R.S. Syal Accountant Member - This appeal by the Revenue and the cross-objection by the assessee arise out of the order passed by CIT(A) on 28.02.2011 in relation to the assessment year 2005-06.
2. First ground of the Revenue's appeal is against the deletion of transfer pricing adjustment of Rs. 12,60,29,372/- made by the Assessing Officer.
2.1 Briefly stated the facts of the case are that the assessee is engaged in the business of providing human resource and management consultancy services. Since the international transactions with the Associated Enterprises (AEs) were more than Rs.15 crore, the Assessing Officer referred the matter of determination of Arm's Length Price (ALP) of such transactions to the Transfer Pricing Officer (TPO). At this stage, we want to make it clear that the TPO disputed the determination of ALP only in respect of Software segment and BPO segment. The international transactions in other segments were not called into question by the TPO. The assessee adopted Transactional Net Margins Method (TNMM) as the most appropriate method with Operating profit/ Total cost (OP/TC) as Profit Level Indicator (PLI). In its transfer pricing study, the assessee worked out arm's length price by adopting three years' data and taking weighted average of such profit rates in respect of 18 comparable cases chosen for Software development segment and 10 comparable cases for BPO segment. In this manner, the assessee worked out weighted profit rate of 9.73% in respect of software development segment and 9.60% in respect BPO segment as a benchmark. As the assessee declared its OP/TC at 10% in both the segments, it was claimed that the profits so declared was more than the weighted average of the comparable cases. The TPO accepted the TNMM as the most appropriate method and also OP/TP as a PLI for benchmarking of the international transactions. It was, however, held that the assessee, in selection of the comparable cases, missed out certain important parameters which vitiated the working of ALP declared by the assessee. Certain new filters, as mentioned on pages 13 and 15 of the TPO's order, were chosen and applied, on which basis two comparables cases were finally chosen in the BPO segment giving mean of their OP/TC at 29.05%. Similarly, for software segment, the TPO finally shortlisted three cases as comparable and worked out the average of their OP/TC at 25%. That is how, he proposed the transfer pricing adjustment of Rs.7.26 crore under the BPO segment and Rs.5.33 crore under the software segment. This was done by way of his order u/s 92CA(3) passed on 30.09.2008.
2.2 On the basis of such adjustment proposed by the TPO, the Assessing Officer made addition for the equal sum. The assessee succeeded in proving before the learned CIT(A) that the ALP declared by it was correct which did not require any interference at the end of the TPO/AO. The Revenue is aggrieved against the deletion of addition of Rs. 12.60 crore.
2.3 We have heard the rival submissions and perused the relevant material on record in the light of precedents cited. Primarily, there is no dispute as to the adoption of TNMM as the most appropriate method and also OP/TC as PLI. However, it is observed that the assessee chose certain comparable cases under both the segments in its TP study and worked out mean profit rate of such comparable cases at 9.73% and 9.60% by using multiple years' data and also applying the weighted average. In this regard, it would be relevant to note the prescription of Rule 10B(4) which is as under :-
"The data to be used in analyzing comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into;"
2.4 Proviso to this sub-rule contemplates the adoption of a data relating to a period not being more than two years prior to such financial year if the data for the current year reveals facts which could have an influence on the determination of transfer price in relation to transactions being compared. Adverting to the facts of the instant case, we find that no material worth the name has been placed before us to indicate that the data for the current year did not lead to the determination of correct ALP.
2.5 Further, rule 10D(1) requires every person who has entered into an international transaction to keep and maintain the information and documents, inter alia, :
"(g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions ; (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction'. On having a cursory look at rule 10D(4), it transpires that : 'The information and documents specified under sub-rules (1) and (2), should, as far as possible, be contemporaneous....'. When we read sub-rule (1) in juxtaposition to sub-rule (4) of rule 10D, it emerges that the data of comparable uncontrolled transactions, which are used for benchmarking the international transactions, should be as far as possible of the same period as that of the international transaction under consideration."
2.6 In view of the manifest mandate of the above rules, we are not inclined to accept the correctness of the assessee's transfer pricing study on the basis of multiple years' data.
2.7 Now we turn to the adoption by the assessee of weighted average of the profit rate in respect of the comparable case in its transfer pricing study. Here again, we find that the same is contrary to the relevant provisions. Proviso to section 92C(2) provides in unambiguous terms that: "where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices". Thus, it is apparent that there is no instruction under the law for resorting to weighted average as has been done by the assessee in its transfer pricing study. This exercise done by the assessee does not merit acceptance.
2.8 At this juncture, it is relevant to accentuate that during the course of proceedings before the TPO, the assessee objected to the selection of cases done by the later and pointed out certain anomalies therein vide its letter dated 18.09.2008. A copy of such letter is available on pages 96 onwards of the Departmental paper book. Without prejudice to the objections so raised, the assessee also conducted voluntary fresh search adopting the TPO's methodology and /the qualitative filters so chosen by him. In this way, the assessee shortlisted nine cases under the BPO segment with profit rate for the relevant year alone. Arithmetical mean (not weighted average) of such nine comparable cases was worked out at 12.53%. This chart is available on page 127 of the Departmental paper book. Similarly, 12 cases were chosen as comparable under the Software development segment. The arithmetical mean (not weighted average) of the profit rate of such cases for the relevant year alone was found out at 14.63%. These pages are annexures to the above letter addressed to the TPO. It was claimed that the assessee's profit rate of 10% under both the segments was within plus minus 5% range and hence the same was required to be accepted. The TPO very conveniently brushed aside the assessee's letter dated 18.09.2008 and chose not to comment on the working given by the assessee determining ALP at 12.53% and 14.36%) under both the segments. It is apparent from the TPO's order that he did not take up for consideration the list of comparables and the profit rates given by the assessee on the same set of filters as adopted by him. It shows that the comparable cases chosen by the assessee on the proper application of filters adopted by the TPO himself, which were duly put across to the TPO during the course of proceedings before him, were neither rejected nor adversely commented by the TPO. The Mumbai Bench of the Tribunal in Asstt. CIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 133 ITD 543/16 taxmann.com 47 (Mum.) has held that the burden of demonstrating the ALP of an international transaction is primarily on the taxpayer and when such onus is discharged and the tax authorities propose any variation in the comparables selected by the taxpayer, they are required to show that the comparables selected by the assessee were not, in fact, comparable. It has further been held in this case that: 'If TPO agrees with the comparables given by the assessee, the matter ends. If he wants to exclude any of such comparables, then it is for him to justify the exclusion by adducing cogent reasons. It is not open to the TPO to exclude the comparable cases given by the assessee at his whims and fancies. To put it in simple terms, where the assessee furnishes a list of comparable cases and the TPO fails to show expressly as to how all or any of such cases are not comparable, then a presumption has to be drawn that those cases are comparable. It is only when the TPO gives reason for non-acceptance of any case as not comparable, the duty is cast on the appellate authorities to examine the reasons given by the TPO with a view to determine as to whether or not such cases were rightly excluded. But where the TPO fails to give any reason for the exclusion of the comparables given by the assessee, then going by the presumption of acceptability of such cases, the first appellate authority cannot be said to have any duty to check the work done by the AO/TPO with a view to ensure whether or not it was properly done.' Going by the mandate in Maersk Global Service Centre (India) (P.) Ltd. (supra), it is apparent that the list of cases given by the assessee to the TPO during the course of proceedings before him, consisting of 12 cases under the Software development and 9 cases under the BPO segment are required to be accepted.
2.10 As has been noticed above that OP/TC in respect of comparable cases chosen by the assessee under both the segments and as furnished before the TPO, inclusive of all the cases chosen by the TPO himself is 14.03% under the BPO segment and 14.63% under the Software development segment. The assessee's PLI of OP/TC under both the segments is 10%. As the assessee's profit rate is within the permissible plus minus 5% limit, we hold that no addition is called for and the learned CIT(A) was justified in deleting the addition.
2.11 Before parting with this ground, we want to point out that the methodology adopted by the learned CIT(A) in deleting the addition is incorrect. As can be seen from para 14 page 52 of the impugned order that he went by arm's length mark-up under both the segments at 9.73% and 9.60% for the purposes of deleting the addition. These rates of mark-up are, in fact, the rates computed by the assessee in its original transfer pricing study by adopting multiple years' data with the weighted average. Since we have disproved the working of the assessee on both these counts supra, the deletion of addition by the Id. first appellate authority on the basis of such profit margins cannot be countenanced. However, in view of the detailed independent reasons given above noticing that the assessee's margin of profit is within the permissible range of comparable cases, we uphold the conclusion of the Id. CIT(A) albeit on different reasons This ground is not allowed.
3. Second ground of the Revenue's appeal is against the deletion of disallowance of Rs. 14,76,748/- under section 43B of the Act.
3.1 Briefly stated the facts of this ground are that the Assessing Officer made disallowance of Rs. 14,76,788/-, detailed as under:—
|
(In Rs.) |
Professional tax |
6,607/- |
Service tax |
13,20,536/- |
Punjab Welfare fund |
1,399/- |
Works Contract tax |
4,980/- |
Sales tax |
1,43,266/- |
Total: |
14,76,788/- |
3.2 Such disallowance was made on the basis of audit report stating that the following expenses were not paid within the specified time. The learned CIT(A) deleted the addition by observing that three items were routed through balance sheet and the other two items were already disallowed.
3.3 Having heard the rival submissions and perused the relevant material on record, we find that the addition made by the Assessing Officer on the basis of audit report came to be deleted in the first appeal on the basis that either the amounts were not routed through balance sheet or were already disallowed. The learned AR was directed to show computation of income as well as its final accounts to demonstrate this fact as argued before the first appellate authority. The same was not available with him. It is but natural that if no deduction is claimed by the assessee, there can be no question of disallowance. If, however, deduction was claimed, the same can be deleted only on the basis of legal provisions and principles of law interpreting such provisions. As there is contradiction between the audit report and the finding given by the Id. CIT(A) and further the Id. AR did not have the necessary documents to show the correctness of the finding recorded by the Id. CIT(A), we deem it appropriate to set aside the impugned order on this issue and restore the matter to the Assessing Officer, Accordingly, we direct the AO to verify as to whether or not assessee claimed deduction in respect of these items. If the assessee's version before the Id. CIT(A) is found to be correct, then the matter would end and the impugned order would be correct. If, however, it is found that the deduction was claimed then the matter should be decided as per law after allowing a reasonable opportunity of being heard to the assessee.
4. The cross-objection filed by the assessee, being simply in support of the impugned order, has become infructuous.
5. In result, the appeal of the Revenue is partly j allowed for statistical purposes and the cross-objection of the assessee is dismissed.