Income Tax Appellate Tribunal - Mumbai
Exxon Mobil Co. India Pvt.Ltd., Mumbai vs Department Of Income Tax on 24 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI ' K ' BENCH
MUMBAI BENCHES, MUMBAI
BEFORE SHRI P M JAGTAP, AM & SHRI VIJAY PAL RAO, JM
ITA No. 4389/Mum/2010
(Asst Year 2004-05)
The Dy Commr of Income Tax Vs M/s Exxon Mobil Company (I) Pvt Ltd
Circlr 3(1), Mumbai 92 Maker Chambers VI
Nariman Point\Mumbai 400 021
(Appellant) (Respondent)
PAN No. AAACE3157H
Assessee by Sh Sayadbh Sloparkar
Revenue by Sh Ajit Kumar Jain/Dinesh Kumar
Dt.of hearing 12TH Dec 2012
Dt of pronouncement 19th, DEC 2012
ORDER
PER VIJAY PAL RAO, JM
This appeal by the revenue is directed against the order dated 24.3.2010 of the CIT(A) for the AY 2004-05.
2 The revenue has raised the following effective grounds in this appeal:
1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs,1,19,31,647/- by taking a different set of comparables while computing operating margin under benchmarking analysis for 'Provision of Technical Services..
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs.58,48,375/-, by taking a different set of comparables while computing operating margin under benchmarking analysis for 'Provision of Back-Office support service'.
3.On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the Global support service charges amounting to Rs.38,26,277/- without appreciating the fact that during the assessment proceedings, the assessee had failed to furnish the necessary documents in support of the services rendered."2
ITA No 4389/M/2010 .
3 Ground no. 1 is regarding transfer pricing adjustment on account of provisions of technical services.
3.1 The assessee company is an indirect subsidiary of the Exxon Mobil Corporation (EMC) which is a US based corporation. During the year under consideration, the assessee received income on account of application research and technical services from its parent company, which are international transactions as defined u/s 92B of the I T Act. The Assessing Officer made a reference to the TPO for determination of Arm's Length Price (ALP) of the international transaction. The assessee used Transactional Net Margin Method (TNMM) to benchmark its transactions and had calculated operating profit on technical services in respect of this segment at 13.04% and the ratio of OP/TC in respect of comparables provided by the assessee was 12.96%. The assessee took six comparables out of which the TPO rejected two comparables thereby calculated the OP/TC ratio of the comparables at 36.19% by taking into consideration the data for the current financial year only in stead of two or three years average taken by the assessee. Accordingly, the TPO made an adjustment of ` 1,19,31,647/- on this segment namely application research and technical services income.
3.2 On appeal, the CIT(A) has observed that when the TPO has rejected the two comparables on the ground of loss making concerns, then the high margin comparables should also be excluded to determine the ALP on the basis of average of the margins of the comparables. Accordingly, the CIT(A) took the comparables after eliminating the high margin companies from the comparables considered by the TPO. In this way, the benchmark computed by the CIT(A) is by taking the average of only 2 comparables out of six taken by the assessee. The CIT(A) has arrived at the revised mean margin at 14.79% and since the margin of 3 ITA No 4389/M/2010 .
the assessee is at 13.04%, the same was found to be at arm's length. Consequently, the CIT(A) has deleted the adjustment of ` 1,19,31,647/- on this account. 4 Before us, the ld CIT(DR) Shri Ajit Kumar Jain has submitted that the assessee is engaged in the activity of marketing services to its Associated Enterprises (AE) in India and outside India. The assessee provides application research and technical services to its various AEs in the Asia-Pacific Region at the R&D centre at Bangalore. The ld DR has pointed out that the assessee has used six comparables and three years data were used for comparables and weighted mean was computed at 12.96%. He has referred the details of international transactions and benchmark to show that the assessee has used two years data for its own margin and multiple years' data of the comparables for computing the weighted average margins of the comparables. Whereas the TPO used single year data as provided under the law. The ld DR has referred the order of the TPO and submitted that the TPO has rejected two comparables namely Biotech Consortium India Ltd and ADS Diagnostics for the reasons that these companies are persistently making losses and therefore, the TPO has rightly rejected these two companies as comparables. Though the CIT(A) has not disturbed the order of the TPO so far as it relates to taking only current year data; however, the CIT(A) has further eliminated the comparables on the ground that two of the companies are having high margin. 4.1 The ld DR has referred para 7.6 of the order of the CIT(A) and submitted that the CIT(A) has proceeded on the analogy that if the outliers were to be eliminated, it should be done in a statistical manner, such as by taking the inter-quartile range of the comparables set. The ld DR has submitted that this approach and concept of inter-quartile range, does not find place in the Indian law; but this aspect is in the US law because under the provisions of I T Act, when a mean of the comparable price/ 4 ITA No 4389/M/2010 .
margin is taken as benchmark, then it covers the elimination of outliers, Thus, the ld DR has submitted that the CIT(A) has proceeded on the principle which is contrary to the provisions of law and therefore, the order of the CIT(A) is not sustainable. In support of his contention, he has referred Rule 10(B)(2) and proviso to sec 92C(2) of the Act and submitted that as per Sub. Rule (2) of 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged after considering the various factors namely functions performed, assets employed and risks assumed by the respective parties to the transactions. Therefore, if on the basis of FAR analysis, if a comparable is extensively different from the international transactions, only on that basis it can be excluded or rejected and there is no basis under the provisions of law to reject a comparable simply on the basis of high profit margin. He has referred OECD transfer pricing guidelines 2010 on the issue of extreme results of the comparables and submitted that OECD guidelines states that loss making uncontrolled transaction should be further investigation in order to establish whether or not it can be a comparable and similarly, investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables.
4.2 In support of his contention, the ld DR has relied upon the order of the E Bench of this Tribunal in assessee's own case for the AY 2006-07 and submitted that the Tribunal has observed that as a general principle that both loss making unit and high profit making unit cannot be eliminated from the comparables unless there are specific reasons for eliminating the same, which is other than the general reasons that comparable has incurred loss as abnormal profit. He has also relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2006-07 as well as the decision of the Bangalore 'A' Bench of the Tribunal in ITA No. 5 ITA No 4389/M/2010 .
227/Bang/2010 in the case of 24/7 Customer Com Pvt ltd vide order dated 9th Nov 2012 and submitted that the Tribunal has taken a similar view by following the decision of the Tribunal in assessee's own case for the AY 2006-07. He has also relied upon the order dated 19th Oct 2012 of the Bangalore Bench of the Tribunal in the case of ITO vs M/s Nextlink India P Ltd in 454/Bang/2011 and submitted that the Tribunal has dealt with similar issue of super profit making comparables and observed that net margin of 24% was arrived at after taking into account both 40% and also 2% which is lowest in the relevant industry. 40% profit in the ITES industry cannot be held to be extra ordinary or super profit. He has also relied upon the order of the Tribunal in the case of M/s B P India Services P Ltd dated 23rd Sept 2011 in ITA No.4425/Mum/2010 and submitted that the Tribunal has observed that merely because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should not be excluded. The decisive factors for determining inclusion or exclusion of any case in the list of comparable are the specific characteristics of services provided, assets, employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, cost of labour and capital in the markets etc. Nowhere, the higher or lower profit rate has been prescribed as the determinative factor to make a case incomparable.
4.3 The ld DR has submitted that in the case of MCS Ltd, the comparable which was rejected by the TPO, the revenue of the said company was from the domestic market whereas the assessee's revenue is from the export to AE outside India. Therefore, on the basis of FAR analysis, key conditions, and different market conditions, these companies cannot be considerable as comparable. 6
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4.4 On the other hand, the ld AR of the assessee has submitted that the TPO has made adjustment without giving any show-cause notice to the assessee and therefore, the assessee was not given an opportunity of hearing prior to rejecting the comparables on the ground of loss making company. The ld AR has submitted that the TPO should have been given an opportunity to the assessee to show-cause as to why the ALP should not be determined on the basis of the material or documents available with the TPO. By not giving such opportunity, the TPO has violated the principle of natural justice and therefore, the order of the TPO is bad in law. 4.5 Further, the TPO has never discussed the concerned issue when the assessee has carried the comparability analysis for the international transaction in the course of transfer pricing proceedings. The documents maintained by the assessee in the form of TP report submitted to the TPO has been summarily dismissed without providing the reasons for the same. Once the assessee has furnished the relevant material in the TP report in determining the ALP, then the onus of the assessee is discharged and if the TPO proposed any variation in the method or comparable selected by the assessee, then, a proper reason has to be given for taking such action.
4.6 Even, prior to make any adjustment to the ALP, the assessee should have been given an opportunity to rebut the material sought to be relied upon by the TPO. The ld AR has further submitted that loss making companies, which are rejected by the TPO are not abnormally and even as per the OECD guidelines, the same cannot be rejected as a comparable merely on the ground of having negative returns. Even otherwise, the TPO rejected two comparables namely Biotech Consortium India Ltd and ADS Dianostics on the ground of consistent loss maker whereas as per the annual account and other records, it is evident that these 7 ITA No 4389/M/2010 .
two companies namely Biotech Consortium India Ltd and ADS Dianostics are not consistently loss making and in fact made profits in the year ending 31.3.2002. 4.7 The ld AR has further submitted that the other two comparables namely Alphageo (India) Ltd and Vimta Lab Ltd which were rejected by the CIT(A) on the ground of extra profit making companies as computed by the TPO at 51.35% and 61.78% respectively. Apart from highly and abnormally profit making companies, these companies are otherwise incomparable because of vast difference of business risk and bad debt in comparison to the assessee and secondly these companies are also having transaction with its related parties. Thus, these companies have to be judged as comparables on the basis of functional analysis because functional profiles is not comparable to the assessee. He has referred page 1032, 1066, 1003, 1044, 1050 to 1053 of the paper book and submitted that in case of Alphageo India P Ltd, the revenue from related parties on job work, contract charge is very high which itself is the ground to eliminate the same from the comparables. The ld AR has submitted that though these companies were selected by the assessee as a comparable; but when the assessee had made out a case for exclusion of the same, then there is no bar for considering the same by the TPO as per the provisions of law. Thus, the ld AR has submitted that the two comparables which were rejected/excluded by the CIT(A) are otherwise incomparable cases as per FAR analysis. In support of his contention, he has relied upon the decision of the Tribunal in the case of DCIT vs Monsanto Holdings P Ltd reported in 134 ITD 189 (Mum).
5 We have considered the rival submissions as well as the relevant material on record. During the year under consideration the assessee has carried out the business activities which are divided in these segments i.e. (i) marketing support 8 ITA No 4389/M/2010 .
services (ii) application research and technical services and (iii) back office support services. Since, there is no transfer pricing dispute on the marketing support services and the adjustment has been made only in other two segments namely application research and technical services and back office support services; therefore, the dispute before us is only with respect to the international transactions in the segment of application research and technical services and back office support services. 5.1 In the application research and technical services segment, the assessee has shown the sales/operating income at Rs.5,85,80,728/- and after reducing the operating expenses, the operating profit was shown at 13.04%. The ratio of operating profit in respect of comparables provided by the assessee was 12.96%. The TPO noticed that the assessee has taken multi years data i.e. 3 years of the comparables for arriving at the average ratio in respect of six comparables as selected by the assessee. The TPO has calculated the ratio of comparables by taking one year/current year data and arrived at the average ratio of 36.19% after rejecting two of the comparables companies on the ground that these were consistently making losses. The details of the comparables selected by the assessee, operating profit ratio calculated by the assessee and by the TPO are as under:
Company Name OP/TC OP/TC as Remarks
assessee's calculated by
calculation this office
1 Alphageo(India) Ltd 37.03% 51.35%
2 Biotech Consortium India Ltd -17.05% Rejected
3 Tata Projects Ltd - 2.99% 2.34%
4 ADS Diagonstics - 0.89% Rejected
5 N G Industries Ltd 28.67% 29.28%
6 Vimta Labs Ltd 33.01% 61.78%
Average 12.96% 36.19%
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.
5.2 On appeal, the CIT(A), though accepted the action of the TPO so far as taking single year i.e. current year data instead of multiyear data for the purpose of calculated the operating profit rate of comparables; however, the CIT(A) has held that when the loss making comparables are rejected, then on the same analogy, the high margin comparable companies are also be eliminated. The CIT(A) had fortified this view by the concept of taking the inter-quartile range of comparable set. Accordingly, the CIT(A) has recomputed the margin of the comparables after excluding the companies i.e. Alphageo (i)Ltd and Vimta Labs Ltd. Thus, the CIT(A) has arrived at the revised mean margin at 14.79% by taking into consideration only two comparables namely Tata Projects Ltd and N G Industries Ltd. 5.3 As regards the issue of taking the current year data instead of multi year data by the assessee, the same is settled at the level of the CIT(A) because the assessee has not challenged the order of the CIT(A) on this issue.
5.4 This is a case where the TPO has rejected two comparables on the ground that they were consistently making losses and the CIT(A) has further eliminated two more comparables on the ground of high profit making companies. Consequently, out of six companies selected by the assessee, the CIT(A) has revised the average mean ratio of comparables from 36.19% calculated by the TPO to 14.79% and hence, deleted the adjustments made by the TPO on this segment. 5.5 The question arises before us is whether the comparables can be selected and rejected merely on the basis of their degree of profitability. From the provisions of Rule 10B, it can not be inferred that simply because loss making companies or high profit margin companies can be excluded from the list of comparables for determination of the mean margin. For selecting comparables for the purpose of 10 ITA No 4389/M/2010 .
determination of ALP, some factors are enumerated under Rule 10B(2) and (3) and therefore, these relevant factors like functioning similarity, asset employed similarity, risk assumed similarity and other prevailing economic conditions and geographical locations as well as market conditions, effect of cost or labour and capital has to be taken into consideration and not the profitability of the comparables. Though, the abnormal profit margin or abnormal persistent loss due to the factor as described under rule 10(b)(2) and (3) can be a decisive factor for selecting the comparables; but in any case the sole extraordinary profit or loss cannot be a decisive factor. 6 The coordinate Bench of this Tribunal, one of us -Judicial Member - is party to the order dated 10.6.2011 for the AY 2006-07 in the case of the assessee has observed in para 33 (vi) as under:
xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition.
The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which cannot be accepted. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed."
6.1 The coordinate Bench of this Tribunal, in the case of CIT vs M/s B P India Services Pvt ltd in ITA 4425/Mum/2010 vide order dt 23.9.2011 has observed and held in paras 12.2 ato 12.8 as under:
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"12.2. It is noticed that the TPO worked out mean of profit rate at 20.55% by excluding the cases of Fl and ME. In this calculation of 2O.55%, the other 10 companies also including DT giving profit rate at 75.6% and HT giving profit rate at 68.7% were continued to remain in the list. We are not convinced with the submission advanced on behalf of the assessee that simply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 1OB(1)(e)(ii) clearly refers to 'a comparable uncontrolled transaction or a number of such transactions'. It not only talks of one transaction which is comparable and uncontrolled, but also contemplates a number of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot.
12.3. The cases of FT and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule l0B read with Rule 1OA as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the Id. CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis of relevant considerations and not the higher or lower profit rates. It is imperative to note that the list of 12 comparable cases was provided by the assessee and not something created by the TPO as per his own whims and fancies. When the list of comparable cases was furnished by the assessee, it was the turn of the TPO to find out whether such cases were, in fact, comparable or not and if not, then to exclude them after showing how these were not comparable. The Id. CIT(A) was not empowered to order the exclusion of two high profit cases without showing that these were not comparable as per the relevant considerations, which we will discuss infra.
12.4. A case is a comparable when it satisfies the prescription of Rule 1OB(2), which is as under:
Rule l0B (2): For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;12
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(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions;
(d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail." 12.5. Further sub-rule (3) of rule l0B provides that an uncontrolled transaction shall be comparable to an international transaction if
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or
(ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the Id. CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 1OB(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables. 12.7. Now let us examine the facts of the case of Quark System (supra), which is the trump card of both the Id. CIT(A) as well as the assessee. In that case it was contended on behalf of the assessee, by way of an additional ground, that a particular case with high profit rate was not comparable with that of the case before the Bench on account of positive reasons pointed out and hence the same be excluded. The Bench, while holding that the assessee could not be estopped from pointing out that such case was wrongly taken as a comparable, remitted the matter to the AO for de novo examination of the assessee's claim in this regard. Thus it is palpable that the decision of the case is not as has been projected, that the special bench of the tribunal ordered for the exclusion of high profit rate case from the list of comparables supplied by the assessee. On the contrary, we find that it remitted the matter to the AO for examination of the claim as to whether such high profit case could be excluded.
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12.8. Adverting to the facts of the instant case it is noted that the Id CIT(A), without considering any data of HT and DT or comparing it with the assessee's facts, simply ordered for elimination on sole the reason of their having high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule l0B. As such we are not inclined to uphold the impugned order on this score." 6.2 As held by the Co-ordinate Bench of this Tribunal that only if the higher or lower profit ratio resulted on account of the effect of the factor given in Rule 10(B)(2) r.w.r (3), such case was deserves omission from the comparable list and therefore, even higher profit rate archived due to the factor other than those given in the rule, such case would continue to find place in the list of comparable. 6.3 A similar view has been taken by the Bangalore Benches of the Tribunal in the case of ITO vs N/s Nextlink India P Ltd in ITA No.454/Bangalore/2011 as under:
".................. The word 'super' is a superlative word which denotes that it is something extra ordinary i.e. the profit which is far above what the industry in general is making. In all the cases where these super profit making companies were directed to be excluded, the TPO was comparing the cases like Infosys, Wipro etc., where the turnover was more than 10 times of the assessee and the profit margin was abnormally high. The net profit of Nuclear Netsoft was 40% which cannot be said to be super profit making company. The assessee's contention is that any margin above the assessee's margin has to be ignored cannot be accepted. The net margin of 24% was arrived at after taking into account both 40% and also 2% which is lowest in the relevant industry. 40% profit in the ITES industry cannot be held to be extra ordinary or super profit. In view of the same, we hold that the net margin of Nuclear Netsoft has to be considered. Similarly, the net margin of Transwork Information Services Ltd., also have to be considered for the purpose of computing the ALP of the international transaction. This ground is accordingly partly allowed."
6.4 In a subsequent decision, the Bangalore Benches of the Tribunal by following the decision in the case of M/s Nextlink India Pvt as well as in the case of the assessee for the AY 2006-07 has observed and held as under:
"We have carefully considered the submissions made seeking the exclusion of this company as a comparable for the reason that it has high profits of 63.27% and that it has various segmental apart from ITES and that there were a catera of decisions in support of the assessee's proposition. A similar matter of Super Profits was considered by a coordinate Bench of this Tribunal in the case of M/s Netlinx India Pvt Ltd (ITA No.454/Bang/2011) to which both of us 14 ITA No 4389/M/2010 .
were a party. In that order, it was held that the word 'super' is a superlative word which denotes something extraordinary and noted that in all the cases / decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high.
In the case of Exxon Mobile Company India Pvt Ltd Vs. DCIT (ITA No.8311/Mum/2015 dt.10.6.2011), the Income Tax Appellate Tribunal Mumbai held that:
"A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that the comparable has incurred loss or made abnormal profits."
Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithmetic Mean Method all companies that are in the sample are considered, without exception, and the average of all the companies are considered as ALP. Therefore as a general rule that companies with abnormal profits should be excluded may be in line with the principles enumerated in the OECD guidelines, but cannot be said to be in tune with Indian TP regulations. The assessee has not been able to establish or demonstrate with any evidence any reason to support the proposition that the profit of the comparable company was abnormally high. It must not be overlooked that high profits reflect better business sense and practices also. The net Arithmetic Mean margin of 36.49% was arrived at after taking into account both 63.27% and also 3.44% which is the lowest in the relevant ITES industry. We also find from the material on record that this company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company. We, therefore, see no reason why the M/s. Ultra Marine Pigments Ltd should not be considered as a comparable and therefore reject the assessee's grounds seeking its exclusion. This company is, therefore, directed to be retained as a comparable for the assessee for Assessment Year 2004-05. 6.5 Though, the ld AR of the assessee has relied upon the decision of the Hyderabad Bench of this Tribunal dated 23.11.2012 in the case of Capital IQ Information Systems (I)Ltd in ITA No.1961/Hyd/2011; however, in the said case the 15 ITA No 4389/M/2010 .
comparable was considered as exceptional financial result due to merger/de- merger and therefore, the same was held not to be treated as comparable, as in the case of the said comparable company having 113% profit due to abnormal development in the overall financial capital and structural change consequent to merger/de-merger. Therefore, the said case cannot be applied, in general when the high profit or loss is not because of some exceptional development in the financial condition, which is covered under the factor as prescribed under Rule 10B(2) and (3).
7 In view of the above discussions as well as the decisions of this Tribunal on the point of exclusion of the comparables due to high profit margin or loss, we find that the action of the TPO excluding the two comparables on the ground that these companies are persistent loss making concluded merely on the basis of two years data and without going into the details whether the loss is because of factors as prescribed under Rule 10B(2) r.w. sub rule (3) is not justified. 7.1 Similarly, the elimination of two more comparables by the CIT(A) on the ground of high profit making companies is also not inconformity with the provisions of law. Further, the concept of inter-quartile range of the comparables set is not recognized in the Indian Income Tax Law because when mean average of the comparables is taken, then it neutralized the effects of all the extreme cases. Accordingly, the order of the TPO/AO as well as the CIT(A) are not sustainable and hence, set aside. We, therefore, remit the issue to the record of the Assessing Officer for examination of the same and decide the issue afresh as per law. 8 Regarding back office support services, the assessee has shown the margin at 13.59% by using two years data. The assessee has used TNMM as most appropriate 16 ITA No 4389/M/2010 .
method and operating profit as the Profit Level Indicator (PLI). The assessee has selected 16 comparables and computed weighted mean by using three years data of the comparables at 13.79%. The TPO has rejected ten comparables; 4 on the ground of persistent loss and six on the ground that the data for the current year i.e. the financial year 2003-04 were not available on the database. Thus, the TPO computed the mean margin by taking six comparables and using single year data at 22.48%. This mean margin of comparables has been compared with the margin of the assessee recalculated by the TPO by using single year data at 2.56%. Accordingly, the TPO made an adjustment of Rs. 81.31 lacs on this segment. The details of comparables as selected by the assessee out of which ten comparables were rejected by the TPO as given at page 4 of the order of the TPO are as under:
Company Name OP/TC OP/TC as Remarks
assessee's calculated by
calculation this office
1 Ace Software Exports Ltd 13.18% -0.68%
2 C S Software Enterprise Ltd -12.48% 11.34%
3 Datamatics Consultants Ltd 49.06% -17.38%
4 Suprawin Technologies Ltd -23.08% Rejected
5 F I Sofex Ltd -14.08% Rejected
6 Hinduja TMT 112.07% 90.71%
7 Nucleus Netsoft & GIS(India) Ltd -14.03% Rejected
8 MCS Ltd 7.19% Rejected
9 Max Health scribe Ltd 9.57% Rejected
10 Tata Services Ltd 4.07% 12.11%
11 Tulsyan Technologies 5.91% Rejected
12 Weal Infotech 10.16% Rejected
Segmental Information
13 Carborundum Universal Ltd 28.18% Rejected
14 Mukand Enggrs Ltd -2.58% Rejected
15 Tricom India 51.30% Rejected
16 Ultramarine & Pigments Ltd 7.98% 38.78%
Average 13.79% 22.48%
8.1 On appeal, the CIT(A) further rejected two more comparables namely Ace
Software and Ultramarine & Pigments Ltd on the ground of high margin but
included two other comparables which were rejected by the TPO on the ground of 17 ITA No 4389/M/2010 .
persistent loss making companies and non availability of data. Namely Nucleus Netsoft & GIS(India) Ltd and MCS Ltd. Hence, the CIT(A) has revised the mean margin by taking a different set of comparables.
8.2 As far as the use of single data instead of multi year data is concerned, this issue is settled by the Tribunal in assesse's own case for the AY Tricom India2006-07 in para 33 (v) & (vi) as under
v) The other aspect which is in dispute is, whether the data of one year has to be taken or multiple year data has to be taken. Rule-1OB(4) of the I.T. Rules, 1962, reads as follows:
"4. The data to be used in analyzing the comparability 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:
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared."
vi) A plain reading of this rule makes it clear that the data relating to the financial year only has to be taken. As an exception, the rule also provides that the data of two years prior to the financial year may be taken, only if, such data reveals the facts which could have influenced the determination of transfer pricing. When the assessee wants to consider previous year's data, then the burden is on the assessee to demonstrate that the previous year's data contained certain facts which would influence the determinationof transfer pricing. In the case on hand, no such evidence is laid by the assessee. A general argument is made that, taking more than one year data, would give a better comparable. The rule does not provide for general submissions. In the absence of the assessee specifically demonstrating that the data of the prior financial year reveals fact which influence the determination of the transfer price of the transactions being compared, the question of taking into consideration data other than the current year's data does not arise."
8.3 The issue of rejecting certain comparables on the ground of persistent loss making and high profit making by the TPO and CIT(A) respectively is common as in respect of application research and technical services. We have dealt with the 18 ITA No 4389/M/2010 .
issue in the foregoing paragraphs. Accordingly, this issue is set aside to the record of the Assessing Officer for examining and considering the same afresh.. 9 Ground no.3 is regarding disallowance in respect of global support service charges.
9.1 The assessee has debited its P&L Account an amount of ` 38,26,277/- as the global service charges payable to M/s Exxon Mobil Asia Pacific Pte Ltd.,(EMCAP) Singapore for services pertaining to the period Jan 2003 to March 2003. It was contended by the assessee before the Assessing Officer that the debit note in respect of that amount was received by the assessee during the financial year ended on 31.3.2004 in pursuant to the agreement dated 3.10.2003 entered into with EMCAP, Singapore. Therefore, the expenditure has been crystallised during the year under consideration and the claim aught to have been allowed. As a matter of abandoned precautions, the assessee has also filed the revised return for the AY 2003-04 and made a claim of the same amount. The Assessing Officer has disallowed the claim of the assessee on the ground that the claim is of prior period expenses.
9.2 The Commissioner of Income Tax(Appeals) has taken up the issue in both the assessment years i.e. 2003-04 and 2004-05. For the AY 2003-04, the CIT(A) has recorded all the facts and circumstance regarding this issue. The assessee initially claimed an amount of ` 62,82,246/-. Since out of the total amount of ` 62,82,246/-, an amount of ` 24,55,969/- was liable for deduction of TDS and therefore, the said amount is subject to the provisions of sec. 40(a)(i) of the I T Act. The tax on the said amount was deduced and paid in the Financial Year 2004-05 relevant to AY 2005-06 and accordingly, deduction in respect thereof has been claimed for the AY 2005-06. 19
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The assessee accordingly revised its claim at ` 38,26,277/- in the revised return. Since the assessee has also claimed this amount for the AY 2003-04, as a matter of abandoned precautions, the CIT(A) has decided this issue in paras 2.9 of his order for the AY 2003-04 as under:
"2.9 I have perused the facts as well as history of this issue. It is observed that the issue of global support service charges was examined by the TPO while carrying out scrutiny for Assessment Year 2004-05 and no adjustment was made. This was prior to the action of the Assessing Officer. TPO is a senior and specialises in handling International Transactions between Associated Enterprises as he is dedicated for the work only. Once the same was held to be at arms length, it was nor fair and proper to disallow it under general provisions and that too without calling for any evidence or bringing any adverse material on record. The action of the Assessing Officer is arbitrary. However as the charge had crystallised in the FY 2003-04 relevant to Assessment Year 2004-05, the matter has been dealt at length and decided in appellants favour in that year on merits."
9.3 It is observed by the CIT(A) that the charges has crystallised for the FY 2003-04 relevant to AY 2004-05 and the matter has been dealt at length and decided the issue in favour of the assessee in that year on merit.
10 We have heard the ld DR as well as the ld AR and considered the relevant material on record. The ld DR has submitted that the assessee has not furnished any record that the services were actually rendered. On the other hand, the ld AR has referred the order of the CIT(A) for both the AYs 2003-04 and 2004-05 and submitted that when the CIT(A) has considered all the facts and particularly the relevant material filed before the TPO as this issue was referred to the TPO and no adjustment was made on this account by the TPO after examination of the relevant material, then the claim of the assessee cannot be disallowed. He has relied upon the following decisions:
i) Saurashtra Cement and Chemical Industries Ltd. v. CIT - 213 ITR 523
ii) CIT v. Tamilnadu Dairy Development Corporation Ltd.250 ITR 273
ii) Commissioner of Income-tax v. Phalton Sugar Works Ltd. -162 ITR 622 20 ITA No 4389/M/2010 .
10.1 Having considered the rival submissions and careful perusal of the relevant material on record, we note that the Assessing Officer has disallowed the claim of the assessee on the ground of prior period expenses. The Assessing Officer has not disputed the rendering of services and expenditure incurred by the assessee. The disallowance made by the Assessing Officer is only on the ground of prior period expenses. The Assessee has also taken precaution by making a claim for AY 2003-04 and the issue was then decided by the CIT(A) by considering all the aspects for both the AYs.
10.2 We have noted earlier that for the AY 2003-04, the CIT(A) has found that the assessee has filed relevant material before the TPO and the TPO has not made any adjustment as the payment was found at ALP. Though, making no adjustment by TPO does not ipso facto prove that the expenditure is genuine; however, when the Assessing Officer has also not doubted the genuineness of the expenditure but disallowed only on the ground of prior period, then, the claim of the assessee cannot be disallowed for both the AYs. . The Commissioner of Income Tax (Appeals) has discussed and decide the issue in paras 8 to 8.3 as under:
"8) Ground no.4 relates to the issue which has also been examined during the proceedings for AY 2003-04. The Assessing Officer has not given any cogent reason as to why he feels it is a prior period item. In any case the genuineness of the expenditure is not doubted either by the Assessing Officer or the TPO.
Even otherwise, there is sufficient authority for the proposition that an expenditure which has crystallised in the particular year does not constitute a prior period item and is required to be allowed as a deduction. In this connection, reliance is placed on the following decisions:-
i) Saurashtra Cement and Chemical Industries Ltd. v. CIT - 213 ITR 523
ii) CIT v. Tamilnadu Dairy Development Corporation Ltd.250 ITR 273
ii) Commissioner of Income-tax v. Phalton Sugar Works Ltd. -162 ITR 622 8.1. In the decision of the Gujarat High Court in 213 ITR, it has been held on page 531 as under:21
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"Having considered the material on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystallized, which is to be taken into account under the mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year. "
8.2. Recently the Delhi high Court in CIT Vs. Vishm Industrial Gases has held that where the department has not disputed that the expenditure was deductible in principle but was only disputing the year in which the deduction could be allowed it has castigated the department by holding that as the tax rates were the same in both the years, the department should not fritter away its energies in raising question as to the year of deductibility/taxability. As the global support charges have crystallised in the current F.Y.2003-04, the same is treated as allowable expenditure in A.Y.2004-05.
8.3. This matter was dismissed on statistical grounds for' AY 2003-04 and so the same is considered and allowed on merits for the current AY 2004-05.
Accordingly, as the deduction for the said charges are denied to the appellant in AY 2003-04, the same can rightly, be claimed as deductible expenditure for AY 2004-05.as there are no adverse findings on this International Transaction with its AE by the TPO and the matter is accordingly decided in favour of the appellant. The Assessing Officer is directed to accordingly give effect to the same."
22
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10.2 There is no dispute that the agreement between the parties was entered into during the year relevant to assessment under consideration and the debit note in respect of the expenses was also received during the year under consideration therefore, the expenditure has been crystallised during the year under consideration. The CIT(A) has allowed the claim of the assessee by considering both the AYs . Therefore, in the facts and circumstances of the case, we do not find any error or illegality in the order of the CIT(A), which is supported by the decisions as relied upon by the assessee.
11 In the result, the appeal filed by the revenue is partly allowed. Order pronounced in the Open Court on this 19th, day of Dec 2012 Sd/- Sd/-
( P M JAGTAP ) ( VIJAY PAL RAO )
Accountant Member Judicial Member
Place: Mumbai : Dated: 19th, Dec 2012
Raj*
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai