Brief of the Case
ITAT Ahmedabad held In the case of Lubrizol Advanced Materials India Pvt. Ltd. vs. DCIT that after the retrospective amendment to the second proviso to section 92C (2) by the Finance Act, 2012, there remains no ambiguity that the benefit of tolerance margin is available only when the variation between the arm’s length price as determined under section 92C (1) and the price at which the international transaction has actually been under taken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the arm’s length price as determined under section 92C (1) shall be considered.
Facts of the Case
The assessee (formerly known as the Indiamalt Pvt. Ltd) manufactures guar gum and cassia gum powder. It is a 100% export oriented undertaking selling all its finished goods to overseas associate enterprises ‘AEs’ for marketing in european markets. The assessee does have two business segments of manufacturing and provision for market support services. The assessee filed its return on 31-10-2007 stating income of Rs. 70,72,190/-. The Assessing Officer noticed during scrutiny its international transactions with AEs exceeding Rs. 15 crores. He made section 92CA(1) reference to the Transfer Pricing Officer ‘ the TPO’ for ascertaining ALP thereof.
The TPO in his order dated 30-09-2010 accordingly recomputed assessee’s ALP @ 28.06% on cost of Rs. 4,49,14,198/- coming to Rs. 1,38,65,624/- as against that declared of Rs. 22,38,908/- @ 4.53% resulting in the impugned adjustment of Rs. 1,16,26,716/-. The Assessing Officer framed draft assessment on 24-11-2010 in line with the TPO’s action. The assessee petitioned before the DRP. The learned panel in its direction dated 30-08-2011 accepted its arguments to a limited extent seeking exclusion of M/s. Indusind Information Technology from the array of comparables. It agreed with inclusion of rest of the ten companies. The Assessing Officer accordingly framed the impugned assessment vide order under challenge making the transfer pricing adjustment under challenge. He further declined assessee’s plea claiming tolerable margin of (+/-) 5% in the ALP recomputed as a standard deduction.
Held by ITAT
The assessee’s first substantive argument raised in the course of hearing and written submissions challenges inclusion of five entities in the array of comparables. They are M/s C S Software Enterprise Ltd, ICRA Online Ltd, Informed Technologies India Ltd, Maple E-Solutions and Vishal Information Technologies Ltd.
With regard to first company M/s C S Software Enterprise Ltd, it was submitted that it was selected at the assessee’s behest and no objection in this regard seeking its exclusion was raised before any of the lower authorities. This entity is engaged in engineering design services and computer software. Our attention is drawn to the fact that the TPO had himself rejected one of such entity performing the very functions. We accept assessee’s legal plea on estoppel principle and decline the same on merits in view of annual report hereinabove. We accordingly confirm lower authorities action in treating M/s CS Software Enterprise as a valid comparable selected by the assessee itself.
With regard to second company ICRA Online Ltd, it was submitted that company’s revenue have been increased @ 4.55 times from Rs. 6,414.70 to Rs. 35014.96 in assessment year 2005-06 and BPO segment results jumping from Rs. 963.29 to Rs. 10,951.43/-. Also there are fluctuating operating profits @ -13.08%, -1.47%, 7.66%, 29.8% and 6.02% for assessment years 2003-04 to 2007-08; respectively. The assessee relies upon case law Actis Advisors Pvt. Ltd vs. DCIT ITA 5277/Del/2011 for assessment year 2007-08 holding that disproportionate fluctuations in profits and loss would not result from a company business operations but are attributable to extra-ordinary reasons.The Revenue’s arguments mainly highlight this entity employee’s cost factor in justifying comparability thereof. It fails to rebut the assessee’s contentions with regard to fluctuating profit margins in light of tribunal’s decision. We accept assessee’s plea accordingly and order exclusion of this entity M/s ICRA Ltd. from the array of comparables.
With regard to third company Informational Technology India Pvt. Ltd., it was submitted that this entity is functionally different as its annual accounts in management discussion and analysis report indicate the same to be engaged in IT enabled knowledge base back office processing centre. The Revenue’s pleads that no such argument was raised before the lower authorities. It highlights the fact that the assessee’s case before the TPO and DRP was that co-related parties of 15% approximately falling less than the filter limit of 25%. The Revenue further quotes case law of Willis Processing Services India Pvt. Ltd. vs. DCIT 41 taxman.com 33 (Mumbai), PTC Software India Pvt. Ltd vs. ACIT (Pune) ITA 1605/Pn/2011 and M/s Zabata India Pvt. Ltd vs. DCIT 35 taxman.com 423 (Hydra) holding that this comparable entity is very much engaged in ITES/BPO services. The assessee seeks to raise yet another plea relying upon the decision of Maersk Global Centre India Pvt. Ltd vs. ACIT 147 ITD 83 (Mumbai) (SB) holding that whether a comparable is a low end or high end service provider has to be seen in facts of each case . It states that this comparable entity provides high end services to its clients and deserves to be excluded. We see merit in assessee’s arguments. It is evident from annual report of this compare entity, this company is indeed involved in high end niche market segment of financial contents which cannot be equated with routine marketing support services in which the assessee is involved.
With regard to fourth company M/s. Maple E-Solutions, it was submitted that directors of this company is involved in fraud activity. Therefore, the financial results demonstrating profitability could not be accepted as comparable instances. The Revenue relies upon yet another decision of the tribunal in Vodafone India Services Pvt. Ltd. vs DCIT 36 taxman.com 127 (Mum) accepting M/s Maple E-Solutions as comparables in case of ITES/BPO functions. The assessee states that this decision has not examined fraud indictment of above stated directors. We find force in this submission. A perusal of this decision reveals that the ld. co-ordinate bench has considered issue of merger and not that of the above stated indictment. We accept the assessee’s arguments and hold that this entity M/s. Maple E-Solutions Ltd. is not a valid comparable.
With regard to fifth company M/s Vishal Information Technologies, it was submitted that profit and loss account of this entity demonstrates data entry charges and vendor payments forming part of operating expenses in schedule 15. The latter segment is stated to be that of approximate 65% of the total cost. The assessee pleads that this entity had outsourced its ITES services to third party vendors. The Revenue’s arguments refer to DRP’s observations relying upon this entity’s expenditure account allegedly confirming it to be an ITES company. And also that expenditure book as salary or data entry charges cannot form basis for determining whether or not these services had been performed. The assessee in rebuttal submits three decisions of the tribunal i.e. Techbooks International (P.) Ltd. (2014) 45 taxmann.com 528 (Delhi-Trib) AY 2009-10, Copal Research India (P) Ltd (2015) taxmann.com 27 (Delhi-Trib) AY 2006-07 and New River Software Services (P.) Ltd (2015) 56 taxmann.com 440 (Delhi-Trib) excluding M/s Vishal Information Technologies post Deloitee’s decision. The Revenue fails to counter this submission. We accordingly accept assessee’s arguments by following the above stated case law and conclude that the lower authorities have wrongly included M/s Vishal Information Technologies as a valid comparable. This renders the assessee’s alternative argument seeking exclusion of M/s Vishal on the ground that the TPO had violated his filter of employee’s cost less than 20% as having being rendered infructuous.
Denial of relief u/s 92C (2)
We find that a Special Bench of the tribunal in (2013) 023 ITR 0608 (Del) IHG IT Services India Pvt. Ltd vs. ITO has decided this issue in the Revenue’s favour. It was held that after the retrospective amendment to the second proviso to section 92C (2) by the Finance Act, 2012, there remains no ambiguity that the benefit of tolerance margin is available only when the variation between the arm’s length price as determined under section 92C (1) and the price at which the international transaction has actually been under taken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the arm’s length price as determined under section 92C (1) shall be considered.
The assessee fails to point out any distinction on facts or law. We uphold action of the lower authorities by deciding the issue in hand against the assessee by following the Special Bench decision hereinabove. The assessee’s second substantive ground is rejected.
Accordingly appeal of the assessee partly allowed.