Income Tax Appellate Tribunal - Pune
Vishay Components India Pvt. Ltd.,, ... vs Asst. Cit, Circle-7, Pune on 31 May, 2017
आयकर अपीऱीय अधिकरण पुणे न्यायपीठ "ए" पुणे में
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
सश्र
ु ी सष
ु मा चावऱा, न्याययक सदस्य एवं श्री अयिऱ चतव
ु ेदी, ऱेखा सदस्य के समक्ष
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपीऱ सं. / ITA No.341/PUN/2013
यििाारण वषा / Assessment Year : 2008-09
Vishay Components Pvt. Ltd.,
Loni-Kalbhor, Near Pune (C.Rly),
Pune - 412 201. .... अऩीऱाथी/Appellant
PAN: AAACB9652L
Vs.
Asst. Commissioner of Income-tax,
Circle-7, Pune .... प्रत्यथी / Respondent
अऩीऱाथी की ओर से / Appellant by : Shri F.V. Irani
प्रत्यथी की ओर से / Respondent by : S/Shri Rajiv Kumar, CIT and
Suhas Kulkarni
सुनवाई की तारीख / घोषणा की तारीख /
Date of Hearing : 08.03.2017 Date of Pronouncement: 31.05.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
This appeal filed by the assessee is against the order of ACIT, Circle 7, Pune, dated 29.11.2012 relating to assessment year 2008-09 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:-
On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequentially, the learned AO have:2 ITA No.341/PUN/2013
Vishay Components (India) Pvt. Ltd.
I. In respect of transfer pricing adjustment Common grounds
1. General ground challenging the transfer pricing adjustment of Rs.19,94,63,764 Erred on facts and in law by making a transfer pricing adjustment to its international transactions in connection with its manufacturing activity (export of finished goods, import of raw materials and components for manufacturing finished goods, import of finished goods for resale and receipt of commission) and in respect of back-office segment (for provision of back office services) and not accepting the analysis undertaken by the Appellant to determine the arms length price.
2. Rejection of transfer pricing documentation and non-consideration of the comparability analysis as documented in the transfer pricing study report.
Erred on facts and in law by rejecting the transfer pricing documentation maintained by the Appellant and also not considering the data provided in the transfer pricing study report for benchmarking analysis.
3. Non consideration of contemporaneous data Erred on facts and in law by conducting an analysis based on information currently available for determining arms' length price but which was not available at the time of complying with the regulations.
4. Use of single year data Erred in considering the operating margins earned by the companies identified as comparable based on the financial data pertaining to the financial year ended 31 March 2008 only and rejecting the financial data of such companies for prior two years for determining the arms length price of international transactions.
5. Non- consideration of +/-5% range Erred in computing the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's length price, a price which varies by not more than 5 per cent from the arm's length price.
In connection with manufacturing activity
6. Adopting an incoherent approach for selection / rejection criteria of comparable companies Rejection of Keltron Group companies as comparable Without prejudice to the grounds above, erred on facts and in law in rejecting Keltron Group companies ad comparables.
Incoherent approach adopted while accepting Gujarat Poly-Avx Electronics Limited as comparable Also without prejudice to the above grounds, erred on facts and in law, by adopting an incoherent approach for rejecting Keltron Group companies as comparable on certain criteria and not applying similar criteria / rationale (as applied for such rejection) while accepting Gujarat Poly-Avx Electronics Limited as comparable.
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7. Rejection of K Dhandapani and Company Limited as a comparable company Erred in law and in facts in rejecting K Dhandapani and Company Limited as a comparable company.
8. Non-consideration of correct operating margin of Tibrewala Electronics Limited Erred in law and in fact by not considering correct operating margin of Tibrewala Electronics Limited.
9. Non-exclusion of depreciation while calculating the Profit level indicator of the Appellant as well as of the comparable companies Erred in facts and law in considering depreciation as part of operating expenses of companies considered as comparable and the Appellant without giving due credence of the fact that the Appellant charges higher rate of depreciation (compared to depreciation rates provided in Schedule XIV of the Companies Act, 1956) vis-à-vis companies considered as comparable (while largely follow depreciation rates as prescribed in Schedule XIV of the Companies Act, 1956)
10. Non-consideration of capacity related adjustment for companies considered as comparable to factor differences on account of capacity utilized by the Appellant and such companies Erred in facts and law by comparing the operating margins earned by the Appellant and the companies considered as comparable without allowing an adjustment undertaken on account of differences in the capacity utilized by the Appellant and the companies considered as comparable.
11. Computation of transfer pricing adjustment with reference to total turnover instead of adjustment attributable to the value of international transactions Erred on facts and in law by computing the transfer pricing adjustment with reference to total turnover instead of computing and restricting the same with reference to value of international transactions In connection with back-office activity
12. Selection of certain inappropriate qualitative filters and applying certain filters on selective basis Erred on facts and in law by selecting following inappropriate qualitative filters and also applying certain filters on selective basis:
- Use of diminishing revenue filter;
- Use of different accounting year filter for comparability analysis;
- Rejection of loss making companies; and
- Rejection of companies with peculiar circumstances.
13. Rejection of turnover criteria applied by the Appellant Erred on facts and in law by not considering the turnover filter applied by the Appellant of INR 25 crores (ie rejecting companies having turnover exceeding INR 25 crores) as a comparable selection criteria and considering the turnover range of INR 1 cr to INR 200 cr for selecting the comparable companies.
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14. Accepting companies having supernormal profits Erred on facts and in law by accepting companies having supernormal profit as comparable to the Appellant.
15. Rejection of certain companies identified as comparable by the Appellant Erred on facts and in law by rejecting certain comparable companies from the set of comparable companies identified by the Appellant.
16. Accepting certain additional companies as comparable Erred on facts and in law by accepting certain additional companies as comparable to the Appellant.
17. Error in computation of working capital adjustment Erred on facts and in law in incorrectly computing working capital adjusted operating margins of the comparable companies.
18. Non-consideration of adjustment for companies indentified as comparable to factor differences on account of risk undertaken by such companies Erred on facts and in law by comparing full-fledged risk bearing entities with the Appellant's captive operations without undertaking any risk adjustment II. In respect of disallowances/additions other than transfer pricing adjustment
19. Disallowance of stock written-off in Domestic Tariff Area ('DTA) unit Erred on facts and in law by disallowing the deduction claimed by the Appellant in respect of stock written off without appreciating the fact that all documentary evidences supporting such write-off were submitted during the course of assessment proceedings Without prejudice to above, the learned Assessing Officer, erred in proposing to disallow the amount of provision for stock write-off of INR 12,657,145, already disallowed while computing the taxable income, instead of actual write-off in DT A unit of INR 11,904,508. 20 Error in considering the total income as per the return of income Erred on facts and in law in considering the total income as per Return of Income as 'NIL', while computing the proposed assessed income, instead of loss of INR 38,923,006 as declared by the Appellant in the return of income III. Other Grounds of Objections
21. Initiation of penalty proceedings under section 271(1)(c) of the Act Erred in law and on facts in initiating penalty proceedings under section 271 (1)( c) without considering the fact that transfer pricing adjustment and corporate tax adjustment are on account of difference of opinion pertaining to selection criteria adopted for identifying the comparable companies, interpretation of provisions of law, etc 5 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
22. Erroneous levy of interest under section 234B of the Act Erred in law and on facts in levying interest under section 2348 of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustment and corporate tax related matters without considering the fact that shortfall in advance tax resulted in view of the proposed additions to total income, which are unanticipated in nature.
Without prejudice to the above, the learned Assessing Officer, erred in computing the interest under 234B of the Act.
3. The learned Authorized Representative for the assessee at the outset pointed out that many of the issues raised in the present appeal are covered by the order of Tribunal in assessee's own case relating to assessment year 2007- 08 in ITA No.1712/PUN/2011, order dated 10.02.2017.
4. Briefly, in the facts of the case, the assessee had e-filed the return of income declaring Nil Income. The Assessing Officer made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price with reference to all international transactions reported in Form 3CEB filed by the assessee. The assessee was engaged in the manufacture of resistors and capacitors which in turn, were used in various electronic applications / products. The assessee had Domestic Tariff Area unit for manufacturing capacitors and low end resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are exported to overseas group entities. The assessee was also providing certain information technology related services to certain Vishay group entities. The TPO noted that Vishay group was a leading international manufacturer and supplier of electronic components which were used in every type of product that contains electronic circuitry, including computer related products, power management products, telecommunications equipments, etc. The assessee had entered into following international transactions with its associated enterprises:- 6 ITA No.341/PUN/2013
Vishay Components (India) Pvt. Ltd.
Sr No. Nature of international transaction Amount (Rs.) Method applied
1 Export of finished goods to overseas 61,31,75,372
Group companies
2 Import of raw materials and components 15,60,07,206
for manufacturing finished goods TNMM
3 Import of finished goods for resale 76,38,990
4 Receipt of commission 58,40,686
5 Import of capital machinery 13,94,58,435 CUP
6 Amount paid for software and data 1,93,87,272 Cost allocation
communication expenses arrangement
7 Provision of IT services 8,45,45,444 TNMM
8 Reimbursement of expenses 8,38,608 At cost
9 Recovery of expenses 6,66,37,288 At cost
109,35,29,301
10 Issue of equity shares including share 23,84,10,000 -
premium to AEs
Total 133,19,39,301
5. The assessee had entered into various international transactions with its associated enterprises and the TPO passed an order under section 92CA(3) of the Act proposing an upward adjustment of Rs.24,95,94,449/- in manufacturing segment and ITES segment. The TPO did not allow the risk adjustment in the hands of assessee. The Assessing Officer passed draft assessment order, against which the assessee filed the objections before the Dispute Resolution Panel (DRP), which gave certain directions to the Assessing Officer vide its order dated 05.09.2012. The Assessing Officer therefore, referred back the matter to the TPO and worked out the adjustment of Rs.1,30,97,557/- in the international transactions pertaining to IT Enabled Services of the assessee and Rs.18,63,66,207/- in manufacturing segment. The Assessing Officer made the said adnustment. Another addition made by the Assessing Officer was on account of stock written off at Rs.1,26,57,145/-.
6. The assessee is in appeal against the order of Assessing Officer.
7. The grounds of appeal No.1 and 2 raised by the assessee are general in nature and the same are dismissed. The issue in grounds of appeal No.3 to 10 are in relation to the transfer pricing adjustment in the manufacturing segment.7 ITA No.341/PUN/2013
Vishay Components (India) Pvt. Ltd.
The issue raised by way of ground of appeal No.3 is against reliance on information which was not available at the time of complying with the regulations by the assessee. The learned Authorized Representative for the assessee has pointed out that the said issue is decided against the assessee by the Tribunal in paras 11 to 14 at pages 8 to 15 of the order dated 10.02.2017, wherein the Tribunal had relied on its earlier order in ITA No.133/PN/2011, relating to assessment year 2006-07, order dated 16.05.2016, has decided the issue against the assessee. Following the same parity of reasoning, we dismiss the ground of appeal No.3 raised by the assessee. We make reference to our finding in assessment years 2006-07 and 2007-08. However, the said findings of the Tribunal are referred to but are not reproduced for the sake of brevity.
8. Now, coming to the ground of appeal No.4 which is against the issue of use of single year's data for determining the arithmetic mean of margins of comparables. Similar issue also arose before the Tribunal in assessment years 2006-07 and 2007-08 vide orders dated 16.05.2016 and 10.02.2017 respectively and the Tribunal decided the said issue against the assessee. The learned Authorized Representative for the assessee has also pointed out that the said issue has been decided against the assessee and following the same parity of reasoning, we uphold the order of Assessing Officer / TPO in considering single year's data in order to arrive at the PLI of comparable cases, while applying transfer pricing provisions. The Tribunal has decided this issue in assessment year 2007-08 in paras 15 to 18 and the same are being referred to and are not being reproduced for the sake of brevity. The ground of appeal No.4 raised by the assessee is thus, dismissed.
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9. The issue in ground of appeal No.5 is against non-consideration of +/- 5% range. The Tribunal had also decided this issue against the assessee vide page 39 of its order dated 10.02.2017. The learned Authorized Representative for the assessee has referred to the findings of the Tribunal in this regard. We hold that the assessee is not entitled to the standard deduction under the proviso to section 92C(2) of the Act. However, where transfer pricing adjustment is within +/-5% range, then the assessee is entitled to the said benefit. Accordingly, the ground of appeal No.5 is dismissed.
10. The issue in ground of appeal No.6 raised by the assessee is against rejection of Keltron Group as comparable and adoption of Gujarat Poly-Avx Electronics Ltd. as comparable. The assessee is aggrieved by incoherent approach of the TPO in rejecting Keltron Group on certain criteria and not applying similar criteria / rationale while accepting Gujarat Poly-Avx Electronics Ltd. Similar issue of selection / rejection of both the Gujarat Poly-Avx Electronics Ltd. and Keltron Group arose before the Tribunal in assessment year 2007-08 and vide order dated 10.02.2017, the said issue was decided vide paras 18 and 22 at pages 18 to 22 of the order and the Tribunal held that the claim of assessee is to be verified as to whether Keltron Group and Gujarat Poly-Avx Electronics Ltd. were persistent loss making concerns; if so, then both the concerns are to be excluded from the final set of comparables while benchmarking international transactions in manufacturing segment. Following the same parity of reasoning, we hold that in the instant case also, the Assessing Officer is directed to follow our directions in assessment year 2007- 08 in order to decide the inclusion / exclusion of Keltron Group and Gujarat Poly-Avx Electronics Ltd. in the final set of comparables in the manufacturing segment. Accordingly, the ground of appeal No.6 raised by the assessee is allowed for statistical purposes.
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11. The issue in ground of appeal No.7 is against rejection of K Dhandapani and Company Ltd. as comparable company. The assessee is aggrieved by the rejection of said concern though the said concern was accepted to be comparable in assessment year 2007-08. The TPO admits that the said concern was functionally comparable to the assessee but the percentage of sale of capacitors to the total sale was only 51%, so the said concern was rejected as being not comparable by the TPO.
12. The learned Authorized Representative for the assessee pointed out that the sale of capacitors was 59.25% of the manufacturing segment and not 51% as stated by the TPO. The plea of assessee was that around 60% of manufacturing segment activity comprised of capacitors which was fairly good proposition to consider K Chandapani and Company Ltd. as comparable company. The DRP rejected the submissions of assessee. The learned Authorized Representative for the assessee pointed out that the TPO had erred in calculating the denominator of inter unit transfers which were not sales of assessee and if the same is excluded, then the sale of capacitors would be 59.25% of the manufacturing segment and not 51%. He further pointed out that in the preceding year, sale of capacitors of K Dhandapani and Company Ltd. was 48% on the same method of working of denominator and the same should be applied for the year under consideration.
13. The learned Departmental Representative for the Revenue on the other hand, referred to the TP study report of the assessee for the year under consideration at page 5.61 of the Paper Book and pointed out that the assessee himself had rejected the concerns where the turnover from the capacitors was less than 75%, hence there is no merit in the plea of assessee. 10 ITA No.341/PUN/2013
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14. We have heard the rival contentions and perused the record. The assessee vide ground of appeal No.7 is aggrieved by the order of TPO in rejecting K Dhandapani and Company Ltd., which as per the TPO also, it is functionally comparable to the assessee. The plea of assessee before us is that the said concern is also engaged in sale of capacitors and its sale is 59.25% of the manufacturing segment and hence, the said concern be included in the final list of comparables. The learned Departmental Representative for the Revenue on the other hand, has pointed out that the assessee while selecting the comparables had applied certain filters and had rejected the companies which were undertaking significantly different functions i.e. companies engaged primarily in trading activity or manufacturing different products or turnover from capacitors and resistors is less than 75% of the total turnover. In other words, one of the filters applied by the assessee that the concern whose turnover from capacitors and resistors was less than 75% of the total turnover, then the margins of said concerns were not applied while benchmarking international transactions of the assessee. The TPO has pointed out that in the case of K Dhandapani and Company Ltd., the sale of capacitors was to the extent of 51%; on the other hand, the assessee claimed the same at 59.25% on account of certain exclusion of inter unit transfers from the denominator. However, we find no merit in the plea of assessee as the assessee itself has applied the filter and rejected the concern whose turnover from capacitors and resistors was less than 75% of the total turnover. Accordingly, we hold that K Dhandapani and Company Ltd. is to be excluded from the final list of comparables. The ground of appeal No.7 is thus, dismissed.
15. The issue in ground of appeal No.8 raised by the assessee is against working of credit operating margins of Tibrewala Electronics Ltd. The margins 11 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
of the said concern Tibrewala Electronics Ltd. were applied by the TPO and the assessee before us is aggrieved by the calculation of operating margins of the said concern. The assessee claims that vide its submission dated 14.10.2011, it had submitted the corrected operating margins of the said comparable company before the TPO and the TPO has not considered the same. The TPO had treated the cost towards currency capital options, forming part of financial expenses in the Profit and Loss Account of Tibrewala Electronics Ltd., as non- operating in nature. The plea of assessee was that the same should be considered as part of operating cost of the company since the cost towards currency option was in relation to foreign exchange related transactions undertaken by the said concern and the same could not be treated as finance cost. The DRP had rejected the plea of assessee and had held that the TPO was correct in treating the same as operating cost of the company. The plea of learned Authorized Representative for the assessee before us was that cost towards currency option was in relation to foreign exchange related transaction undertaken and the same cannot be treated as finance cost. The learned Authorized Representative for the assessee pointed out that where foreign exchange gain is taken as part of operating income, then the expenses incurred by Tibrewala Electronics Ltd. is to be considered as part of operating cost. He further submitted that when the TPO computes the margins of assessee, then he treats it as operating cost. Reliance was placed on the ratio laid down by the Pune Bench of Tribunal in Approva Systems Pvt. Ltd. Vs. CIT in ITA No.1788/PN/2013 and DCIT Vs. Approva Systems Pvt. Ltd. in ITA No.1803/PN/2013, relating to assessment year 2009-10, order dated 13.01.2015 and the Hon'ble High Court of Delhi in Pr. CIT Vs. Ameriprise India Pvt. Ltd. in ITA No.206/2016, judgment dated 23.03.2016. 12 ITA No.341/PUN/2013
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16. The learned Departmental Representative for the Revenue fairly admitted that if the assessee was following similar practice of recognizing the income / cost, then the adjustment can be allowed in the hands of comparables also.
17. We have heard the rival contentions and perused the record. The issue which arises by way of ground of appeal No.8 is in respect of determination of operating margins of Tibrewala Electronics Ltd. The plea of assessee is that the cost towards currency options are to be considered as part of operating cost of the company and not as part of financial expenses in the Profit and Loss Account, being non-operating in nature. The assessee pleaded that where foreign exchange gain is part of operating income, then the expenses incurred are also to be included as part of operating cost. The Hon'ble High Court of Delhi in Pr. CIT Vs. Ameriprise India Pvt. Ltd. (supra) has held that foreign exchange loss was to be considered as part of operating cost. The learned Departmental Representative for the Revenue has also fairly agreed that in case the assessee was following similar practice of recognizing its income / cost, then the adjustment is to be allowed in the hands of comparables also. While applying the transfer pricing provisions, the TPO has to make sure that like is compared to like. So, in case income or cost is recognized in a particular manner by the assessee and the margins are computed thereunder by the assessee, then similar recognition of income / cost is to be given in the hands of comparables. Accordingly, we remit this issue back to the file of TPO to verify the claim of assessee in this regard and if the assessee has given similar recognition to the foreign exchange income / loss by treating it as operating income / cost respectively, then the margins of comparable M/s.Tibrewala Electronics Ltd., be similarly worked out. The TPO / Assessing Officer shall 13 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
afford reasonable opportunity of hearing to the assessee. The ground of appeal No.8 raised by the assessee is thus, allowed for statistical purposes.
18. The ground of appeal No.9 raised by the assessee is against non- exclusion of depreciation while calculating Profit Level Indicator of the assessee as well as the comparable companies arose before the Tribunal in assessment year 2007-08, which was decided by the Tribunal in paras 33 to 44 at pages 28 to 35 of the order dated 10.02.2017. The Tribunal rejected the claim of assessee in adopting cash PLI or OPBDIT, as PLI but had remitted the issue back to the file of Assessing Officer / TPO to allow suitable adjustment in the hands of comparables after due verification, where the assessee is able to establish that there was material difference in the claim of depreciation by the assessee vis-à-vis comparables. The relevant findings of Tribunal are in paras 43 and 44 which read as under:-
"43. In view of above said, we hold that where the assessee is engaged in the business of manufacture of resistors and capacitors which in turn, are used in various electronic applications and products and where the assessee's manufacturing facilities are established separately for the domestic tariff area and for export oriented unit and the items manufactured by the are used in different products which contained electronic circuits and has wide application in different spheres, there is no merit in the claim of assessee in adopting the cash PLI or PBDIT as the PLI. We dismiss the plea of the assessee in this regard.
44. In the written note filed, the assessee had made submissions for differential depreciation adjustment which was without prejudice to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said plea of the assessee under Rule 10B(1)(e)(iii) of the Rules, adjustment if any, has to be made in the hands of comparables and not in the hands of tested party. We dismiss the plea of the assessee in this regard. However, in case the assessee is able to establish that there is material difference in the claim of depreciation by the assessee vis-à-vis comparables, then suitable adjustment may be allowed in the hands of comparables after due verification by the Assessing Officer / TPO."14 ITA No.341/PUN/2013
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19. Following the same parity of reasoning and since the issue raised in the present ground of appeal is identical to the issue before the Tribunal in assessment year 2007-08, we direct the Assessing Officer to follow our directions in assessment year 2007-08 and decide the issue accordingly. The ground of appeal No.9 is allowed for statistical purpose.
20. The issue in ground of appeal No.10 is for non-allowance of capacity utilization in the hands of comparables which issue was also decided by the Tribunal in assessment year 2007-08 vide paras 50 to 54 at pages 36 to 38 of the order, against assessee. Following the same parity of reasoning, we dismiss the ground of appeal No.10 raised by the assessee.
21. The issue in ground of appeal No.11 is against computation of transfer pricing adjustment with reference to total turnover in respect of computing and restricting the same with reference to the value of international transactions. The learned Authorized Representative for the assessee pointed out that the said issue also arose before the Tribunal in assessment year 2007-08 and the same has been decided in favour of the assessee.
22. We find that the Tribunal has decided the said issue vide paras 59 and 60 at pages 39 and 40 of the order in favour of assessee and has directed the Assessing Officer to compute the transfer pricing adjustment only with reference to the value of international transactions. Following the same parity of reasoning, we allow the ground of appeal No.11 raised by the assessee.
23. The issue in grounds of appeal No.12 to 16 are in connection with back office activity, where the TPO had made an upward adjustment of Rs.1,30,97,557/-.
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24. The learned Authorized Representative for the assessee at the outset pointed out that the issue in grounds of appeal No.12 and 14 is linked to grounds of appeal No.15 and 16 and the ground of appeal No.13 in application of turnover filter is against the assessee. The assessee by way of the aforesaid transfer pricing adjustments in ITES segment is aggrieved by the inclusion of certain concerns and exclusion of certain concerns by the TPO while benchmarking its international transactions. The learned Authorized Representative for the assessee has filed a detailed chart of disputed companies and pointed out that the concerns Accentia Technologies Ltd., Coral Hubs Ltd., Cross domain Solutions Ltd. and E4e Health Solutions were included by the TPO which are to be excluded since they are not functionally comparable. In respect of the concerns which were picked up by the assessee in its transfer pricing study analysis i.e. Ace Software Exports Ltd., R Systems International Ltd., Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd., the learned Authorized Representative for the assessee pointed out that the margins of said concerns should be included to benchmark the assessee's ITES segment. The main plea of assessee in respect of the concerns Accentia Technologies Ltd. was that the said concern was functionally different as it was involved in on-site development as against back office services provided by the assessee. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) in ITA No.784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016. We find merit in the plea of assessee since the assessee is engaged in ITES segment and Accentia Technologies Ltd. is engaged in the business of medical prescription services, which is functionally different from the services provided by the assessee. Accordingly, we hold that 16 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
the said concern Accentia Technologies Ltd. is to be excluded from the final set of comparables while benchmarking ITES segment.
25. The next concern which as per the assessee is to be excluded is Coral Hubs Ltd., which is engaged in e-publishing and where the employee cost is only 4.3% of its operating and it has substantial vendor payments.
26. The learned Authorized Representative for the assessee placed reliance on the decision of Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015, judgment dated 10.08.2015.
27. The learned Departmental Representative for the Revenue placed reliance on the order of TPO.
28. We have heard the rival contentions and perused the record. The Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) has held that there are different factors which have to be judged with reference to service / product characterization and the same cannot be undermined by using broad classification of ITES. The Hon'ble High Court of Delhi drew the distinction between BPO service provider and the KPO service provider and held that where the controlled transactions were in the nature of lower end ITeS such as Call Centres, etc. for rendering data processing not involving domain knowledge, in such circumstances inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. The Hon'ble High Court therefore, directed the exclusion of Vishal Information Technology Ltd., which is subsequently known as Coral Hubs Ltd. Following the ratio laid down by the Hon'ble High 17 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
Court, we direct the TPO to exclude Coral Hubs Ltd. from the final list of comparables.
29. The next concern with which the assessee is concerned is Cross domain Solutions Ltd., which is also providing KPO services. Another issue raised by the assessee was that it had applied turnover filter of Rs.25 crores and had rejected Cross domain Solutions Ltd. and hence, it could not be accepted, as it does not fulfill the turnover criteria adopted by the assessee. He also placed reliance on the ratio laid down by the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) (supra).
30. We have heard the rival contentions and perused the record. Where the concern is providing KPO services, then the same is not comparable to the assessee, which is engaged in BPO services as per the ratio laid down by the Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra). Accordingly, we hold so.
31. The second plea of the assessee that the said concern does not fulfill the turnover filter does not stand since we have already held in the paras hereinabove that the turnover filter of Rs.1-200 crores is to be applied while benchmarking the international transactions of the assessee. Further, it may be pointed out herein that the Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) in addition to drawing difference between the BPO and KPO services had also deliberated upon the exclusion of concerns on the ground that the companies had shown super normal profits. The Hon'ble High Court held that "In our view, it would not be opposite to exclude comparables only for the reason that their profits are high, as the same is not 18 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
provided for in the Statute framework. The OECD guidelines suggest that quartile method be adopted which excludes entities that fall in the extreme quartiles for comparability. However, neither Chapter X of the Act nor the Rules made by CBDT provide for exclusion for such statistical reason." The Hon'ble High Court held that supernormal profits may in certain cases indicate a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability which need to be analyzed before excluding the concern with higher profitability. Applying the said principle, we find no merit in the said plea of assessee that because of turnover filter, Cross domain Solutions Ltd. should be excluded. However, following the ratio laid down by the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) (supra) vide para 15 of the order, we hold that Cross domain Solutions Ltd. should be excluded from the final set of comparables as functionally not comparable.
32. Similarly, E4e health solutions, which is engaged in the business of providing healthcare services; in other words, being specialized service of knowledge based services are to be excluded on the same line of reasoning.
33. Now, coming to the companies which the learned Authorized Representative for the assessee seeks to be included in the final set of comparables.
34. The first concern which the assessee wants inclusion in the final list is R Systems International Ltd. The said concern was rejected by the TPO because its accounting period was different. The learned Authorized Representative for the assessee has vehemently argued and placed reliance on the decisions of 19 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
Hon'ble High Court of Punjab & Haryana in CIT Vs. M/s. Mercer Consulting (India) Pvt. Ltd. in Income Tax Appeal No.101 of 2015, judgment dated 24.08.2016 and the Hon'ble High Court of Delhi in CIT Vs. Mckinsey Knowledge Centre India Pvt. Ltd. in ITA No.217/2014, judgment dated 27.03.2015 and pointed out that the Assessing Officer may calculate the profits for the relevant period.
35. The learned Departmental Representative for the Revenue on the other hand has opposed the submissions made by the assessee.
36. After hearing the rival submissions, we find that the issue of exclusion of a concern on the basis of different accounting period has been decided by the Hon'ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014, judgment dated 26.09.2016, which has held vide para 11(b) that the provisions of Rule 10B(4) of the Income Tax Rules are clear in as much as it obliges that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. The Hon'ble High Court further held that the mandate of Rule 10B of the Rules could not be ignored even if the difference was only of three months, since no such liberty was granted in terms of the said Rule. Following the principle laid down by the Jurisdictional High Court, we hold that where the assessee is following financial year ending with 31.03.2008 and the said concern had different financial year, then the same is not comparable and hence, it cannot be included in the final list of comparables. We uphold the order of TPO in this regard. 20 ITA No.341/PUN/2013
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37. The next concern which was excluded by the TPO is Ace Software Exports Ltd. The said concern was excluded by the TPO since it was consistently loss making concern. The TPO applied the proposition laid down by in the case of Sony India Pvt. Ltd. in ITA NO.1187/Del/2005 and others. The DRP upheld the order of TPO and observed that the said concern had sold its investments and profit on sale of investment of Rs.3.84 crores was shown, which shows that the assessee has restructured its business operations during the year. The DRP also noted that the total operation receipts were Rs.3.07 crores as compared to Rs.19.09 crores in the immediately preceding year and the other income which was not related to the operations was Rs.4.90 crores. The assessee is aggrieved by the order of TPO/DRP and has pointed out that during the year under consideration, sales were to the tune of Rs.3.06 crores as against sales of Rs.4.52 crores in the preceding year and there is no figure of turnover of Rs.19.90 crores in the preceding year, which has been picked up by the DRP.
38. The learned Departmental Representative for the Revenue referred to the financials of the said concern and pointed out that under Schedule 11, it is pointed out that the said concern is software sourcing concern, so it is outsourcing company plus under Schedule 10, the said concern gives inventory and has also created a data base. The learned Departmental Representative for the Revenue pointed out that Ace Software Exports Ltd. has been rejected for loss making wherein in assessment year 2006-07 though there was profit but in assessment year 2007-08, there was loss and during the year under consideration also, there is loss of (-) 34% and the concern with such abnormal trend, is to be rejected.
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39. We find merit in the plea raised by the learned Departmental Representative for the Revenue, wherein the functional analysis shows the said concern to be functionally dissimilar to the assessee. Further, there are certain extraordinary events, despite which the assessee has shown losses and the said concern cannot be compared because of extraordinary events. Further, the concern is loss making concern and merely because it was accepted to be comparable in assessment year 2007-08 in another case, without looking at its financials for the year under consideration, wherein it has recorded its operations, then it cannot be held to be comparable. We hold so.
40. Now, coming to the last two concerns i.e. Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd., wherein Informed Technologies India Ltd. is providing KPO services.
41. In respect of Aditya Birla Minacs Worldwide Ltd., the learned Departmental Representative for the Revenue has referred to the financial statements of the said concern and pointed out that the business over view talks of the KPO business carried on by the said concern though the DRP says that it is a BPO but the Directors Report shows different functions.
42. The learned Authorized Representative for the assessee on the other hand, pointed out that the said concern was multi tasking but it was accepted as comparable in the last year which was objected by the learned Authorized Representative for the assessee. The learned Authorized Representative for the assessee further pointed out that the said concern was accepted as comparable in assessment year 2009-10 in CIT Vs. M/s. Mercer Consulting (India) Pvt. Ltd. (supra). Further, the learned Authorized Representative for the 22 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
assessee fairly pointed out that the financial data for assessment year 2009-10 in respect of Aditya Birla Minacs Worldwide Ltd. are not available.
43. We have already held in the paras hereinabove and following the ratio laid down by the Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) that the concerns which are engaged in providing KPO services are not functionally comparable to the concerns which are providing BPO services and have directed the TPO to exclude the same. Applying the said ratio, we hold that the TPO has correctly excluded Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd. from the final list of comparables. In view thereof, the grounds of appeal No.12, 14 to 16 are partly allowed.
44. The limited issue which arises in ground of appeal No.17 is against an error in computation of working capital adjustment, which has been directed to be allowed by the DRP. However, the assessee points out that in the order passed by the Assessing Officer, the computation is wrong, against which the assessee has filed an application under section 154 of the Act, which is not disposed of. The learned Authorized Representative for the assessee seeks directions of the Bench in this regard. Accordingly, we direct the Assessing Officer to dispose of the application moved under section 154 of the Act by the assessee in accordance with directions of DRP.
45. The issue in ground of appeal 18 is with regard to allowing risk adjustment. The plea of assessee before us is that the assessee is operating cost plus method with mark up at 15%, since it was captive service provider to its associated enterprises, there was no risk and hence, risk adjustment should 23 ITA No.341/PUN/2013 Vishay Components (India) Pvt. Ltd.
be allowed in the case of comparables, which are not at the same level. Reliance in this regard was placed on the decisions of Pune Bench of Tribunal in BMC Software India Pvt. Ltd. Vs. DCIT in ITA No.1425/PN/2010, relating to assessment year 2006-07, order dated 16.03.2016 and in Schlumberger Global Support Centre Limited Vs. DDIT (IT) in ITA No.86/PN/2013, relating to assessment year 2009-10, order dated 30.10.2015.
46. The learned Departmental Representative for the Revenue opposed the plea of assessee for allowing risk adjustment.
47. We have heard the rival contentions and perused the record. Similar issue of risk adjustment arose before the Tribunal in the case of Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012, relating to assessment year 2008-09, order 10.02.2017 and we have held as under:-
"32. Under the TP provisions, where in the facts of the present case, the assessee is risk mitigating entity, wherein all the risks are taken care of by the associate enterprises, then adjustment on account of difference in the risk profile of comparable companies merits to be allowed while benchmarking the international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:-
Particular %
Average prime lending rate during AY 2008-09 12.93
(A) percent
Average bank rate during AY 2008-09 (B) 6.00 percent
Difference between the prime lending rate and 6.93 percent
bank rate C = (A-B)
Risk Adjustment (C) 6.93 percent
33. Further, the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 has allowed 20% risk adjustment considering the fact that it may not be possible to quantify risk adjustments. The assessee applying the said ratio in the case of Sony India Pvt. Ltd. (supra) has worked out the risk adjustment on the operating margins of comparables to be allowed when computed @ 20%. We direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee."24 ITA No.341/PUN/2013
Vishay Components (India) Pvt. Ltd.
48. Following the same parity of reasoning, we direct the Assessing Officer to allow the risk adjustment, if any, and re-compute the margins of comparables and compute the TP adjustment, if any, in the hands of assessee.
49. Now, coming to the issue in respect of disallowance of stock written off in Domestic Tariff Area. The learned Authorized Representative for the assessee pointed out that similar issue arose before the Tribunal in assessment year 2007-08, wherein the Tribunal vide para 66 at pages 43 to 44 has remitted the issue back to the file of Assessing Officer with directions. Following the same parity of reasoning, we remit this issue also back to the file of Assessing Officer, who shall follow our directions in assessment year 2007- 08 to decide the same. The ground of appeal No.19 is thus, allowed for statistical purposes.
50. The assessee by way of ground of appeal No.20 is aggrieved by the computation of total income, wherein the Assessing Officer has not considered the loss but had computed the income by taking business income at Nil. The assessee fairly pointed out that it has already filed an application under section 154 of the Act before the Assessing Officer, which is pending. Accordingly, we find no merit in the said plea of assessee and the same is rejected. The Assessing Officer shall dispose of the application under section 154 of the Act as per law. The ground of appeal No.20 is thus, rejected.
51. The ground of appeal No.21 against initiation of penalty proceedings is premature and the same is rejected.
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52. The ground of appeal No.22 is linked with ground of appeal No.20 and hence, the same is also rejected. Even this ground of appeal has been decided by the Tribunal in assessment year 2007-08 vide para 77 at page 49 against the assessee and the same parity is applied for disposing of ground of appeal No.22.
53. In the result, the appeal of the assessee is partly allowed.
Order pronounced on this 31st day of May, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER
ऩुणे / Pune; ददनाांक Dated : 31st May, 2017.
GCVSR
आदे श की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to :
1. The Appellant;
2. The Respondent;
3. The DIT (Intl. Taxation), Pune;
4. The DRP, Pune;
5. The DR 'A', ITAT, Pune;
6. Guard file.
ु ार/ BY ORDER, आदे शािस सत्यापऩत प्रतत //True Copy// सहायक ऩांजीकार / Assistant Registrar, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune