Brigade Global Services (P.) Ltd. v. ITO

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The Tax Publishers2013 TaxPub(DT) 2049 (Hyd-Trib) : (2013) 143 ITD 0059 : (2013) 028 ITR (Trib) 0411 Income Tax Act, 1961 --Transfer pricing--Computation of ALP Selection of comparables--Assessee-company was engaged in providing back office processing services. Assessee had entered into international transactions with its AE and TP study was made after making adjustment of Rs.13.05 crores. For benchmarking its international transaction, assessee followed TNMM. For comparability analysis assessee used data belonging to the period April 2001 to 16-2-2004. TPO while considering data belonging to financial year 2003-04 only, excluded six companies from the list of eight comparable companies originally selected. Taking PL1 for financial year 2003-04 in respect of 8 comparables, TPO arrived at average profit margin at 34.82 per cent to operational cost. TPO computed ALP at Rs. 17.73 crores and made adjustment (addition) of Rs. 4.68 crores to ALP determined by assessee. *Held:,/b>Justified, TPO was justified in using data of only current financial year for determining ALP in view of rule 10B of Income Tax Rules, 1962 and where gain or loss on account of foreign exchange fluctuation arose in normal course of business transactions, same was to be considered while computing net margin of international transactions entered into by assessee with its AEs. Assessee has used data of the preceding two financial years and partly of the current financial year, from 1-4-2003 to 16-4-2004. However, under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction. Under Rule 10B(4), it says the data to be used in analyzing the 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. Thus, as per the above provisions, user of data of the current financial year, in which international transaction has been entered into by an assessee, is mandatory. There is no option but to use the data of only the relevant financial year, in which the international transaction has been entered into by the assessee, for comparability analysis. Though, in the proviso below the said rule 10B(4), it says that data relating to the preceding two financial years may also be considered, if such data reveals facts which could have an influence on determination of transfer prices in relation to the transactions being compared, since in the instant case, the assessee has not been able to reveal any facts pertaining to the earlier financial years which had an influence on the determination .of transfer prices with reference to those comparable companies, the TPO justified in using the data of only the current financial year 2003-04, for determining the ALP in this case. [Para 12] With regard to exclusion of gain on account of foreign exchange fluctuation, while computing the net margin, as claimed by the assessee, exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss is on account of exchange fluctuation arising in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the AEs of the assessee. If the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further. However, if the loss of the comparable is abnormal and there is no trading activity of whatsoever, data of such company cannot be considered. Accordingly, the assessing officer is directed to consider the data of MCS Ltd. as comparable while computing the ALP and to exclude other two companies from comparables. [Para 19] The contention of the assessee is that the loss making companies were not to be taken out from the comparables while determining the ALP. One finds merit in the argument of the assessee's counsel. Determining of ALP is depend upon the comparables of identical or similar in controlled transactions in similar or comparable circumstances and thereafter suitable adjustment has to be made to set off the difference to make the transaction commercially comparable. Upon careful consideration of the assessee's counsel plea, one finds himselves in agreement with the assessee's contention that only abnormal loss making companies are to be taken out from the comparables. The judgement relied on by the assessee's counsel in Quark Systems (P.) Ltd.* supports the assessee's counsel arguments. Being so, for proper comparables these three companies viz., items at 11, 13 and 14 are to be included in the comparables if their loss is on account of normal business reasons and segmental turnover is above Rs. 1 crore. [Para 26] the assessing officer has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Ltd. and these companies are to be excluded from the comparables. For computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, Tribunal agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Four Soft Ltd. v. Dy. CIT 2012 TaxPub(DT) 2534 (Hyd-Trib) : (2011) 142 TTJ 358. Same view has been taken by the Tribunal in various cases stated by the assessee in its arguments. Being so, segmental data of the company F.I. Sofex Ltd., ought to be considered as comparable if there is normal loss. In this case, there is abnormal loss on account of extraordinary reasons, then it is not comparable and to be excluded from comparables. Thus, F.I. Sofex Ltd., has to be excluded by the assessing officer. [Para 35] Assessee is entitled for deduction 5% if the difference between the ALP determined by the TPO and the assessee is within the range of 5%, then, as prescribed in section 92C(2) as held by various decisions relied on by the assessee's counsel, the deduction at 5% should be given on ALP computed by the assessing officer. [Para 55] With regard to adjustment towards working capital at 2%, the plea of the assessee should be allowed in the light of order of the Tribunal in the case of Logix Micro Systems Ltd. v. Asstt. CIT 2011 TaxPub(DT) 528 (Bang-Trib) : (2010) 42 SOT 525 (Bang-Trib) and also Tally Solutions (P.) Ltd. v. Dy. CIT 2012 TaxPub(DT) 1179 (Bang-Trib) : (2011) 48 SOT 110 (Bang-Trib). [Para 56] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 2049 (Hyd-Trib) : (2013) 143 ITD 0059 : (2013) 028 ITR (Trib) 0411

Income Tax Act, 1961

--Transfer pricing--Computation of ALP Selection of comparables--Assessee-company was engaged in providing back office processing services. Assessee had entered into international transactions with its AE and TP study was made after making adjustment of Rs.13.05 crores. For benchmarking its international transaction, assessee followed TNMM. For comparability analysis assessee used data belonging to the period April 2001 to 16-2-2004. TPO while considering data belonging to financial year 2003-04 only, excluded six companies from the list of eight comparable companies originally selected. Taking PL1 for financial year 2003-04 in respect of 8 comparables, TPO arrived at average profit margin at 34.82 per cent to operational cost. TPO computed ALP at Rs. 17.73 crores and made adjustment (addition) of Rs. 4.68 crores to ALP determined by assessee. Held:,/b>Justified, TPO was justified in using data of only current financial year for determining ALP in view of rule 10B of Income Tax Rules, 1962 and where gain or loss on account of foreign exchange fluctuation arose in normal course of business transactions, same was to be considered while computing net margin of international transactions entered into by assessee with its AEs.

Assessee has used data of the preceding two financial years and partly of the current financial year, from 1-4-2003 to 16-4-2004. However, under Indian Transfer Pricing Regulation, for the purpose of comparability analysis, an assessee is bound to use the data of relevant financial year, in which it has entered into international transaction. Under Rule 10B(4), it says the data to be used in analyzing the 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. Thus, as per the above provisions, user of data of the current financial year, in which international transaction has been entered into by an assessee, is mandatory. There is no option but to use the data of only the relevant financial year, in which the international transaction has been entered into by the assessee, for comparability analysis. Though, in the proviso below the said rule 10B(4), it says that data relating to the preceding two financial years may also be considered, if such data reveals facts which could have an influence on determination of transfer prices in relation to the transactions being compared, since in the instant case, the assessee has not been able to reveal any facts pertaining to the earlier financial years which had an influence on the determination .of transfer prices with reference to those comparable companies, the TPO justified in using the data of only the current financial year 2003-04, for determining the ALP in this case. [Para 12] With regard to exclusion of gain on account of foreign exchange fluctuation, while computing the net margin, as claimed by the assessee, exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues payable at lower rate. Since the gain or loss is on account of exchange fluctuation arising in the normal course of business transaction, the same should be considered while computing the net margin for the international transactions with the AEs of the assessee. If the gain on account of foreign exchange rate fluctuation is to be taken as operating gain in nature, the net margin declared by the assessee for the international transaction with the AEs, goes up still further. However, if the loss of the comparable is abnormal and there is no trading activity of whatsoever, data of such company cannot be considered. Accordingly, the assessing officer is directed to consider the data of MCS Ltd. as comparable while computing the ALP and to exclude other two companies from comparables. [Para 19] The contention of the assessee is that the loss making companies were not to be taken out from the comparables while determining the ALP. One finds merit in the argument of the assessee's counsel. Determining of ALP is depend upon the comparables of identical or similar in controlled transactions in similar or comparable circumstances and thereafter suitable adjustment has to be made to set off the difference to make the transaction commercially comparable. Upon careful consideration of the assessee's counsel plea, one finds himselves in agreement with the assessee's contention that only abnormal loss making companies are to be taken out from the comparables. The judgement relied on by the assessee's counsel in Quark Systems (P.) Ltd. supports the assessee's counsel arguments. Being so, for proper comparables these three companies viz., items at 11, 13 and 14 are to be included in the comparables if their loss is on account of normal business reasons and segmental turnover is above Rs. 1 crore. [Para 26] the assessing officer has to recalculate the ALP after excluding only the data of the companies which have losses due to extraordinary reasons. In other words, if there is loss in ordinary course of business which is normal/nominal cannot be excluded from the comparables. However, we make it clear that if there is any abnormal loss or if there is continuous loss year by year, in such situation that company data cannot be considered as comparable with the assessee company. For example, F.I. Sofex Ltd., Vans Information Ltd. and Mukund Engineers Ltd. and these companies are to be excluded from the comparables. For computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, Tribunal agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Four Soft Ltd. v. Dy. CIT 2012 TaxPub(DT) 2534 (Hyd-Trib) : (2011) 142 TTJ 358. Same view has been taken by the Tribunal in various cases stated by the assessee in its arguments. Being so, segmental data of the company F.I. Sofex Ltd., ought to be considered as comparable if there is normal loss. In this case, there is abnormal loss on account of extraordinary reasons, then it is not comparable and to be excluded from comparables. Thus, F.I. Sofex Ltd., has to be excluded by the assessing officer. [Para 35] Assessee is entitled for deduction 5% if the difference between the ALP determined by the TPO and the assessee is within the range of 5%, then, as prescribed in section 92C(2) as held by various decisions relied on by the assessee's counsel, the deduction at 5% should be given on ALP computed by the assessing officer. [Para 55] With regard to adjustment towards working capital at 2%, the plea of the assessee should be allowed in the light of order of the Tribunal in the case of Logix Micro Systems Ltd. v. Asstt. CIT 2011 TaxPub(DT) 528 (Bang-Trib) : (2010) 42 SOT 525 (Bang-Trib) and also Tally Solutions (P.) Ltd. v. Dy. CIT 2012 TaxPub(DT) 1179 (Bang-Trib) : (2011) 48 SOT 110 (Bang-Trib). [Para 56]