Income Tax Appellate Tribunal - Delhi
Premier Exploration Services Pvt. ... vs Assessee on 30 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I' : NEW DELHI)
SMT. DIVA SINGH, JUDICIAL MEMBER
and
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.4935/Del./2011
(ASSESSMENT YEAR : 2007-08)
M/s. Premier Exploration Services Pvt. Ltd., vs. ITO, Ward 14 (3),
507, Bhikaji Cama Bhawan, New Delhi.
Bhikaji Cama Place,
New Delhi - 110 066.
(PAN : AACCP6976F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ved Jain, Chartered Accountant
REVENUE BY : Shri Peeyush Jain, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This appeal is filed by the assessee against the order of the Dy.CIT, Circle 14(1), New Delhi u/s 143(3) read with section 144C of the Income-tax Act, 1961 dated 30.09.2011.
2. The return of income was filed on 31.10.2007 declaring income at Rs.2,54,66,337/-. The return was processed u/s 143(1) of the Income-tax Act, 1961. On selection for scrutiny, notice u/s 143(2) of the Act was issued on 18.09.2008. The assessment was finalized on 30.09.2011 u/s 143(3) read 2 ITA No.4935/Del./2011 with section 144C of the Income-tax Act, 1961 at an income of Rs.4,38,76,245/-.
3. The assessee is engaged in the business of providing technical and administrative services relating to oil and gas exploration and drilling activities. The grounds of appeal read as under :-
"1. On the facts and circumstances of the case, the order passed by learned Deputy Commissioner of Income Tax (DCIT) under Section 143(3) read with Section' 144C of the Act is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the learned DCIT has erred both on facts and in law in assessing the income at Rs.4,38,76,245/- as against a loss of Rs.2,54,66,337/- declared by the assessee.
3. On the facts and circumstances of the case, the learned DCIT has erred both or, facts and in law in making an addition of Rs.1,79,05,415/- as difference in arm's length price determined by the Transfer Pricing Officer.
4.(i) On the facts and circumstances of the case, the learned Dispute Resolution Board has erred both on facts and in law in rejecting the contention of the appellant that the Transfer Price Officer (TPO) was not justified in ignoring the com parables in respect of the two companies viz., Capital Trust Limited and Crisil Limited while determining the arm's length price.
(ii) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the appellant that the TPO was not justified in not excluding the comparables of TSR Darashaw Ltd. despite the assessee bringing abnormality about this comparable and the margin being abnormal.
(iii) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the appellant that the benefit of ± 5% as provided 3 ITA No.4935/Del./2011 in Section 92C(2) of the Act shall not be available to the assessee.
(iv) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the appellant that TPO was not justified in not allowing adjustment on account of the risks.
(v) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in rejecting the contention of the appellant that the TPO was not justified in considering only the current financial year data while determining the arm's length price despite the fact that in the nature of the activities carried out by the appellant earlier year data has influence on the determination of the transfer price.
(vi) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in restricting the working capital adjustment based on the 10.225% PLR ignoring the market rate in the year under reference.
5(i) On the facts and circumstances of the case, the learned DRP and the AO has erred in rejecting the contention of the appellant that the ld. TPO has erred both on facts and in law in not applying the comparability criterion judicially and disregarding the comparables identified by the appellant.
(ii) On the facts and circumstances of the case, the learned DCIT has erred both on facts and in law in applying arm's length price for determination of income of the appellant based on the data of those companies which are not comparable with the level of operation of the appellant.
(iii) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in arbitrarily rejecting the comparables given by the appellant for determination of arm's length price.
(iv) Without prejudice to above and in the alternative, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that even if the comparables submitted by the appellant are to be ignored, then the 4 ITA No.4935/Del./2011 comparables of the similarly placed entities were to be considered for determination of arm's length price.
6. On the facts and circumstances of the case, the learned DCIT has erred both on facts and in law in disallowing an amount of Rs.2,73,339/- on account of charitable donation.
7. On the facts and circumstances of the case, the learned DCIT has erred both on facts and in law in disallowing an amount of Rs.1,70,785/- on account of entertainment expense.
8. On the facts and circumstances of the case, the learned DCIT has erred both on facts and in law in making an addition of Rs.60,329/- by restricting depreciation on computer peripherals @ 25 per cent as against 60 per cent allowable as per law.
9. That the appellant craves leave to add, amend or alter any of the grounds of appeal.
4. Ground Nos.1, 2, 3 & 9 are general in nature. The same do not require adjudication and the same are dismissed.
5. Ground Nos.4 & 5 are related to transfer pricing issue and ground nos.6, 7 and 8 are related to corporate issues.
6. The ground nos.4 & 5 are related to transfer pricing adjustments. The assessee has prayed that Dispute Resolution Panel-II, New Delhi has erred in rejecting contention of assessee that Transfer Pricing Officer (TPO) was not justified in ignoring the comparables in respect of the two companies, viz., Capital Trust Limited and Crisil Limited while determining the arm's length price. Further it is also prayed that the TPO was not justified in not excluding the comparables of M/s. TSR Darashaw Limited. The inclusion of TSR 5 ITA No.4935/Del./2011 Darashaw Limited brings abnormality in the comparables on account of abnormal margins. It has been also pleaded that the assessee has not been given the benefit of ± 5% as provided in section 92C(2) of the Income-tax Act, 1961. It is that there is a need for adjustment on account of the risks. The assessee has also objected that the TPO was not justified in considering only the current financial year data while determining the ALP despite the fact that in the nature of activities carried out by the assessee, earlier year data has influence on the determination of the transfer price. The assessee has also objected in restricting the working capital adjustment based on the 10.225% PLR ignoring the market rate in the year under consideration. It is also objected that the TPO has erred on fact and in law in not applying the comparability criterion judicially and also the datas of the companies which are not comparable with level of the operation of the assessee.
7. Ld. AR submitted that the transfer pricing adjustment has been made of Rs.1,79,05,415/- by taking TNMM mean of 5 comparables at 14.83% as against 7.90% of the assessee. Ld. AR pleaded that the major issue is inclusion of TSR Darashaw Limited as comparable. The DRP has rejected the contention of the assessee for excluding this company from the list of comparables. Ld. AR submitted that the business profile of this company is changed during the year under consideration due to merger of TSR Darashaw Limited and Tata Share Registry Ltd. This fact is evident from the report as 6 ITA No.4935/Del./2011 well as the press report in this regard. Ld. AR submitted that the FAR of TSR Darashaw Limited is entirely different than the assessee company for the year under consideration. This company was selected comparable in assessee's T.P. study due to use of two preceding year datas. TPO has used only current year data. In the current year, the functions performed by this company were not similar to assessee company. This fact has also been acknowledged by the ld. TPO in its TP study for Assessment Year 2008-09. It has been noted that post sale of controlling stake in the company in October 2005, the area of operations of the company is BPO/KPO sector with focus on financial service offerings. Accordingly, the business of the company is not comparable and it was rejected. The website of company shows that company has developed software for payroll processing and revenues are earned through such software. Accordingly, the business of the company is not comparable and hence the company deserves to be rejected. This factual aspect was supported by various press notes and the website. October 2005 falls in the financial year relevant to Assessment Year 2006-07. In view of these facts, TSR Darashaw Limited cannot be taken as a comparable in the assessee's case. Ld. AR further submitted that since TSR Darashaw Limited has a different profile, it should be taken out of the comparables. Once it is out of comparable, then no adjustment is required. The TNMM comes to 10.93% which is within the range of ± 5% as provided in section 92C(2), therefore, no 7 ITA No.4935/Del./2011 adjustment is required. For all other grounds raised in sub-paras of ground nos.4 & 5, the ld. AR relied on the submissions made before the DRP.
8. On the other hand, ld. DR relied on the order of the TPO as well as DRP.
9. Now we decide the issues raised in these grounds. The assessee has earned OP/OC margin of 7.34%. In the assessee's TP Study, 7 comparable were taken and the datas of financial years 2004-05, 2005-06 and 2006-07 were used and the OP/OC margins were worked out at 11.92%. It is claimed that it comes within the range ± 5%, therefore, there is no adjustment u/s 92C(2) of Income-tax Act, 1961 is called for. The TPO selected 5 comparables out of the 7 and determined the margin at 16.69% and proposed the adjustment to the price at Rs.2,27,11,880/-. The TPO used only current year data, i.e. financial year 2006-07. The claim of the assessee for risk adjustment and working capital adjustment was not allowed. On the issue of the use of current year's data is concerned, we are fully in agreement with the TPO and we hold that the use of the current year data is as per law. The provisions of Rule 10B(4) of the Income-tax Act, 1961 are unambiguous and it mandates for use of the current year data. The provisions of Rule 10B(4) permit use of preceding year data along with the current year's data only when it is shown that the same has influence on the determination of transfer pricing. Unless it is shown that the earlier years' data has influence on the 8 ITA No.4935/Del./2011 determination of the transfer price, proviso to Rule 10B(4) cannot be invoked. Whenever the tax payer wants to use the data of preceding two years' data then onus lies on the assessee to prove that his case falls under the proviso to the Rule. The Hon'ble ITAT in the various decisions has endorsed this view that unless the case is made out under the proviso to rule 10B(4), only current year's data has to be used. This view is supported by various decisions and some of which quoted are as under:-
(i) Aztech Software Technology - 294 ITR (AT)(32) (BANG)(SB)
(ii) Mentor Graphics Noida Pvt Ltd - 2007-TII-02-ITAT-DEL-TP
(iii) Honeywell Ltd - 2009-TIOL-104-ITAT Pune
(iv) Customer Services India (P) Ltd - 2009-TIOL-424-ITAT-Del
(v) Schefenacker Motherson Ltd. - 2009-TIOL-376-ITAT-Del
(vi) Global Vantedge Pvt Ltd. - 2010-TIOL-24-ITAT-Del
(vii) M/s. Geodis Overseas (P) Ltd. - 2011-TII-34-ITAT-DEL-TP
(viii) M/s. TNT India Pvt Ltd - (2011-TII-39-ITAT-BANG-TP)
(ix) M/s. ADP PRIVATE LIMITED (2011-TII-44-ITAT-HYD-TP)
(x) M/s. NGC Network (India) Pvt Ltd (2011-TII-45-ITAT-MUM-INTL)
(xi) M/s. Symantec Software Solutions Pvt Ltd (2011-TII-60-ITAT-MUM-TP)
(xii) Haworth (India) Pvt. Ltd (2011-TII-64-ITAT-DEL-TP)
(xiii) M/s. ST Micro Electronics (2011-TII-63-ITAT-DEL-TP)
(xiv) M/s. Exxon Mobil Company India Pvt Ltd (2011-TII-68-ITAT-MUM-TP)
(xv) M/s. Birla Soft Limited - 2011-TII-70-ITAT-DEL-TP 9 ITA No.4935/Del./2011 9.1 The other issue in Ground No.4(i) of the appeal is regarding excluding Capital Trust Limited and Crisil Limited from the comparables. Ld. AR relied on the written submissions filed before DRP. The DRP dismissed the plea of the assessee on the ground that the Capital Trust Limited was engaged in the business of automobile sales and service and from this segment, the revenue was of about 80%. The other major segment is hire purchase from which it derives revenue of 18.39% of the revenue. The foreign consultancy segment contributes only 1.7% and total consideration in the segment of foreign consultancy was only Rs.25 lacs. This company was engaged mainly in the other business activities, hence it cannot be taken as a comparable with assessee company. The company is having a very small turnover in the foreign consultancy segment, therefore, cannot be accepted as comparable. In such cases, margins earned by such companies fluctuate to extremes because of the narrow base. Such companies lack competitive strength, operational efficiencies and also lack in human resources which are the main strength of the service sector. Therefore, companies with a small turnover of Rs.25 lacs cannot be held to be comparable in this case. In the case of Crisil Limited, ld.
DRP held that there is a difference in the financial year. There were also related party transactions of more than 25%. Wherever the related party transactions exceed 25% then also such companies cannot be taken as 10 ITA No.4935/Del./2011 comparable. Since AR is failed to controvert the finding of ld. DRP, this ground is also dismissed.
9.2 The other issue is regarding the TPO's action in not allowing adjustment on account of risk and working capital. It was prayed that the taxpayer operates in a risk mitigated environment as compared to the comparables. It does not bear risks like market risk, warranty risk, technology risk, R&D risk, intellectual property risk, credit risk, etc. and adjustment for which need to be given to assessee. The reliance was placed by ld. AR on the decision of ITAT, Delhi in the case of Sony India where ad hoc adjustment of 20% was allowed on account of risk, working capital and R & D. Ld. DR submitted that there is no need for any adjustment on this count.
10. After hearing both the sides on this issue, we find no merits in the taxpayer's claim for risk adjustment. Risk adjustment cannot be allowed as a general rule. It can only be considered when it is demonstrated that comparables had actually undertaken such risk and these are materially affected their margins. Unless it is shown that risk adjustment had changed, the result of each comparable and there are adequate reasons for such adjustment, no adjustment is justified. In absence of any such situation, no adjustment can be allowed. In our considered view, taxpayer has not been able to show how this risk, if any, is translated into charging a higher margin in comparable companies. Similarly, the assessee's claim that it has no market risk is also not acceptable. Assessee provides service to its group 11 ITA No.4935/Del./2011 company only. Single customer risk is also a market risk. The performance of company in such cases is entirely dependent on the Associated Enterprises (AE). As soon as the AE runs out of the business or if AE's business gets reduced substantially then the business of the assessee will also get adversely effected accordingly. Being a captive service provider, the assessee cannot look for other customers. In such cases, the assessee runs a greater risk than an average independent entity who can always overcome the risk by looking for other customers or other markets. The dependence on a particular client or a particular geography area alone is always considered a high risk. It can be seen from the financial crisis in 2008-09 in USA as a result of subprime crisis, many companies which were completely dependent on USA clients diversified to the other areas to overcome the risk. Further, credit risk was existed in assessee's case as there was no clause in agreement that advance payment shall be made for services. Therefore, in our considered view, this ground of the assessee has no merits.
11. The other issue involved in the ground regarding transfer pricing is giving the benefit of ± 5% in respect of u/s 92C(2) of Income-tax Act, 1961.
12. We have heard both the sides on the issue. After hearing, we find that amendment to Proviso to section 92C by Finance Act, 2009 has made it clear that benefit of ± 5% as provided in section 92C (2) is not a standard 12 ITA No.4935/Del./2011 deduction. It cannot be made applicable when the price was outside ± 5%. In such situations, only the arithmetical mean shall be taken as the ALP.
13. The other issue involved is inclusion of comparable of TSR Darashaw Limited.
14. We have heard both the sides on this issue and we find that this company was included in assessee's TP study when the datas of two preceding years relevant to Assessment Year 2005-06 and 2006-07 were used. The assessee is able to demonstrate that during the financial year relevant to Assessment Year 2007-08, the company has developed software for payroll processing and its revenues are earned through such software. During this year, this company has not performed any significant "people" functions. The functions performed by this company during the year were similar to the companies providing service of IT/ITES. In our considered view, when the profile of that company for the current year was not comparable to the assessee company then such company cannot be made comparable only on the basis that it has been selected by the assessee itself in its TP study. The change in profile of the company in comparison to the two preceding years makes it non-comparable. Therefore, we find merits in the argument of the assessee and we direct to exclude this company from the comparables. With above observations, we set aside the issue to the file of the Assessing Officer 13 ITA No.4935/Del./2011 to rework out the OP/OC margins of the remaining comparables and then decide the issue.
15. Thus, issues raised in ground nos.4 & 5 are decided in the above terms.
16. In the ground no.6, the issue involved is disallowance of Rs.2,73,339/- on account of charitable donations. During the hearing, the ld. AR did not press this ground, therefore, the same is dismissed for non-prosecution.
17. In Ground No.7, the issue involved is disallowance of Rs.1,70,785/- on account of entertainment expense out of club/entertainment expenses for personal use. The ld. AR submitted that the assessee was a company and no such disallowances are called for in the hands of company. Ld. AR also relied on the following decisions :-
(i) Sayoji Iron & Eng. Co. vs. CIT - 253 ITR 749 (Guj.)
(ii) Dinesh Mills Ltd. vs. CIT - 254 ITR 673 (Guj.)
(iii) Midland Intl. Ltd. vs. DCIT - 109 ITD 198 (Del.)
(iv) DCIT vs. Haryana Oxgen Ltd. - 76 ITD 32 (Del.) Ld. AR also submitted that similar disallowances were proposed in the Assessment Year 2008-09 which has been dropped by DRP in assessee's own case.
18. We have heard both the sides. We have also considered the case laws relied upon by the assessee. After considering facts of the case, we find that there is no scope for disallowing out of club/entertainment expenses debited 14 ITA No.4935/Del./2011 in the books of account of the company for personal nature, therefore, we direct to delete this disallowance.
19. Ground No.8 is against the addition of Rs.60,329/- by restricting depreciation on computer peripherals. The DRP has upheld the Assessing Officer's action for allowing depreciation @ 25% only. The ld. AR submitted that the issue is covered in favour of the assessee by the various decisions of Hon'ble jurisdictional High Court including the decision in the case of CIT vs. Datacraft India Limited - 133 TTJ 377 and BSES Rajdhani Powers Ltd. - ITA No.1266/2010 dated 31.08.2010. He has also mentioned the other case laws as given below :
(i) Expeditors International (India)(P.) Ltd. vs. Addl. CIT - 13 DTR (Del.)(Trib.) 435;
(ii) Haworth (India) (P.)Ltd. vs. DCIT - (2011) 11 taxmann.com 76 (Delhi);
(iii) Carlton Overseas (P.) Ltd. vs. DCIT - (2011) 14 taxmann.com 97 (Delhi);
(iv) ACIT vs. Chrys Capital Investment Advisors India Pvt. Ltd. -
(2011) 45 SOT 71 (Delhi) (URO);
(v) Nokia India (P.) Ltd. vs. Addl.CIT - (2012) 20 taxmann.com 810 (Delhi);
(vi) Coil Company (P.) Ltd. vs. ACIT (2012) 22 taxmann.com 75 (Delhi - Trib.)
(vii) CIT vs. Galileo India (P.) Ltd. (2012) 24 taxmann.com 38 (Delhi).
15 ITA No.4935/Del./2011After hearing both the sides on the issue and looking to the facts of the case, we find that this issue is covered in favour of the assessee by various decisions of Hon'ble jurisdictional High Court. Accordingly, we allow this ground.
20. In the result, the appeal of the assessee is partly allowed.
Order pronounced in open court on this 31st day of May, 2013.
Sd/- sd/-
(DIVA SINGH) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 31st day of May, 2013
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.