Revenue cannot file appeal against voluntarily decision of AO/TPO

Brief of the case:

In this case of Trend Micro India Pvt. Ltd. Vs. DCIT Delhi Bench of ITAT observed that whether revenue can argue against the order passed by AO in pursuance to the directions of DRP. The ITAT held that it is not permissible to argue any issue decided by AO by DR before tribunal. Only ITAT can voluntarily direct AO to reconsider the correctness of the companies in the list of comparables. ITAT held that if the AO/TPO has chosen a company as comparable, which has been directed to the excluded by the DRP, then an appeal can be filed against the assessment order on such exclusion. The power to file appeal does not extend to the selection of a company as comparable by the AO/TPO himself which has remained intact even after the direction given by the DRP.

Facts of the case:

• Assessee is primarily engaged in providing pre-sales and post-sales services, marketing and other technical services to the clients on behalf of its associated enterprise (AE), namely, Trend Taiwan. For this purpose assessee entered into support agreement which is valid for three years. The assessee also imports certain services from its AE.
• As per the Agreement, the assessee desires to provide pre-sales and after-sales services, marketing, financial and technical support services to Trend Taiwan in the specific areas of computer and network security. Further, the assessee is remunerated with the actual costs incurred plus a mark-up of 10%.
• Four international transactions were reported in Form No.3CEB which include `Rendering of services’ with the transacted value of Rs.15,34,24,161/- and ‘Services received’ with the transacted value of Rs.1,07,15,985/-.
• The AO referred the determination of the arm’s length price (ALP) of the international transactions reported by the assessee to the Transfer Pricing Officer (TPO).
• The TPO accepted other international transactions at ALP except ‘Rendering of services’.
• The assessee employed Cost plus method as the most appropriate method for demonstrating that the international transaction of `Rendering of services’ was at ALP.
• The TPO rejected the application of the Cost plus method and also the use of multiple year data. He applied the Transactional Net Margin Method (TNMM) as the most appropriate method with the use of current year data alone.
• The assessee has not challenged either the application of TNMM as the most appropriate method or the use of current year data alone.
• In so far as the transaction is concerned, the assessee had selected four companies as comparables in its transfer pricing study report. The TPO rejected all these companies and selected nine new companies as comparables.
• By applying this ALP margin of 23.25%, the TPO worked out the ALP of the international transaction of `Rendering services’ at Rs.17,14,94,190/-. That is how, he proposed transfer pricing adjustment of Rs.1,80,70,029/-.
• The assessee assailed the correctness of the draft order, containing the effect of the TPO’s order, before the Dispute Resolution Panel (DRP) who allowed certain relief.
• In the final assessment order passed by the AO, an addition of Rs.1,70,26,454/- was made on account of transfer pricing adjustment.
• Total nine companies were taken by the TPO as comparable. Initially, the assessee objected to the inclusion of five companies out of such nine, but later on, such claim was restricted to three companies.
• It was also seen that during appellate proceedings DR tried to accentuate on the functional dissimilarities of the remaining four companies out of nine held as comparable by TPO.

Contention of the revenue:

• If the five/three companies challenged by the assessee having higher profit rate are to be excluded for any reason, then the remaining four companies having low profit rate should also be eliminated due to their functional dissimilarities.
• There can be no estoppel against the Act and hence no shadow can be cast on his right to argue against the inclusion of four companies which are not comparable.

Held by ITAT:

• Assessee has not challenged the application of TNMM as the most appropriate method.
• Assessee’s selection of four comparable companies that have been rejected by the TPO not in challenge before us. The controversy is only against inclusion of three companies in the final set of comparables by the TPO.
• The agreement between assessee and Trend Taiwan is valid for three years, impliedly, covering the entire previous year relevant to the assessment year under consideration. As per this Agreement, the assessee desires to provide pre-sales and after-sales services, marketing, financial and technical support services to Trend Taiwan in the specific areas of computer and network security. Further, the assessee is remunerated with the actual costs incurred plus a mark-up of 10%.
• It is necessary to find out whether the three companies under challenge in seriatim (point to point) are, in fact, comparable.
• Apitco Limited.

a. Assessee argued that the above company provides high-end diversified activities but TPO treated this company as comparable by including its OP/OC at 40.09%.

b. A careful perusal of the operations carried out by Apitco Limited reveals that this company is providing services in the nature of Project report preparation, Technical and economic studies, Feasibility studies, Micro enterprise development, Skill development, Project management consulting, Industrial cluster development, Environmental management consulting, Energy management consulting, Market and social research and Asset reconstruction management services.

c. Revenue contended that all the activities done by this company are basically `Business services’ and the assessee is also rendering business services.

d. ITAT held that there is a tiny resemblance of `Market and social research’ functions performed by this company with the overall activities undertaken by the assessee. All other services are entirely different.

e. It is difficult to held that above listed services can be considered as comparable with the services provided by the assessee.

f. Hon’ble Delhi HC in the case of Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) it has been held that the comparables are to be selected on the basis of similarity even under TNMM.

g. Finally, it was held that the functionally similarity of Apitco Limited is lacking on entity level with the assessee company.

• Global Procurement Consultants Limited

a. According to assessee this company is engaged in providing consultancy services and review of procurement processes for various projects funded by the World Bank.

b. As per annual report of company this company is promoted by Export-Import Bank of India in association with leading Indian Public Sector and Private Sector consultancy organisations on the basis of Public-private partnership model that offers collective Indian experience and expertise through the provision of a range of advisory services with particular focus on `Procurement’.

c. his company provides technical assistance in enhancing quality, transparency, efficiency and effectiveness of procurement and implementation service to help attain desired institutional and corporate objectives.

d. This company is providing full time advice on procurement and contract related aspects to several agencies across the globe.

e. In India, it provided Procurement Advisory Services to IIT Pune in the implementation of World Bank administered administered for rural areas of Pune District’ funded by Japan Social Development Fund Grant.

f. After going through the nature of services provided by the company ITAT held that the basic aim of the company id to provide advice on procurement and also carrying out procurement audit, it becomes palpable that there is an absolute mismatch with the services provided by the assessee.

g. The services provided by this company are miles apart from those rendered by the assessee.

h. By no standard, Global Procurement Consultants Ltd., can be considered as comparable with the assessee company. So this company is liable to eliminate.

•  TSR Darashaw Limited.

a. According to assessee the business segments of this company are, Registrar and Transfer Agent activity; Records management activity; and Payroll and trust fund activity.

b. ITAT held that this company is a broking and investment banking house with its three segments, namely, Registrar and transfer agent activity (R&T); Records management activity (Records); and Payroll and trust fund activity (Payroll).

c. It also undertakes transfer processing, customer/query handling and correspondence, split/consolidation/renewal of certificates, processing and distribution of interest/dividend warrants, payments by physical warrants/through ECS/Direct Credit.

d. When it was compared all the three broader activities undertaken by this company with the overall pre and post sale services rendered by the assessee to its AE, on a cost plus basis, it can be seen that there is a huge functional disparity between the two.

e. Finding striking dissimilarities between this company and the assessee, ITAT order to exclude this company from the final set of comparables.

• DR cannot argue for the exclusion of some companies, which were treated by the AO/TPO as comparable.
• AO can under no circumstance be aggrieved with his own view taken in the assessment order independent of any external influence of the DRP.
• DR represents the AO in an appeal before the tribunal. Taking up an issue for argument by the DR before the tribunal means taking up the issue by the AO through the DR.
• If we allow the DR to argue that the decision taken by the AO/TPO was wrong and certain companies included by the TPO himself should be deleted, it would mean that the AO is challenging the correctness of his own decision through the DR before the tribunal, which is illogical.
• After the insertion/amendment by the Finance Act, 2012 to sub-sections (2A) and (4) of section 253, the Department has acquired a right to file appeal or cross objection against the assessment order passed in pursuance of the direction of the DRP to the extent it is aggrieved against such direction.
• It has no right to file appeal or cross objection against the voluntary decision of the AO/TPO which was not subject matter of any adverse direction by the DRP.
•  If no appellate recourse is open to the Department against the suo motu order of the AO/TPO, then, the DR, who argues before the tribunal for and on behalf of the AO, can equally have no right to argue against that part of the order.
• ITAT set aside the impugned order and restore the matter to the file of AO/TPO for recalculating the ALP of the international transaction of ‘Rendering of services’ afresh as ITAT also considered that he companies are liable to exclude.