Reuters India Pvt Ltd Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that profit before depreciation (PBDIT) is to be considered as Profit Level Indicator (PLI) for transfer pricing analysis for benchmarking the international transaction.
Facts- The assessee is wholly owned subsidiary of Reuters , U.K. The Reuters group is a leading global provider of news, financial information, and technology solutions to the world’s media, financial institutions, businesses and individuals. Assessee distributes Reuters products within the territory of India.
During the year under consideration, assessee provided IT Enabled Services to its associated enterprises. For benchmarking the aforesaid international transaction, assessee adopted Transitional Net Margin Method as the most appropriate method with operating profit by total cost as the PLI. The assessee after considering itself as a tested party selected the comparables, and accordingly concluded that its international transaction is at arm’s length price.
Pursuant to reference by AO, TPO vide order passed u/s. 92CA(3) of the Act made adjustment of Rs. 10,58,96,504, to the aforesaid international transaction after inclusion/exclusion of certain comparables.
Assessee filed detailed objections against the aforesaid transfer pricing adjustment made by the TPO on various aspects before DRP. Assessee vide application dated 01/09/2010, raised additional/supplementary ground of objection on the issue that Profit before depreciation (PBDIT) be considered as the PLI for benchmarking the aforesaid international transaction.
DRP vide directions issued u/s. 144C(5) of the Act, inter-alia, rejected the additional ground of objection raised by the assessee and held that for benchmarking the transaction relating to rendering of ITeS to the associated enterprises, PBIT/Operating Cost is considered as PLI instead of PBDIT/Operating Cost. Being aggrieved, the assessee is inter-alia in appeal before us.
Conclusion- Held that the learned DR could not show us any reason to deviate from the aforesaid orders and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present case is recurring in nature and has been decided in favour of the assessee by the decisions cited supra. Thus, respectfully following the decision rendered by Hon’ble jurisdictional High Court in assessee’s own case, we uphold the plea of the assessee and direct the TPO/Assessing Officer to consider profit before depreciation (PBDIT) as PLI for transfer pricing analysis. Accordingly, ground No. 11 raised in assessee’s appeal is allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the final assessment order dated 22/10/2010, passed by the Assessing Officer under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 („the Act‟), for the assessment year 2006-07.
2. The assessee filed revised grounds of appeal on 04/02/2014, which were taken on record. The revised grounds of appeal filed by the assessee are as under:
“On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income-tax (OSD) -2 (3) (AO) based on the directions of the DRP:
General
1. erred in assessing the total income at Rs. 494,447,750 as against Rs 300,010,920 computed by the Appellant while filing its return of income;
Adjustments made by the Transfer Pricing Officer („TPO‟)/AO
2. erred in making an transfer pricing adjustment and thereby making an addition of Rs.93,894,899 to the income of the appellant, on the premise that the international transactions entered by the Appellant with its Associated enterprise (AE) were not at arm‟s length;
3. erred in invoking powers under section 92C(3) of the Act without fulfilling the conditions stated therein and considering the facts and circumstances of the case;
4. erred in disregarding the economic analysis undertaken by the Appellant, without proper justification and conducting a fresh economic analysis for the determination of the arm’s length price in connection with the impugned international transactions;
5. failed to appreciate that the Appellant is availing tax holiday u/s 1 0A of the Act, and hence there is no intention to shit the profit base out of India, which is one of the basic intention of the introduction of transfer pricing provisions;
Use of contemporaneous data
6. erred in determining the arm’s length margin price by applying the data of the comparables for the financial year 2005-06 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements, as against multiple year data considered by the Appellant;
Rejection of comparables identified by the Appellant and introducing new comparables
7. erred in using arbitrary turnover filter as a comparability criterion for rejecting 16 comparable companies without appreciating the approach adopted by the learned TPO in past years;
8. erred in rejecting loss making comparable companies while computing the Arithmetic mean of all the comparable companies, disregarding the tact that they are functionally similar and had positive networth and therefore had to be considered a valid comparable while doing the transfer pricing analysis;
9. erred in considering Allsec Technologies Ltd as a comparable company without appreciating that the same could not be considered as a valid comparable due to inter-alia differences in functional and risk profile and significant advertisement expenses;
10. Without prejudice to the above, erred in not granting risk adjustments to account for differences in the risk profiles of the Appellant vis a vis the compara bles;
Profit before depreciation to be considered as Profit level Indicator (PLD) while doing comparability analysis
11. Without prejudice to the above, erred in considering profit after depreciation (PADIT) as the PLI for transfer pricing analysis without appreciating that there were significant differences between the depreciation policies followed by the comparable companies vis-à-vis the appellant, and hence the Profit before depreciation (PBDIT) as a PLI should be considered for transfer pricing analysis;
Benefit of +/- 5% range
12. The learned TPO has erect in computing the ALP without considering the 5 percent bandwidth available under the proviso to Section 92C(2) of the Act;
Deduction under section 1 0A
13. erred in reworking the deduction under section 10A at Rs 18,92,64,699/- as against Rs. 22.77.07,063/- computed by the Appellant:
Re-allocation of certain expenses pertaining to non STPI unit to the STP unit
14. erred in re-allocating communication expenses, auditor’s remuneration and foreign exchange fluctuation expenses, between 10A unit and non 1 0A unit in the ratio of their turnovers, thereby reducing the profits eligible for deduction under section 1 0A of the Act;
Reduction of communication expenses from export turnover and but including the same in turnover
15. erred in reducing 50 per cent of the communication expenses amounting to Rs. 6,652,452 from the export turnover on the ground that the same was in connection with the delivery of services outside India;
16. Without prejudice to Ground No. 15, erred in excluding the communication expenses from the export turnover and not excluding the same from total turnover while calculating the deduction under Section 10A of the Act;
Depreciation granted on servers considered as ‘Computer’s as against ‘Plant and Machinery‟
17. erred in granting depreciation by classifying additions to servers amounting to Rs.19,587,053 in relation to the STP unit as ‘Computers instead of ‘Plant and Machinery and thereby reducing the profits eligible for deduction under Section 10A of the Act;
18. Without prejudice to the Ground No 17. should have on a consistent basis given similar treatment to the additions made to servers while computing the profits of non-10A unit;
Disallowance of capital expenditure while computing the assessed income
19. erred in not considering the amount of Rs. 15,054,179 being capital expenditure already disallowed in the return of income for the purpose of computing the income of the STP unit, thereby resulting in reduction in the amount eligible for deduction under section 1 0A;
Disallowance under section 40(a) (ia)
20. On the facts and in the circumstances of the case and in law, the learned AO erred in law and in fact, in disallowing the following expenses for non-deduction of taxes, without appreciating that no tax was deductible on the payments:
