Case Law Details
Brief of the Case
ITAT Bangalore held In the case of DCIT vs. M/s. Parametric Technology (India) Pvt. Ltd. that the use of current year’s data is mandated by the relevant I.T. Rules, 1962 and by not adhering to this, the assessee’s TP Study was rendered unreliable. Before us the assessee reiterated the submissions made earlier and has not adduced any material evidence to controvert the findings of the TPO and the detailed reasoning of the DRP while rejecting the assessee’s contentions. There are a nos. of judicial pronouncements supporting the use of current year’s data alone for the purpose of comparability. In this view of the matter, we hold that the TPO was correct in rejecting the assessee’s TP Study / documentation in the facts and circumstances of the case and conducting her own search process for selection of comparables.
Facts of the Case
The assessee, a wholly owned subsidiary of Parametric Holdings Inc., USA which in turn is a subsidiary of Parametric Technology Corporation, USA, renders software development services to its Associated Enterprises. For the year under consideration, the assessee’s operations were classified under the three business segments, naming (i) Distribution of Software Licenses, (ii) Market Support Services and (iii) Global Support Services. The assessee also had third party local sales in the domestic business segment.
For Assessment Year 2010-11, the assessee filed its return of income on 29.3.2011admitting total income of Rs.1,14,70,596. The return was processed under Section 143(1) and the case was subsequently taken up for scrutiny. Reference under Section 92CA was made by the Assessing Officer to the Transfer Pricing Officer in respect of the international transactions reportedly entered into by the assessee. The TPO after examining the matter passed an order under Section 92CA dt.31.1.2014 proposing the TP adjustment on account of Market Support Services amounting Rs.1,34,48,859 and on account of Global Support Services amounting Rs. 54,56,263 to the international transactions entered into by the assessee in the period under consideration.
Aggrieved by the draft assessment order for Assessment Year 2010-11 dt.28.2.2014, the assessee filed its objections thereto before the DRP, which disposed off the matter by issuing its directions under Section 144C(5) vide order dt.28.11.2014, allowing the assessee partial relief. Consequent thereto, the Assessing Officer passed the final order of assessment under Section 143(3) rws 144C vide order dt.30.12.2014, wherein the assessee’s income was determined at Rs.2,68,55,668; which included T.P. Adjustment of Rs.1,53,85,072 to the returned income.
Revenue’s appeal in IT (TP) A No.145
Exclusion of comparables
It is the contention of revenue that some companies qualify all the qualitative and quantitative filters applied by the TPO and therefore the DRP was wrong in directing the exclusion of these companies.
Risk Adjustment
In this Ground, Revenue contends that risk adjustment is not required in this case as the assessee face risks like political risk, foreign exchange risk and also market risks. It was also contended that the DRP was wrong in directing that risk adjustment may be granted @ 1% without indicating the method by which the same is to be computed. The learned Departmental Representative submitted that this claim for risk adjustment cannot be allowed since no such claim was made in the assessee’s T.P. Study or before the TPO nor was any quantification of the claim made before any authority for examination which ought to have been done.
Assessee’s appeal in IT (TP)A No.26
Addition on account of Marketing and Support Services segment
Inclusion of comparables
It was submitted that the company IDL (India) Ltd. was selected as a comparable company by the assessee in its T.P. Study. It was pointed out that in the T.P. order, while analyzing the comparability of the five comparables chosen by the assessee, the TPO has recorded this company is functionally comparable to the assessee and acceptable but, however, in the final set of comparables selected by the TPO, this company was not included and no reason has been given by the TPO for its exclusion in the final set of comparables.
It was submitted that the company Kores (India) Ltd , while reviewing the search process conducted by the TPO, the assessee identified this company as a comparable, as it passes all the filters adopted by the assessee in the T.P. Study and also the filters adopted by the TPO and as such should be included as a comparable company.
Computation of margin
It was submitted by the assessee that the assessee has computed the margin of Cyber Media Research Ltd./IDC (India) Ltd. wrongly. It was submitted that the TPO has computed the OP/Cost at 19.52% (Page 9 of TPO’s order) whereas it is actually 13.68% as per the show cause notice issued by the TPO (page 6 of TPO’s order).
Addition on account of Global support services segment
Rejection of TP study of Assessee
The assessee has raised 3 grounds related to T.P. Study conducted by the TPO, regarding the comparables selected by the TPO and regarding the comparability analysis conducted by the assessee.
The TPO rejected the documentation prepared by the assessee for the reasons mentioned in the TP order under Section 92CA of the Act. The assessee in its TP Study had worked out matters at the entry level, including the Global Support Services Segment also under the distribution segment. The TPO in his order has recorded detailed reasons for considering the Global Support Services as a separate segment. Further, for the subsequent years, admittedly, the assessee itself has classified Global Support Services as a separate segment. In support of Market Support Services also, the assessee had analysed the transactions by selecting companies engaged in trading activities and for this reason also the TPO had rejected the assessee’s TP Study. Further, another reason for the TPO to reject the assessee’s TP Study was the fact that the assessee adopted multiple year data.
Inclusion of comparables
Further the assessee seeks exclusion of 2 companies as comparables. First company is G.K.Consultants Ltd. The TPO has selected this company as a comparable to the assessee. As per the TPO, this company operates as a Non-Banking Finance Company (‘NBFC’) and is involved in financing, share trading, etc. and also provides information technology marketing and professional services. The TPO was of the view that this company provides services in the nature of comprehensive consultancy services. The assessee filed objections before the DRP for exclusion of this company from the list of comparables on the ground that this company is functionally different and not comparable to the assessee. The DRP, however, was of the view that the assessee’s objection is not tenable and upheld the inclusion of this company, observing that the Annual Report of this company clearly mentions that it is involved in the provision of professional services.
Second company is Maruti Insurance Agency Logistics Ltd. The TPO selected this company as a comparable to the assessee as she was of the view that this company operates as an insurance agent and is seen to be providing various consultancy services despite the objections of the assessee. The assessee filed its objections to the inclusion of this company as a comparable before the DRP on the grounds that this company is not functionally comparable. The DRP, however, held that the objections of the assessee as not tenable since the insurance agency services, at the heart of its operations, involve consultancy and upheld the decision of the TPO in including this company as comparable to the assessee.
Inclusion of comparables sought for by the assessee
It was submitted that the following two companies may also be considered for inclusion in the list of comparables to the assessee:- (i) ICRA Management Consulting Services Ltd. (‘ICRA’) (ii) Pagaria Energy Ltd. It was submitted that the assessee has proposed these two companies for being considered as comparables before the DRP and that the DRP had not specifically adjudicated on these two comparables. It was the contention of the assessee that ICRA was involved in the business of software consultancy services and is functionally similar to the assessee. It was also contended that Pagaria Energy Ltd. is also involved in the provision of software and consultancy services.
Contention of the Assessee
Revenue’s appeal in IT (TP) A No.145
Risk Adjustment
The ld counsel of the assessee submitted that a co-ordinate bench of this Tribunal in the case of Intellinet Technologies India (P) Ltd. V ITO in ITA No.1237/Bang/2010 in principle held that risk adjustment ought to be given to the net margin of the companies for bringing them on par with the assessee. It was also submitted that this decision has been followed in several subsequent decisions of this Tribunal. It is submitted that the quantification of risk adjustment has been furnished by the assessee along with the submissions thereto for examination and allowance thereof.
Held by ITAT
Revenue’s appeal in IT (TP) A No.145
Exclusion of comparables
Revenue has raised a general ground without specifying or bringing on record material to establish why it considers the decision of the DRP to be erroneous. We find that the DRP has given elaborate reasons for directing the exclusion of each of the companies. In the absence of any material evidence to controvert the findings of the DRP, the contentions of Revenue in this ground remain unsubstantiated and therefore we are unable to concur with the same. In this view of the matter, we dismiss Ground No.1.
Risk Adjustment
We find that the DRP has directed that risk adjustment may be granted to the assessee by placing reliance, inter alia, on the decisions of the co-ordinate bench in the following cases wherein it was held in principle, that risk adjustment was to be allowed to the assessee, if after examination it is found that the facts of the case being audited warrants such an adjustment. (i) Bearing Point Business Consulting Pvt. Ltd. in ITA No.1124/Bang/2011 and (ii) Intellinet Technologies India Pvt. Ltd. in ITA No.1237/Bang/2007.
We also find that the DRP has directed the TPO to examine the assessee’s claim and decide the percentage of risk adjustment to be allowed to the assessee in the case on hand. While the DRP did mention that 1% risk adjustment was allowed in the case of Helio Soft Pvt. Ltd. (2013) 32 Taxman.Com 101 (ITAT, Hyd.), it is not correct to infer that the DRP has allowed the assessee risk adjustment at 1%.
While it is true that the DRP in its order has observed that the assessee has neither made a claim for risk adjustment in its own T.P. Study or before the TPO in audit proceedings, it is observed that this claim was put forth before the DRP, though bereft of any detailed quantification of the adjustment claimed on account of risk differential. Since these details and quantification of the assessee’s claim for risk adjustment has only been placed before us and was not before the authorities below, we deem it appropriate to remand this issue back to the file of the TPO with a direction that the TPO examine the assessee’s claim for risk adjustment and allow the same if the facts of the case on hand so warrant such adjustment.
Assessee’s appeal in IT (TP) A No.26
Marketing and Support Services
Inclusion of comparables
The company IDL (India) Ltd was included in the list of comparables chosen by the assessee in its T.P. Study. We find that the TPO has indeed mentioned in the T.P. order that this company is ‘functionally comparable and acceptable’. That being so, it is not clear as to why this company was not selected and included in the final set of comparables and why this company did not figure in the search process conducted by the TPO. In this view of the matter, we consider it appropriate to remand this issue to the TPO for consideration.
The company Kores (India) Ltd. was not a comparable selected by the assessee in its T.P. Study, but has been suggested as a comparable by the assessee during T.P. proceedings before the TPO. Evidently, this company has not been selected out of a search process and as such could be a case of ‘cherry picking. The DRP, however, has considered the submissions for the inclusion of this company in the set of comparables and found them to be not acceptable. The after sales services referred to in this division is an insignificant component of the revenue of the company and therefore it is not appropriate to compare the division of this company with the Market Support Services performed by the assessee. We find that the DRP has given detailed reasoning for rejection of this company as a comparable company to the assessee in the case on hand. Before us, the assessee had failed to adduce any material evidence to controvert the findings of the DRP. In this factual matrix, we find no infirmity, in the order of the DRP that would require our interference and therefore uphold its decision to exclude this company from the set of comparables to the assessee.
Computation of margin
We have perused the relevant portions of the TPO’s order and find that the OP/Cost is given by the TPO at 13.68% (Page 6 of TPO’s order) and later computed at 19.52% (Page 9 of TPO’s order). In these circumstances, the TPO is directed to verify the above contention of the assessee and adopt the correct margin of IDC (India) Ltd. / Cyber Media Research Ltd. after affording the assessee adequate opportunity to be heard and make submissions in the matter, which shall be considered by the TPO before coming to a finding in the matter. It is ordered accordingly. Consequently, Ground No.6.3 is allowed for statistical purposes.
Addition on account of Global support services segment
Rejection of TP study of Assessee
The use of current year’s data is mandated by the relevant I.T. Rules, 1962 and by not adhering to this, the assessee’s TP Study was rendered unreliable. Before us the assessee reiterated the submissions made earlier and has not adduced any material evidence to controvert the findings of the TPO and the detailed reasoning of the DRP while rejecting the assessee’s contentions. There are a catena of judicial pronouncements supporting the use of current year’s data alone for the purpose of comparability. In this view of the matter, as discussed above, we hold that the TPO was correct in rejecting the assessee’s TP Study / documentation in the facts and circumstances of the case and conducting her own search process for selection of comparables.
Inclusion of comparables
G.K. Consultants Ltd.
We find that from mentions in the Annual Report that this company carried on its business activities in the area of financing, share trading, professional services, textile trading, information technology and investments. It is also seen that the volume of revenue from share trading is substantial when compared to its other activities, including professional services. It is also seen that the company operates in several segments and segmental details have been furnished in the Annual Report.
From the TPO’s order, it is not clear as to whether the TPO has examined this aspect of the company operating in several segments out of which professional services is only a small portion. It is also not clear as to whether the TPO has adopted the segmental details or the entity level details. In fact, the DRP has directed that it is to be ascertained whether segmental margins were adopted or entity level margins. In this factual matrix as discussed above, we are of the view that it would be appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of this company with the assessee
Maruti Insurance Agency Logistics Ltd. –
It is seen from the orders of the Insurance Regulatory & Development Authority (‘IRDA’) that this company is a group entity belonging to the Maruti Suzuki Ltd. group and is acting as its corporate agent. In that order of the IRDA, it has been held that no insurer is supposed to be granted license to act as corporate agent on the basis of reputation and strength of the applicant firm and a finding has been rendered that the corporate agent; namely this company has violated the statutory provisions. It is seen from the orders of the Insurance Regulatory &
Development Authority (‘IRDA’) that this company is a group entity belonging to the Maruti Suzuki Ltd. group and is acting as its corporate agent. In that order of the IRDA, it has been held that no insurer is supposed to be granted license to act as corporate agent on the basis of reputation and strength of the applicant firm and a finding has been rendered that the corporate agent; namely this company has violated the statutory provisions. We find that the documents filed before us were evidently not placed before the TPO and DRP and therefore this aspect has not been examined by the authorities below. In this view of the matter, we deem it appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of this company with the assessee.
Inclusion of comparables sought for by the assessee
Evidently these two companies have not been selected as part of or as a result of any search process and therefore could be a case of “cherry picking” by the assessee. However, it is also a fact on record that the assessee had included the Global Support Services Segment in the Distribution Segment and therefore had not conducted an independent bench marking for this segment. Therefore, if the Global Support Services Segment is considered as a separate segment, as has been done by the TPO, the assessee should have the right to conduct its search process and select its set of comparables; which of course will be subjected to the examination and scrutiny of the TPO. In this view of the matter, we deem it appropriate to remand the issue back to the file of the Assessing Officer / TPO to examine the comparability of these two companies with the assessee.
Risk Adjustment
We find that the DRP has directed that risk adjustment may be granted to the assessee by placing reliance, inter alia, on the decisions of the co-ordinate bench in the following cases wherein it was held in principle, that risk adjustment was to be allowed to the assessee, if after examination it is found that the facts of the case being audited warrants such an adjustment. (i) Bearing Point Business Consulting Pvt. Ltd. in ITA No.1124/Bang/2011 and (ii) Intellinet Technologies India Pvt. Ltd. in ITA No.1237/Bang/2007. We also find that the DRP has directed the TPO to examine the assessee’s claim and decide the percentage of risk adjustment to be allowed to the assessee in the case on hand. While the DRP did mention that 1% risk adjustment was allowed in the case of Helio Soft Pvt. Ltd. (2013) 32 Taxman.Com 101 (ITAT, Hyd.), it is not correct to infer that the DRP has allowed the assessee risk adjustment at 1%.
Benefit of tolerance limit u/s 92C (2)
The new section 92C (2A), mandates that if the AM price falls beyond + / – 5% from the price charged in international transactions, then the assessee does not have any option referred to in Section 92C (2) of the Act. Thus, as per the above amendment, it is clear that the + / – 5% variation is allowed to justify the price charged in the international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly, the 5% benefit is not allowable in the assessee’s case. In view of the retrospective amendment by way of insertion of Section 92C(2A) w.r.e.f. 1.4.2012 brought about therein by Finance Act, 2012, this Ground No.9 of the assessee’s appeal is not maintainable and is accordingly dismissed.
Accordingly appeal of the revenue dismissed and appeal of the assessee partly allowed.
