×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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12-04-2019, Fulcrum Fund Services, Section 92, 40(a), Tribunal Bangalore
This is an appeal by the assessee against the order dated 03-10-2017 of the Commissioner of Income Tax (Appeals)-3, Bengaluru, relating to Assessment Year 2012-13.
2. Ground Nos. 1 to 14 raised by the assessee in its appeal are with regard to correctness of the determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering Information and Technology Enabled Services (ITES) by the assessee to its Associated Enterprise (AE). It is not in dispute that the transaction of rendering ITES, in the form of providing back office support for Hedge Fund related financial services to its group companies, is an international transaction and income arising from such transaction has to be determined having regard to the ALP as laid down in Section 92 of the Income Tax Act, 1961 (Act) It is also not in dispute between the assessee and the Revenue that the Profit Level Indicator (PLI) chosen for the purpose of comparing the assessee’s profit margin with the comparable companies was Operating Profit on Operating Cost. The assessee’s Operating Profit on Operating Cost was 20.53%, which was arrived at the following manner:
3. The most appropriate method adopted by the assessee and the Revenue for the purpose of determining ALP was the Transactional Net Margin Method (TNMM). The assessee had chosen 04 comparable companies and based on the Arithmetic Average Mean, profit margin of those 04 companies which was arrived at 17.46% concluded that the assessee’s profit margin being higher than that of the comparable companies, the price received by the assessee in the international transaction was at arm’s length.
4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the Assessing Officer, rejected all the 04 comparable companies chosen by the assessee. He chose a set of 10 comparable companies, who’s Arithmetic Mean was 28.11% which was arrived at as follows:
4.1. Based on the above comparable companies and their profit mean and after giving working capital adjustment of (-)3.25%, the TPO arrived at an addition to be made to the total income on account of determination of ALP at a sum of Rs. 2,48,24,560/-, which was arrived at in the following manner:
12.4. Computation of Arm’s Length Price:
The arithmetic mean of the Profit Level indicators is taken as the arm’s length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arm’s length price of the services rendered by the taxpayer to its AE(s) is computed as under The above shortfall of Rs. 248,24,560/- is treated as transfer pricing adjustment u/s.92CA in respect of ITES segment of the taxpayer’s international transactions”.
4.2. Aggrieved by the aforesaid addition made by the Assessing Officer, consequent to determination of ALP, the assessee filed an appeal before the CIT(A).
5. The CIT(A) upheld the order of TPO regarding choosing of comparable companies.
5.1. With regard to allowing negative working capital adjustment, the CIT(A) held that the negative working capital adjustment done by the TPO was not proper. As a result, the Arithmetic Average Mean on profit margins, which was arrived at TPO at 31.36% stood reduced to 28.11% [28.11 + (-)3.25%, towards negative working capital = 31.36%].
5.2. Aggrieved by the order of Ld.CIT(A) in upholding the comparables chosen by the TPO, assessee has preferred an appeal before the Tribunal.
6. At the time of hearing of the appeal, Ld.counsel for the Assesseepressed for adjudication of only Ground No. 5, which reads as under:
Gr.No. 5: The learn d AO/learned TPO/Hon'ble CIT(A) erred in not applying the upp r limit on turnover while selecting the comparable companies.
7. As far as Ground No. 5 is concerned, the same is with reference to application of the turnover filter. The TPO while choosing comparable companies, applied a filter whereby he excluded companies, whose turnover was less then Rs. 1 Crore, as companies which have to be regarded as small, compared to the turnover of the assessee, which was Rs. 27.61 Crores. The assessee’s contentions for the CIT(A) was that - when a lower turnover limit is applied for