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ITA 5927/Del/2010
Varient Systems (India) Pvt. Ltd.
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1 NEW DELHI
BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER
AND
SHRI A.T. VARKEY : JUDICIAL MEMBER
ITA no. 5927/Del/2010
Asstt. Yr: 2006-07
Verient Systems (India) Pvt. Ltd., Vs. Income-tax Officer,
N-8, Ground Floor, Greater Kailash, Ward 17(2), New Delhi.
New Delhi.
PAN: AABCV 9348 Q
( Appellant ) (Respondent)
Appellant by : Shri Deepak Chopra Adv.,
Harpreet Singh Adv. &
Shri Manasvani Bajpai Adv.
Respondent by : Shri Sanjay Prasad CIT(DR)
Date of hearing : 03/06/2015.
Date of order : 21/08/2015.
ORDER
PER S.V. MEHROTRA, A.M..:
This appeal has been preferred by the assessee against the assessment order
dated 20-10-2010 passed by the Income-tax Officer, Ward 17(2), New Delhi,
pursuant to DRP's directions dated 8-09-2010 u/s 144C of the Income-tax Act,
1961 ("the Act" in short), relating to asstt. Year 2006-07, raising following
grounds of appeal:
"On the facts and circumstances of the case and in law, the
Learned Assessing Officer ("the Ld. AO") has erred in passing
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Varient Systems (India) Pvt. Ltd.
the assessment order dated 20 October 2010 u/s 143(3) read
with section 144C of the Income Tax Act, 1961 ('the Act') in
conformity with the directions of the Hon'ble Dispute
Resolution Panel ("DRP") vide letter dated 8 September 2010
and adjustments made by the Learned Transfer Pricing Officer
('the Ld. TPO') in his order dated 13 October 2009 passed u/s
92CA(3) of the Act.
That on the fact and in circumstances of the case and in law,
1. the Ld. AO 1 DRP have grossly erred in upholding the
adjustment made by the Ld. TPO of Rs. 3,028,346/- to the total
income of the appellant vide the TP order dated 13 October
2009 passed u/s 92CA (3) of the Act, on account of
redetermination of the arm's length price of the international
transaction entered by the appellant with its associated
enterprises.
2. while undertaking the addition of Rs. 3,028,346/-, the
Hon'ble DRP and Ld. AO 1 TPO have grossly erred in not
appreciating that the Appellant had prepared the detailed
contemporaneous Transfer Pricing documentation bona fide and
in compliance with the Act and Income Tax Rules 1962 ('the
Rules') and selected uncontrolled comparable companies based
on a detailed Functional Asset and Risk (FAR) analysis
following a methodical benchmarking process.
3. the Hon'ble DRP and Ld. AO 1 TPO have grossly erred
by not allowing the use of multiple~ year data and determining
the arm's length price on the basis of financial information of
the comparables for the financial year 2005-06 which was
available in the public domain at the time of assessment
proceedings and not at the time when the Appellant conducted
its analysis to comply with the provisions of Rules 10B( 4) and
10D( 4).
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ITA 5927/Del/2010
Varient Systems (India) Pvt. Ltd.
4. the Hon'ble DRP and Ld. TPO 1 AO have erred by
rejecting comparable companies out of the set of companies
considered as comparables by the Appellant, without providing
sufficient basis for rejecting them . The Hon'ble DRP and Ld.
TPOI AO have wrongly rejected companies mostly on grounds
of being persistently loss making.
5. the Hon'ble DRP adjustment to the and Ld. TPO 1 AO have
erred by not applying a working capital results of the
companies selected by the Ld. TPO to account for differences
between the working capital requirements of the appellant vis-
a-vis these companies.
6. the Hon'ble DRP and Ld. AO I TPO have grossly erred
by ignoring the business/ commercial reality that since the
Appellant undertakes minimal business risks as against
comparable companies which are full risk bearing
entrepreneur(s), thereby erred in not allowing a risk adjustment
to the Appellant.
7. the Hon'ble DRP and TPO/AO have grossly erred by
denying the benefit of the arm's length range as provided under
proviso to Section 92C of Act for purposes of computing the
arm's length price under Section 92F of the Act.
8. That the Ld. AO has further erred in law and on facts in
levying interest under section 2348 of the Act.
9. The Ld. AO has erred in initiating penalty proceedings
under section 271(1)(c) of the Act."
2. Ground no. 3 was not pressed at the hearing. Accordingly, ground no.
3 stands dismissed being not pressed. Ground no. 9 is premature and stands
dismissed accordingly.
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ITA 5927/Del/2010
Varient Systems (India) Pvt. Ltd.
3. Ground nos. 1,2 and 4 to 7: Brief facts of the case are that the assessee
company, in the relevant assessment year, was engaged in the business of
repair services, computer hardware and software related services, erection,
commissioning and installation services.
3.1. The assessee had filed return of income declaring loss of Rs.
53,91,090/-. A reference u/s 92CA(1) was made for determining the arm's
length price ("ALP" in short) u/s 92CA(3) in respect of following
international transactions undertaken by assessee with its associated
enterprises ("AEs" in short):
S. Nature of transaction Method Value of
No. used Transaction
By (in Rs.)
assessee
1. Provision of pre-sales and TNMM 51,703,483
post-sales support services
2. Receipt of support services TNMM 5,703,177
3. Payment of interest on ECB TNMM 96,406
loan
4. Reimbursement of expenses TNMM 575,409
Total 58,078,475
3.2. The assessee had applied TNMM as the most appropriate method for
benchmarking the ALP and the PLI was OP/TC. There is no dispute on this.
3.3. Ld. TPO considered the comparables selected by the assessee in the TP
report, which were 13 in number having arithmetic mean of 7.68% a against the
NP margin of assessee being 5.79%. After considering the updated margins of the
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Varient Systems (India) Pvt. Ltd.
comparables and after removing the consistent loss making companies and the
companies which were not comparable or whose current year financials were not
available, the final set of comparables for seven companies was accepted by ld.
TPO, the arithmetic mean of which worked out to 11.15%. In doing so the ld. TPO,
inter alia, had rejected Capital Trust Ltd., having arithmetic mean of -9.18%, from
the set of comparables.
3.4. The main dispute in the present appeal is regarding exclusion of this
comparable, which the assessee has taken as ground no. 4 of its grounds of appeal.
This comparable was rejected by ld. TPO on the ground that it was functionally not
comparable and was incurring persistent losses. The main reasons for rejecting this
comparable by ld. TPO was as under:
i. This company was not incurring occasional loss, but persistent losses.
ii. The assessee itself had applied filter of persistent losses, which is
independent of the number of years for which the financials of
comparables had been used.
iii. This company had shown losses (-19% in AY 2004-05 and -9.8% in AY
2006-07).
iv. The company was functionally different because the segmental
results of company showed that in foreign consultancy segment,
consultancy was being offered to foreign banks not having any
branches or representative offices in India. Consultancy services
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Varient Systems (India) Pvt. Ltd.
rendered to foreign banks was very different from the business of
the assessee, because assessee was engaged in the provision of pre
sales and post sales technical and marketing support services to its
AEs, which included market research, collection & supply of
information concerning products and services for communication
interception, digital video security, surveillance and enterprise
business intelligence, whereas Capital Trust, on the other hand,
provided services to foreign banks, which included developing
corresponding relationship of the foreign banks with Indian banks,
promoting the services offered by the foreign banks, referring trade
finance proposals, assisting foreign banks in country review etc.
3.5. Ld. DRP confirmed the ld. TPO's action, inter alia, observing that
besides the issue of persistent losses, the nature of services rendered in the
telecom field were very different from the banking industry.
4. Ld. counsel for the assessee submitted that though persistent loss
making companies were to be rejected from the set of comparables but
Capital Trust Ltd., was wrongly rejected because ld. TPO failed to take into
consideration the fact that in AY 2005-06, this company earned a profit
margin of 26.23%.
4.1. Ld. counsel referred to page 390 of the PB, wherein P&L A/c of
Capital Trust Ltd. for the period ended 31-3-2006 is contained to point out
that the company, inter alia, had earned income from management
consultancy fee.
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Varient Systems (India) Pvt. Ltd.
4.2. Ld. counsel further referred to page 397 of the PB, wherein the annual
accounts of Capital Trust Ltd. are contained and pointed out that segmental
information in regard to this segment is contained in which foreign
consultancy has been separately mentioned.
4.3. Ld. counsel referred to the decision of the ITAT Delhi Bench I" dated
25-2-2014 in the case of Nortel Networks India P. Ltd. (rendered in ITA nos.
4765/Del/2011 and 427/Del/2013 for AY 2007-08 & 2008-09), and
submitted that in that case it has been held that Capital Trust Ltd.'s
consultancy segment is similar to that of Nortel India, which was rendering
ITE services like assessee and, therefore, this comparable should not be
rejected merely on the ground of incurring persistent losses and functionally
not comparable. He referred to para 7 of the said decisions, which is
reproduced hereunder:
7. We have heard the rival contentions and perused the material
available on record. Apropos Capital Trust comparable, the TPO has
observed that primary business of this company is automobiles sales and
service. We are of the considered view that a company cannot be excluded
from the comparables merely for the reason of having low turnover. It is
to be appreciated that no turnover filter was applied by either of the
parities. The comparable has been excluded because the total turnover of
this comparable is Rs. 13.92 crores. The analysis needs to be carried out
on the basis of functional profile and not on an arbitrary or adhoc
criteria. From the facts on record and argument advanced before us, it
emerges that the functional profile of Capital Trust Limited's consultancy
segment is similar to that of Nortel India the same needs to be included in
the final comparables for working the ALP. The AO will accordingly apply
this comparable while working out the ALP, this ground of assessee is
allowed.
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Varient Systems (India) Pvt. Ltd.
4.4. Ld. counsel also relied on the decision of ITAT Pune Bench "A"
dated 9-10-2014 in the case of M/s Bobst India Pvt. Ltd. (rendered in ITA
no. 1380/Del/2010 for AY 2006-07) in support of its contention that the
company cannot be rejected merely on the basis of incurring losses, wherein
in para 5.2 of the order it has been observed as under:
5.2. In this regard, the assessee has placed reliance on various
Judicial pronouncements to support the fact that a company can be
rejected as persistent loss maker if it has incurred losses for more
than 3 years. In the case of Quark Systems (P) Limited vs. DCIT
(2010) 38 SOT 307 (Chd.) (SB) observed that merely because a
comparable is making loss, it cannot be excluded from the list of
comparable for the purpose of computation of arm's length price.
ITAT, Mumbai 'K' Bench in the case of Advance Power Display
Systems Limited vs. ACIT held that persistent loss making company
cannot be considered as good comparable for the purpose of
determining ALP. ITAT, Hyderabad 'A' Bench in the case of
Brigade Global Services Private Limited vs. ITO held that in case
there is continuous loss year by year, in such a situation, that
company's data cannot be considered as comparable with the
assessee company.
5. Ld. CIT(DR) pointed out that the turnover of Capital Trust Ltd. was
only 12,71,21,256/- out of which the income from management consultancy
was only 24 lacs. Therefore, it cannot be said that Capital Trust Ltd., in any
view of the matter, carrying out the same functions as that of assessee and
considering the overall ratio between the income from consultancy to the
total turnover, it cannot be said that the consultancy was one of the main
functions being carried out by the Capital Trust Ltd.
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Varient Systems (India) Pvt. Ltd.
6. We have considered the rival submissions and have perused the record
of the case. The assessee was in the business of repair services, computer
hardware and software related services, erection, commissioning and
installation services. Capital Trust Ltd. was, inter alia, imparting consultancy
to foreign banks not having any branches or representative offices in India.
The assessee's contention is that this consultancy segment is comparable to
the services rendered by assessee. We are not inclined to accept the
assessee's contention on this ground because the consultancy service
rendered to foreign banks are in no way comparable with the assessee's
business. Ld. counsel has relied on the decision of ITAT in the case of
Nortel Networks India P. Ltd. (supra) and M/s Bobst India Pvt. Ltd. (supra).
We find that in the case of Nortel Networks India P. Ltd. (supra) the
Tribunal did not accept the TPO's analysis on the ground of excluding the
comparable because the total turnover of the comparable was Rs. 13.92
crores. The Tribunal specifically observed that the analysis had to be carried
out on the basis of functional profile and not on an arbitrary or ad hoc
criteria. We are fully in agreement with the observation of coordinate Bench,
but when examined on the touch stone of functional profile, we find that
Nortel Networks India P. Ltd. (supra) was providing marketing and after
sales support services to Nortel Group, whereas the assessee herein is not
carrying out such activities but was carrying on computer hardware and
software related services. We, therefore, are of the opinion that the decision
in the case of Nortel Networks India P. Ltd. (supra) is of no assistance to
assessee.
6.1. As far as reliance on the case of M/s Bobst India Pvt. Ltd. (supra) is
concerned, we are in agreement with ld. counsel for the assessee that merely
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Varient Systems (India) Pvt. Ltd.
because a comparable has incurred loss in a particular year, the same cannot
be excluded. However, here we are not confirming the action of lower
authorities on the basis of loss being incurred in two years by Capital Trust
Ltd., but on the ground that functional profile being entirely different from
that of the assessee. Further, we find considerable force in the argument of
ld. CIT(DR) that since the consultancy segment is very meager as compared
to the overall activities carried on by assessee, therefore, it cannot be held
that merely because segmental details are provided, therefore, the financial
consultancy to foreign bank assumes significance. We, accordingly, confirm
the assessment order of AO on the issue in question. Accordingly, ground
nos. 1, 2 and 4 to 7 are rejected.
8. Ground no. 8: The charging of interest u/s 234B is consequential and
is disposed of accordingly.
9. In the result, assessee's appeal is dismissed.
Order pronounced in open court on 21/08/2015..
Sd/- Sd/-
(A.T. VARKETY) (S.V. MEHROTRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:21/08/2015.
*MP*
Copy of order to:
1. Assessee
2. AO
3. CIT
4. CIT(A)
5. DR, ITAT, New Delhi.
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ITA 5927/Del/2010
Varient Systems (India) Pvt. Ltd.
-+ Date
Initial
1. Draft dictated on -07.2015 PS
2. Draft placed before author .07.2015 PS
3. Draft proposed & placed before the second JM/AM
member
4. Draft discussed/approved by Second JM/AM
Member.
5. Approved Draft comes to the Sr.PS/PS PS/PS
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk PS
8. Date on which file goes to the AR
9. Date on which file goes to the Head Clerk.
10. Date of dispatch of Order.
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