NOTIFICATION

it16not120

Rule 114F - Reitrement or pension funds - CBDT substitutes certain clauses to clarify certain doubts

CASE LAWS

2016-TII-610-ITAT-HYD-TP

WORLEY PARSONS INDIA PVT LTD Vs DCIT : HYDERABAD ITAT (Dated: December 21, 2016)

Income tax - Sections 10A, 92CA, 115JB, 143(3) & 144C

Keywords - ALP - AE - aggregation of transactions - combined activity - ITES services - submission of Form 56F - selection of comparables & TNMM

A) The assessee had entered into two international transactions with its AE, i.e. for (i) for provision of ITeS and; (ii) payment for technical support services. In its TP study, the assessee adopted TNMM as the MAM and the PLI as operating profit/operating cost and arrived at the margin of 10.11% as against the margin of comparables taken by the assessee at 5.74%. The TPO observed that the taxpayer has used the capitaline data base for search of comparable companies for the I.T. enabled services. After applying certain filters, the assessee has shortlisted 8 companies as comparables, and the arithmetic mean/PLI of the comparables was computed at 5.74% as against its own PLI of 10.11% and that the assessee has treated its transaction to be at ALP. The TPO observed that the assessee has aggregated both the transactions i.e. of ITES as well as technical support services and treated the combined activity as ITeS. On going through the TP document, the TPO observed that the method of search process adopted by the assessee suffered from defects which resulted in selection of inappropriate comparables and rejection of appropriate comparables. He, therefore, rejected the TP document of the assessee and made an independent analysis by aggregation of transactions under the TNMM. Accordingly, a detailed show cause notice was given to the assessee and the assessee filed its reply thereto. The TPO has accepted only two companies selected by the assessee companies as comparable to the assessee i.e. (i) Projects & Development India Ltd and (ii) IDesign Engineering Solutions Ltd. The TPO has brought in, six new companies as comparables to the assessee.

On appeal, the proceeded to hold that even one comparable is sufficient for comparability analysis and since two of the companies selected by the assessee are found appropriate comparables by the TPO, the TPO, instead of carrying out a fresh search, should have determined the ALP based on these two comparables. Thus, observing, the DRP directed the AO to determine the ALP based on the margin of the above two comparables, i.e. 31.88% and 13.32% respectively, the mean of which works out to 22.6%.

B) The assessee had also challenged the action of the DRP in confirming the order of TPO in disallowing the claim of assessee u/s 10A amounting to Rs. 1,58,84,238, only on the ground of non furnishing of Form No.56F along with the return of income, when the assessee has filed the same before the DRP.

On appeal, the ITAT held that,

Whether the TPO can compute the ALP by considering only those companies which have been selected by assessee and accepted by the TPO himself for computing ALP - NO: ITAT

Whether selection of ‘most appropriate method' is in the unfettered discretion of the assessee - NO: ITAT

Whether TNMM being an indirect method, requires only reasonable set of comparables to arrive at the correct ALP - YES: ITAT

+ It is found that in the case of Fortune Infotech Ltd., the Coordinate Bench of this Tribunal at Ahmedabad has analyzed the issue of the most appropriate method and the relevant factors and the necessary inputs for various alternative options for adoption of a particular method and held that:

["....There is no dispute that the selection of ‘most appropriate method' is not in the unfettered discretion of the assessee and it is something which can always be subject matter of adjudication at the assessment as well as appellate stage. The TPO has a right, as indeed duty, to examine whether a particular method adopted by the assessee is indeed most appropriate method of determining arm's length price on the facts of a particular case. One of the important factors governing the decision on as to what will constitute the most appropriate method, as set out in rule 10C(1)(c) above, is "the availability, coverage and reliability of data necessary for application of the method". The availability of data, with respect to a particular method vis -a-vis other methods of determining the ALP, is thus one of the crucial factors in deciding whether that particular method of determining the ALP is "most appropriate method" of determining ALP on the facts of that case, or not. When only one comparable is available for application of a particular method, this serious limitation on the availability of data, in our considered view, certainly relegates its appropriateness vis-a-vis other alternate methods available, such as external TNMM, in respect of which sufficient, and essentially reliable, data is available. The fact that the independent enterprise was an associated enterprise in not so distant a past, the fact that despite its becoming, in legal terms and as an offshoot of group restructuring, an independent enterprise, the assessee continues to work for this enterprise even after making huge losses, as high as 21.75% on cost, and the fact that it is a single comparable, does raise serious apprehensions about its reliability. This fact situation, coupled with the admitted position that sufficient number of external comparables for TNMM are available, does leave the internal TNMM much lower in the hierarchy of methods, particularly vis-à-vis external TNMM, appropriate for determining the ALP on the facts of this case. We are of the considered view that the internal TNMM, on the basis of which the assessee had done its benchmarking, was indeed not the most appropriate method on the facts of this case...."]

+ It is found that this decision has been followed by the Coordinate Bench of this Tribunal at Chennai in the case of M/s. GE Healthcare Bio-Sciences Ltd vs. DDIT. Therefore, respectfully following the above decisions, we hold that the DRP is not correct in holding that the TPO can compute the ALP by considering only the two companies which have been selected by the assessee and accepted by the TPO for computing the ALP. Further, the TPO u/s 92CA of the Act has conducted his own search for comparable companies and has arrived at Acropetal Technologies Ltd and Accuspeed Engineering Ltd and the assessee also has accepted these companies as comparables by not objecting to the same before the DRP. Therefore, in view of the fact that the TNMM is the indirect method, requiring a reasonable set of comparables, to arrive at the correct ALP, we do not agree with the directions of the DRP;

Whether the claim of deduction u/s 10A can be denied to an assessee only on ground of non furnishing of Form No.56F along with the return of income, when the same has been filed during the proceedings before the DRP - NO: ITAT

+ It is found that the assessee is required to file form No.56F along with the return of income to enable the AO to examine the allowability of and also to compute the deduction u/s 10A. The Supreme Court in the case of CIT vs. Nagpur Hotel Owners, was considering the case of an assessee claiming exemption u/s 11 and it has held that furnishing of return subsequent to the assessment is not to be considered. We find that the assessment in the case of the assessee before this Tribunal was still open as the assessee has filed its objections before the DRP against the draft assessment order and the final assessment order is passed only pursuant to the directions of the DRP u/s 144C(13). Therefore, the decision of the Supreme Court in the case of the CIT vs. Nagpur Hotel Owners is not strictly applicable to the facts of the case of the assessee as in the assessee's case, the assessment order has not yet been passed and the assessee has filed the relevant information before the DRP. Therefore, we deem it fit and proper to remand the issue of the computation of deduction u/s 10A to the file of the AO with a direction to verify the claim in accordance with law after taking note of Form 56F and other documents filed by the assessee before the DRP.

Case remanded

2016-TII-609-ITAT-HYD-TP

HYUNDAI MOTOR INDIA ENGINEERING PVT LTD Vs ITO: HYDERABAD ITAT (Dated: December 21, 2016)

Income Tax - Sections 92CA, 143(3) & 144C

Keywords - international transaction - ALP - selection of comparables - functional dissimilarity - inconsistency in accounting - small turnover - export earning filter - negative working capital adjustment - big brand value

A) The assessee is a subsidiary of Hyundai Motor India Ltd. It is a 100% Export Oriented Unit and is registered under the Software Technology Parks of India (STPI) Scheme of the Ministry of Information Technology, Government of India. Hyundai Motor India Ltd., itself is a subsidiary of Hyundai Motor Company, Korea [Associated Enterprise (AE)]. Assessee is involved in providing support services in connection with CAE/CAD modeling and iterative simulation. It receives the basic design from its group company with respect to CAD modeling and makes a 3D CAD modeling data of vehicle components using CAD software tools. Assessee is a routing support service provider and it assumes less than normal risk associated with carrying out such business. Assessee reported international transactions with its AE's. Assessee selected seven companies as comparables in its Transfer Pricing documentation whose arithmetic mean was arrived at 7.35% as against the margin of assessee at 9.02%. Reference u/s. 92CA was made to the TPO for determining ALP. TPO rejected assessee's TP study and selected his own filters and after issuing show cause notice to assessee, selected thirteen comparable companies whose arithmetic mean was determined at 25.73%. After providing the working capital adjustment, the adjusted arithmetic mean was determined at 24.32%. On the operating cost of Rs. 65.81 Crores, the said adjustment was proposed. Accordingly, a draft assessment order was made. DRP directed to determine the ALP according to its directions. The DRP excluded certain comparables like Infosys BPO, Acropetal Technologies Ltd., Jeevan Scientific Technologies Ltd., e4e Healthcare, TCS E-serve Ltd., and Mastiff Tech Pvt Ltd. Revised ALP addition was determined at Rs. 10,39,16,986/- and assessment order was passed accordingly.

B) The TPO gave positive working capital adjustment. Consequent to DRP order excluding certain comparable selected, the adjustment resulted in negative working. Assessee submits that the negative working capital adjustment cannot be made in the case of captive services provider.

On appeal, the ITAT held that,

Whether a company which is involved in multifarious activities including products and IPR rights, can be selected as a comparable to a KPO company engaged in engineering business process services - NO: ITAT

+ Accentia Technologies Limited is involved in multifarious activities including products and IPR rights. Consequently, it cannot be considered as functionally similar to assessee-company which is categorised as a KPO company, being in engineering business process services. AO/TPO directed to exclude the above company from the list of comparables;

Whether super normal profits can be the basis for exclusion of a company from the list of comparables - NO: ITAT

+ Eclerx Services Limited is categorised as KPO company and the services are similar being provided to the services being provided by the above company. The said company has wound-up a subsidiary company w.e.f. 29-03-2011. Since it has not acquired the company whose turnover is included in assessee-company but only wound-up a dormant company, it does not have any bearing on assessee's operating results. Super normal profits cannot be a basis for exclusion of a company. Even though the company was excluded in earlier year, each year is to be considered separately on the basis of the facts and in TP matters the facts will vary from year to year. This company cannot be excluded;

Whether inconsistency in accounting and huge variation in the margin due to uncertainty of the receivables, can be considered as a valid reason for excluding a company from the list of comparables when all other filters have been compared and accepted by the TPO - NO: ITAT

+ DRP has wrongly excluded e4e Healthcare Business Services Private Limited and Mastiff Tech Private Limited on the reason of inconsistency in accounting and huge variation in the margin due to uncertainty of the receivables. These cannot be considered as a valid reason for excluding the company when all other filters have been compared and accepted by the TPO. The AO/TPO directed to consider these companies as comparable companies.

Whether a functionally different company which also fails the employee cost filter can be selected as a comparable - NO: ITAT

+ Accuspeed engineering Limited has only employee cost of 1.98 Crores which is less than 25% and thus fails the employee cost filter. The said company is functionally different. As seen from P & L account, revenues include sales and services. Consequently, in the absence of any segmental information, it cannot be concluded that the said company is comparable company to assessee which is in ITES providing engineering services. TPO/DRP has rightly excluded the company as functionally dissimilar;

Whether negative working capital adjustment can be made, where the concerned assessee does not carry any working capital risk - NO: ITAT

+ In the case of  Adaptec (India) P. Ltd., Vs. ACIT - 2015-TII-90-ITAT-HYD-TP , the Co-ordinate Bench held that there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. AO/TPO directed not to make any negative working capital adjustment. Since some of the comparables are excluded and some are directed to be verified/ included, the TPO/ AO is directed to work out the adjustment afresh;

Whether a company which stands on its own as an exclusive BPO and has a big brand value, can be selected as a comparable to a captive service provider - No: ITAT

+ DRP has excluded both Infosys BPO Ltd. on the ground that Infosys BPO's Business Service Centre performs the back office functions for dispersed business units and locations. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of functional dissimilarity on FAR Analysis. In view of the detailed reasons given by the DRP in excluding the company, not only on the basis of the high turnover but also with reference to the brand value etc., the order of DRP upheld.

Case Remanded