions is, therefore, rejected;

Cosmic Global Limited

+ the outsourcing charges of assessee constitute 57.31% of its total operating costs. The annual account of Cosmic Global Limited indicates a total revenue from operations of Rs.7.37 crores of which Rs. 9.90 lacs were in respect of medical transcription and consultancy services, Rs. 6.99 crores were towards translation charges and only Rs. 27.76 lacs were on account of the BPO services. Thus the assessee's outsourcing activities constitute 57% of its total expenses whereas the similar activity of Cosmic Global Ltd. viz. the BPO segment was only Rs. 27.76 lacs which is but a small fraction of its total revenue from all its operations. The Tribunal held that the results of Cosmic Global Limited on account of its activities other than those relating to the accounts BPO segment cannot be examined. The financial results of enterprises involved in dissimilar activities cannot be compared. Similarly the financial aspects of dissimilar activities of two enterprises cannot be compared. Only the similar activities of the two can be considered provided however they are financially comparable. The total revenue of Cosmic Global Ltd. of Rs. 7.37 crores is divided into three segments of which only Rs. 27.76 lacs pertained to the accounts BPO which is the comparable activity. The other activities were medical transcription consultancy services and translation charges in respect whereof the revenues were Rs. 9.90 lakhs and Rs. 6.99 crores respectively. The Tribunal rightly came to the conclusion that the case of Cosmic Global Ltd. is not comparable with that of the assessee for the total revenue of the accounts BPO segment of the former was only Rs. 27.76 lacs whereas that of the assessee in the case before us is about Rs. 59 crores. The Tribunal, therefore, rightly excluded Global Cosmic Ltd. from the list of comparables;

Genesys International Corporation Ltd.

+ the assessee provides various services to the customers of its AEs in relation to human resources which relate to the employees of the prospective clients. Genesys International Corporation Ltd. on the other hand provides a full range of geospatial services to its clients. Geospatial services relate to the relative position of things on the earth's surface. This includes 3D mapping, navigation maps, image processing and cadastral mapping etc. The two services are entirely different and therefore cannot be compared for the purpose of determining the ALP. TPO relied upon a CBDT circular dated 26.09.2000 which furnishes a list of products or services that may be considered as ITES for the purpose of sections 10-A and 10-B. The circular enumerates fifteen categories. As rightly observed by the Tribunal these categories refer to products and services which are entirely different in description and functions. The manufacture of such products and the provision of such services also have entirely different financial requirements and consequences. The instances cited by the Tribunal are apposite. Geographical Information Systems Services and the assessee's services are included in the circular and therefore, fall within the category of ITES. It does not follow that they are comparable to each other for the purpose of determining the ALP in respect of the assessee's international transactions. The circular is issued for entirely different reasons viz to enable an assessee to avail deductions in respect of certain activities. The sections do not contemplate or even remotely indicate that the activities referred to therein are comparable to each other. Much less do these provisions indicate that the activities included therein have any relevance to the transfer pricing mechanism for the purpose of determination of the ALP of international transactions. The Tribunal rightly rejected this case from the list of comparables;

R.Systems International Limited

+ we are unable to agree with decision of TPO and of DRP that affirmed it. The view taken by Tribunal commends itself to us. It is not the financial year per se that is relevant. Even if the financial years of the assessee and of another enterprise are different, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. It was rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot be held as not passing the test of sub-rule(4) of rule 10B;

Coral Hub Ltd.

+ the next question was whether Coral Hub Limited ought to be included in the list of comparables. The ground on which the assessee contends that Coral Hub Limited ought to be excluded from the list of comparables is also well founded. Coral Hub Limited outsources a significant portion of its work. The finding is that the outsourcing charges constitute 90% of the total operating costs. It is admitted by the department that the assessee on the other hand conducts its activities itself without outsourcing any part of it. There can be no comparison between an enterprise that conducts its business activities itself with one that outsources its activities although the activities pertain to the same field. The entire administrative set up of such enterprises would be different. An entity that outsources most of its work is not required to maintain a large establishment. For instance, it would be necessary for such an enterprise to have large premises and a large number of employees. Even the material it uses and the equipment that it installs from minor items such as stationery and telephones to electrical fittings and even machinery are bound to be far less than the material and equipment that an enterprise which conducts its activities itself would of necessity be required to maintain. This in turn would also have consequences upon the legal requirements to be fulfilled by the two enterprises. There are several enactments that bring within its ambit, establishments or undertakings that employ a certain number of persons. There are enactments that also bring within their ambit enterprises that use power. This in turn would require an enterprise carrying on its own activities to maintain staff alongwith attendant facilities to ensure compliance with such legislation. The financial difference between such enterprises is bound to be enormous. We are in respectful agreement with the following observations of the Division Bench of Delhi HC in Rampgreen Solutions Pvt. Ltd. v. CIT 2015-TII-33-HC-DEL-TP. The Tribunal's decision not to consider this case is, therefore, correct;

Deductions u/s 10AA for communication expenses incurred in foreign currency

+ the Bombay HC held that the export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Explanation (2) to Section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. We are in respectful agreement with the judgment of Bombay HC. Although the judgment is under section 10A, the ratio applies equally to the issue under consideration under section 10AA. As in the case of section 10A, so also in the case of section 10AA the expression total turnover has not been defined. The export turnover is a part of the total turnover. There is nothing in the section or any other provision of the Act that warrants the exclusion of export turnover from the numerator but not from the denominator i.e. from the total turnover. The plain language certainly militates against such a construction. In the circumstances, both the questions are answered in favour of the assessee i.e. question No.1 is answered in the affirmative and question No.2 is answered in the negative. The appeal is accordingly dismissed.

Revenue's appeal dissmissed