Hitachi High- Technologies (Singapore) Pte. Ltd.- India BO, Gurgaon V. DDIT, New Delhi

ITA 3333/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4973 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 31-05-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 30-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Working capital adjustments
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 , NEW DELHI BEFORE SH. N. K. SAINI, AM AND SH. AMIT SHUKLA , JM ITA NO. 3333 /DEL/2014 : ASSTT. YEAR : 2007 - 08 HITACHI HIGH - TECHNOLOGIES (SINGAPORE) PTE LTD . - INDIA BO, 209, 2 ND FLOOR, TIME TOWER, MG ROAD, GURGAON - 122002 VS DEPUTY DIRECTOR OF INCOME TAX, CIRCLE - 3(2), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. A A B CH8797H ASSESSEE BY : SH. NAGESHWAR RAO , ADV. REVENUE BY : SH. NEERA J KUMAR DR DATE OF HEARING : 31.05 .201 7 DATE OF PRONOUNCEMENT : 28 . 0 8 .201 7 ORDER PER N. K. SAINI, AM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 07.02.2011 PASSED BY THE AO U/S 144C(3) R.W.S. 143(3) OF TH E INCOME - T AX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) ('CIT (A)') HAS ERRED IN CONFIRMIN G THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER ('AO') WHEREIN TOTAL INCOME OF THE APPELLANT IS DETERMINED AT INR 87,06,390/ - AS AGAINST A RETURNED LOSS OF INR 47,77,917 / - ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 2 2. THE CIT(A) ERRED, IN FACTS AND IN LAW, IN CONFIRMING THAT THE AO HAS DISCHAR GED HIS STATUTORY ONUS BY ESTABLISHING THAT THE CONDITIONS SPECIFIED IN CLAUSE (A) TO (D) OF SECTION 92C (3) OF THE ACT HAVE BEEN SATISFIED BEFORE DISREGARDING THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT AND PROCEEDING TO DETERMINE THE ARM'S LENGTH PRICE HIMSELF. 3. THE CIT(A)/AO ERRED IN REJECTING THE USE OF PROJECTED OPERATING MARGINS OF THE APPELLANT, FOR THE PURPOSE OF DETERMINING ARM'S LENGTH PRICE FOR THE IMPUGNED INTERNATIONAL TRANSACTIONS IGNORING THE FACT THAT FY 2007 - 08 WAS THE FIRST YEAR OF OPERATIONS OF THE APPELLANT AND THE APPELLANT WAS IN ITS NASCENT STAGE OF BUSINESS CYCLE FACING BUSINESS EXIGENCIES SUCH AS HIGH UNABSORBED FIXED COST OF OPERATIONS. 4. THE CIT(A)/AO ERRED IN LAW BY NOT ACCEPTING THE QUANTITATIVE ADJUSTMENTS CLAIMED BY THE APPELLANT IN ACCORDANCE WITH THE TRANSFER PRICING PROVISIONS ON ACCOUNT OF SIGNIFICANT DIFFERENCES IN CAPACITY UTILIZATION: 4.1 THE APPELLANT HAD CLAIMED AN ADJUSTMENT FOR DIFFERENCES IN CAPACITY UTILIZATION VIS - A - VIS THE COMPARABLE COMPANIES. THE CI T(A) / AO ALSO FAILED TO APPRECIATE AND GIVE DUE COGNIZANCE TO FACTUAL DATA SUBMITTED ON THE NUMBER OF YEARS OF OPERATIONS OF THE COMPARABLE COMPANIES. 4.2 THE APPELLANT ALSO RESPECTFULLY SUBMITS THAT AN ADJUSTMENT DUE TO DIFFERENCE BETWEEN THE ACTUAL C APACITY UTILIZATION VIS - A - VIS ESTIMATED CAPACITY UTILIZATION SHOULD BE PROVIDED AS THE APPELLANT WAS IN ITS FIRST YEAR OF BUSINESS OPERATIONS. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 3 5. THE CIT(A)/AO GROSSLY ERRED, IN FACTS AND IN LAW, IN FAILING TO APPRECIATE THAT THE AE IN SINGAPORE ALSO FACED OPERATING LOSS IN THE BUSINESS, AND HENCE THERE WAS NO MOTIVE FOR SHIFTING PROFITS TO THE AE. THE CIT(A)/AO ALSO GROSSLY ERRED IN INCREASING THE APPELLANT'S NET MARGIN TO 20.3% WHICH HAD THE IMPACT OF INCREASING THE LOSSES FOR THE SINGAPORE ENTITY SINCE T HERE WAS NO PROFIT WHICH ACCRUED IN THE INDIA BUSINESS. 6. THE LEARNED CIT(A)/AO ERRED IN FACTS AND CIRCUMSTANCES OF THE CASE IN REJECTING CERTAIN COMPARABLES IDENTIFIED BY THE APPELLANT AND CONSIDERING FUNCTIONALLY DISSIMILAR COMPANIES AS COMPARABLE TO T HE APPELLANT FOR BENCHMARKING THE IMPUGNED TRANSACTION PERTAINING TO PROVISION OF SERVICES . 7. THE CIT(A)/AO ERRED BY USING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT, TO COMPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TR ANSACTION OF THE APPELLANT USING TNMM. THE CIT(A)/AO HAVE ALSO ERRED IN USING DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF PREPARING TRANSFER PRICING DOCUMENTATION. 8. THE CIT(A)/AO ERRED IN THE USE OF COMPARABLE UNCONTROLLED PRICE ('CUP') FOR BENCHMARKING THE INTERNATIONAL TRANSACTION INVOLVING AVAILING OF MANAGEMENT AND ADMINISTRATION SUPPORT SERVICES AND CONCLUDING THAT THE ARM'S LENGTH VALUE FOR THE TRANSACTION IS NIL. 9. THE LEARNED AO HAS ERRED IN FACTS AND IN LAW IN INITIATING THE P ENALTY PROCEEDINGS U/S 271(1)( C ) OF ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 4 THE ACT AGAINST THE APPELLANT FOR CONCEALING THE PARTICULARS OF INCOME OR FURNISHING INACCURATE PARTICULARS OF INCOME. 10. THE CIT(A)/AO ERRED IN IGNORING THE FACT THAT FY 2007 - 08 WAS THE FIRST YEAR OF OPERATIONS OF THE APPELLANT AND THE APPELLANT WAS IN ITS NASCENT STAGE OF BUSINESS CYCLE EXPERIENCING HIGH FIXED COST OF OPERATIONS AND THEREFORE THERE WAS A VALID CASE FOR ADJUSTING THE EXCESS FIXED COSTS INCURRED BY COMPARING THE CAPACITY UTILIZED BY THE APPELLANT IN FY 2007 - 08 VIZ - A - VIZ THE BUDGETED PROJECTIONS OR PROFITABILITY BEFORE THE START OF OPERATIONS WITH THE ACTUAL PROFITABILITY. THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, SUPPLEMENT, AMEND, VARY, WITHDRAW OR OTHERWISE MODIFY THE GROUND MENTIONED HEREIN ABOVE AT OR BEFORE THE TIME OF HEARING. 3. THE GRIEVANCE OF THE ASSESSEE IN THIS APPEAL RELATES TO THE ADDITION ON ACCOUNT OF ARM S LENGTH PRICE IGNORING THE FACT THAT IT WAS THE FIRST YEAR O F OPERATIONS OF THE ASSESSEE AND WITHOUT CONSIDERING THE DIFFERENCES IN CAPACITY UTILIZATION BY THE ASSESSEE AND THE COMPARABLES. 4 . FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS A BRANCH OFFICE OF HITACHI HIGH TECHNOLOGIES AND WAS ENGAGED IN ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 5 RENDER ING MARKETING SUPPORT SERVICES & RESEARCH/DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). IT IS RESPONSIBLE FOR TRADING OPERATION ACROSS ASIAN COUNTRIES AND ALSO CARRIES OUT SOURCING AND TRADING OPERATION, THE BRANCH OFFICE WAS SET - UP IN INDIA TO UNDERTAKE THE SUPPORT OF MARKETING PRE - SAL ES ACTIVITIES, TECHNICAL AND BUSINESS INFORMATION GATHERING , LIAISING , TO PROVIDE AFTER SALES SERVICE TO CUSTOMERS IN INDIA AND TO IMPORT & MARKET AUTO COMPONENTS IN INDIA. THE ASSESSEE ENTERED INTO AN AGREEMENT WI TH HITACHI HIGH TECHNOLOGIES, JAPAN (HHT) TO PROVIDE MARKET RESEARCH & DEVELOPMENT SERVICES. THE ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2008 DECLARING A LOSS OF RS.47,77,917/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSEE IS A TRADING A RM OF HHT AND ENGAGED IN THE TRADING & SERVICING ACTIVITIES OF ELECTRONIC INSTRUMENT, COMPONENTS & MATERIALS AND WAS PRIMARILY ENGAGED IN THE FOLLOWING SEGMENTS: SUPPLY OF PARTS, SPARES AND CONSUMABLES FOR PRODUCING OPTICAL MEDIA FORMATS (I.E. CD - RW/DVD+R W/DVD - RW) TO MOSER BAER ( MBI ) IN INDIA. MBI USED SUCH EQUIPMENT TO UNDERTAKE MANUFACTURING OF CD - RW/DVD+RW/DVD - RW IN THE CAPACITY OF AN ORIGINAL EQUIPMENT MANUFACTURER ( OEM ). THE MAKE, MODEL DESIGN AND OTHER KEY SPECIFICATIONS OF THE EQUIPMENT ARE ADVI SED TO HTS, WHICH THEN ARRANGES SUCH MATERIAL. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 6 SUPPLY OF AUTO COMPONENT PARTS, SPARES AND CONSUMABLES TO HONEYWELL AND TURBO ENERGY LTD. 5 . THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROFITS ARISING FROM THE SALE MADE BY THE HEAD OFFICE AS WELL AS HHT IN INDIA SHOULD NOT BE ATTRIBUTED TO THE PE IN INDIA AND TAXED ACCORDINGLY. THE ASSESSEE SUBMITTED THAT THE PROFITS ARE ALLOCATED TO INDIAN PE ON THE BASIS OF THE FUNCTIONS PERFORMED, RISK ASSUMED AND ASSETS EMPLOYED BY SUCH PE AND IN ORDER TO EXECU TE THE SE RVICES, M/S HITACHI HIGH TECHNOLOGIES (SINGAPORE) PTE. LTD. ( HTS ) HAD ENTERED INTO AN AGREEMENT WITH ITS BRANCH OFFICE (BO) WHO AGREED TO PROVIDE THE FOLLOWING SERVICES: MARKETING, INCLUDING ADVERTISEMENTS, EXHIBITION PARTICIPATION AND THE NEC ESSARY SALES CO - ORDINATION ACTIVITY. COMMUNICATING THE PRICE DETAILS FROM HTS TO POTENTIAL CUSTOMERS FOLLOW UP ASSISTANCE SERVICES IN RESPECT OF PURCHASE ORDERS AND LETTERS OF CREDITS FROM CUSTOMERS. COMMUNICATING PURCHASE ORDER DETAILS TO SUPPLIERS BASED ON THE INSTRUCTIONS OF HTS FROM TIME TO TIME. SERVICES PERTAINING TO CREDIT AND COLLECTION, FOLLOW UP ON PAYMENTS DUE FROM CUSTOMERS. PERIODICAL BUDGETING ANALYSIS. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 7 6 . THE AO NOTED THAT THE ASSESSEE ENTERED INTO AN INTERNATIONAL TRANSACTION AS MENTIONED IN FORM NO. 3CEB AS UNDER: NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) PROVISION OF MARKETING SUPPORT SERVICES TNMM 2,64,99,480 7 . THE AO ASKED THE ASSESSEE TO SUBMIT TP DOCUMENTATION IN RESPECT OF INTERNATIONAL TRANSACTION W ITH AE. THE AO REFERRED THE MATTER TO THE TPO WHO REJECTED THE TP STUDY OF THE ASSESSEE AND MADE THE FOLLOWING TP ADJUSTMENTS: TRANSFER PRICING ADJUSTMENT OF MSS SEGMENT: RS.1,13,98,612/ - ADDITION ON ACCOUNT OF COST ALLOCATION: RS.20,85,690/ - 8. THE TPO ALSO REJECTED THE ADJUSTMENT SOUGHT BY THE ASSESSEE ON THE BASIS OF CAPACITY UTILIZATION AND ADJUSTMENT OF COST BY RATIO OF 60%. THE AO MADE THE ADJUSTMENT OF RS.1,13,98,612/ - BY OBSERVING IN PARAS 10 TO 14 OF THE IMPUGNED OR DER WHICH READ AS UNDER: 10. SUBJECT TO ABOVE, THEREFORE, THE DATA PERTAININ G TO ONLY CURRENT YEAR WILL BE US ED. HOWEVER IN ITS REPLY DATED 23.12.2010, (PAGE 17), THE ASSESSEE HAD NOW FRESHLY REJECTED SOME OF THE COMPARABLES AND INCLUDED SOME OF TH E EARLIE R REJECTED COMPARABLE (VIDE LETTER DATED 10. 12.2010). THE ASSESSEE HAS NOW COME UP WITH A SET OF 9 COMPARABLES AND TRIED TO SHOW THAT THE TRANSACTIONS ARE AT ARM'S LENGTH. HOWEVER, THIS CONTENTION OF THE ASSESSEE IS NOT ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 8 ACCEPTABLE, AS THIS IS NO OCCASION F OR DOING THE ANALYSIS AGAIN AFTER ISSUE OF SHOW CAUSE NOTICE. SECONDLY, THE ASSESSEE HAS ALREADY RECONSIDERED COMPARABILITY ANALYSIS GIVEN IN THE TP REPORT VIDE ITS LETTER DATED 10.12.2010, WHEREBY IT HAS ALREADY REJECTED 6 COMPARABLES OUT OF THE 13 COMPAR ABLES TAKEN IN THE TP REPORT. THE ASSESSEE CANNOT BE ALLOWED TO CHANGE ITS SET OF COMPARABLE AGAIN AND AGAIN AND THAT TOO WITHOUT ANY BASIS. IT IS ALSO NOTICED THAT THE ASSESSEE IS GOING TOO MUCH INTO THE VERTICALS, WHICH IS NOT PERMITTED WHEN THE TNMM MET HOD IS USED. THEREFORE, THIS CONTENTION OF THE ASSESSEE IS REJECTED AND THE POSITION WITH 6 REJECTED COMPARABLES WILL BE TAKEN AS FINAL. 11. ANOTHER CONTENTION OF THE ASSESSEE IS THAT THIS BEING THE FIRST YEAR OF OPERATION, THE SCALE OF OPERATION WAS QUIT E LOW, WHILE THE COMPARABLES SELECTED IN THE TP REPORT WERE COMPANIES WHICH WERE IN THE BUSINESS FOR A FEW YEARS NOW. ON THIS PRETEXT, THE ASSESSEE HAS SOUGHT THE ADJUSTMENT ON THE BASIS OF CAPACITY UTILIZATION. THE ASSESSEE HAS SOUGHT TO ADJUST THE COST B Y A RATIO OF 60% AND HAS RECOMPUTED ITS MARGINS AT 20.73%. THE CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE BECAUSE OF THE FOLLOWING REASONS: - - THE ASSESSEE HAS SELECTED THE COMPARABLES IN ITS TP REPORT AFTER CAREFUL CONSIDERATION BY DOING PROPER ANALYS IS. THE OBJECTION TAKEN BY ASSESSEE THAT COMPARABLES ARE ESTABLISHED PLAYERS & ASSESSEE IS NOT, IS ONLY AN AFTERTHOUGHT. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 9 - EVEN IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED, THE CAPACITY UTILIZATION IN SERVICE SECTOR DOES NOT CARRY ANY MEANING, AS THE CO NCEPT OF CAPACITY UTILIZATION IS MORE RELEVANT IN MANUFACTURING SECTOR, WHERE HEAVY PLANT & MACHINERY ARE INSTALLED. - THE ADJUSTMENT FOR CAPACITY UTILIZATION IS ALWAYS CALCULATED WITH RESPECT TO THE CAPAC ITY UTILIZATION OF THE COMPARABL ES. THE ASSESSEE H AS NOT DONE ANY SUCH ANALYSIS AND HAS SOUGHT FOR 60% ADJUSTMENT PURELY ON AD - HOC BASIS WITHOUT REFERRING TO THE FINANCIALS OF THE COMPARABLES. THIS HAS PROBAB LY BEEN DONE JUST TO ARTIFICIALLY BRING THE OPERATING MARGINS IN CLOSE RANGE OF THAT OF COMPARAB L E S. THEREFORE THIS CONTENTION OF THE ASSESSEE IS ALSO REJECTED . 12. HOWEVER THE ASSESSEE HAS CLAIMED WORKING CAPITAL ADJUSTMENTS. THE SAME ARE BEING ALLOWED AND THE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLES ARE BEING TAKEN, AS SUBMITTED BY THE A SSESSEES VIDE ANNEXU RE 4 OF ITS SUBMISSION DATED 23. 12.2010: NAME OF THE COMPANY UNADJUSTED OP/OE WORKING CAPITAL ADJUSTED OP/OE ACCESS INDIA ADVISORS LIMITED 45.97% 42.52 EDUCATIONAL CONSULTANTS (INDIA) LIMITED (S EGMENTA L) 5.20% 12.64 ICC INTER NATIONAL AGENCIES LTD (SEGMENTAL ) 55.28% 49.98 I DC INDIA LIMITED 14.87% 13.91 INDIA TOURISM DEVELOPMENT CORPORATION LIMITED (SEGMENTAL ) 9.40% 11.91 PRI YA INTERNATIONAL LTD. (SEGMENTAL ) 18.15% 17.07 IN H OUSE PRODUCTIO NS LTD. (SEGMENTAL ) 0.56% - 5.90 ARITHMETIC M EAN 21.35% 20.30% ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 10 13. THE ASSESSEE HAS SUBMITTED VIDE LETTER DATED 23.12.2010 THAT IN ORDER TO EARN THE MARKET SUPPORT AND RESEARCH SERVICES CHARGES OF RS. 2,64,99,480 / - , THE ASSES SEE HAS INCURRED EXPENSES OF R S. 3,15,02,986/ - . THEREFORE, IT IS CLEAR THAT THE ASSESSEE HAS INCURRED LOSSES IN THIS SEGMENT AND BECAUSE OF THE LOSSES IN THIS SEGMENT; THE ASSESSEE HAD USED DATA FOR FUTURE YEARS FOR ESTABLISHING COMPARABILITY. IN EFFECT, THE ASSESSEE IS TRYING TO COMPA RE THE FINANCIALS OF FY 2009 - 10, 2010 - 11 AND 2011 - 12 OF THE TESTED PARTY WITH THE FINANCIALS OF COMPARABL ES OF FY 2005 - 06, 2006 - 07, AND 2007 - 08. IT IS AMPLY CLEAR FROM THE ABOVE DISCUSSION & ANALYSIS THAT THE COMPARABILITY ANALYSIS HAS TO BE OF CONTEMPORAN EOUS DATA ONLY, I.E. THE F IN ANCIALS OF THE TESTED PARTY OF FY 2007 - 08 ARE TO BE COMPARED WITH FINANCIALS OF COMPARABLES FOR FY 2007 - 08 ONLY. 14. IT IS ALSO CLEAR THAT THE CO MPENSATION MODEL OF THE ASSESSEE IS NOT PROPER I.E. THE ASSESSES COMPANY IS NOT BE ING COMPENSATED PROPERLY FOR ITS EFFORT. THE ASSESSEE COMPANY HAS INCURRED EXPENSES OF RS. 3,15,02,986/ - FOR EARNING AN INCOME OF RS. 2,64,99,480/ - . IT IS THUS AMPLY CLEAR THAT THE TRANSACTION OF ASSESSEE COMPANY WITH ITS AE IS NOT AT ARM'S LENGTH. THEREF ORE, THE ARM'S LE NGTH IS BEING COMPUTED AS UNDER: TOTAL EXPENSES INCURRED BY ASSESSEE (A) : RS.3, 15,02,986 ARM'S LENGTH MARGIN : 20.30% ARM'S LENGTH PRICE OF MSS (B) : RS.3,78,98,092 102.30% OF (A) CHA RGES ACTUALLY RECEIVED (C) : RS. 2,64, 99,480 ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 11 ADJUSTMENT TO BE MADE : RS.1,13,98,612 ((B) - (C) THEREFORE AN ADJUSTMENT OF RS. 1,13,98,612/ - IS BEING MADE TO THE INCOME OF THE ASSESSEE I.E. THE INCOME OF THE ASSESSEE SHALL BE ENHANCED BY RS. 1,13,98,612/ - ON ACCOUNT OF DIFFERENCE IN ARM'S LENGTH PRICE OF THE SERVICES RENDERED AND THE PRICE ACTUALLY CHARGED BY THE ASSESSEE FROM ITS AE. 9. THE AO ALSO MADE THE ADDITION OF RS.20,85,390/ - ON ACCOUNT OF COST ALLOCATION BY OBSE RVING THAT THE ASSESSEE HAD NOT BEEN ABLE TO DEMONSTRATE THAT AN INDEPENDENT PARTY WOULD HAVE MADE A PAYMENT OF RS.20,85,390/ - ON ACCOUNT OF COST ALLOCATION , AS THE ASSESSEE HAS DONE, ACCORDINGLY BY THE APPLICATION OF CUP , THE ARM S LENGTH PRICE IN RESPECT OF THIS TRANSACTION WAS DETERMINED AT NIL. 10. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) WHO SUSTAINED THE ADDITION BY OBSERVING IN PARAS 5 TO 7.2, AS UNDER: 5 . IN GROUND NO 2, THE APPELLANT HAS CONTENDED THAT THE AO HAS ERRED IN DETERMINING THE PRICE OF THE INTERNATIONAL TRANSACTION OF THE APPELLANT AS THE CIRCUMSTANCES NECESSITATING THE DETERMINATION OF PRICE AS MENTIONED IN SUB SECTION (3) OF SECTION 92C DID NOT EXIST IN CASE OF THE APPELLANT. THE AO HAS REJECTED THE TP STUDY O F THE APPELLANT. THE AO HAS GIVEN THE REASONS FOR REJECTION OF TP REPORT FURNISHED BY THE APPELLANT. IF THE AO ON THE BASIS OF ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 12 MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION IS OF THE OPINION THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF A RM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT, THE AO MAY PROCEED TO DETERMINE THE ARM'S LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTION IN ACCORDANCE WITH SECTION 92C(1) AND 92C(2) ON THE BASIS OF INFORMATION OR MATERIAL OR DOCUMENT AVAILABLE WITH HI M. ON PERUSAL OF THE ORDER PASSED BY THE AO, IT IS FOUND THAT THE TRANSFER PRICING STUDY CONDUCTED BY THE APPELLANT IS DEFECTIVE AND NOT RELIABLE. THE APPELLANT HAD USED DATA PERTAINING TO PRIOR YEAR FOR CARRYING OUT COMPARABILITY ANALYSIS WITHOUT FULFILL ING THE CONDITIONS MENTIONED IN THE PROVISO TO RULE 10B(4) I.E. THE TAXPAYER DID NOT DEMONSTRATE THAT THE DATA IN THE CASE OF THOSE COMPARABLES WOULD MATERIALLY AFFECT THE TRANSACTIONS CARRIED OUT IN THE CURRENT YEAR. ORDER PASSED U/S 144C(3) R.W. S. 143(3) IN THE INSTANT CASE IS ALSO CONSIDERED UNDER THE LIGHT OF CIRCULAR NO. 12 OF 2001 AND CIRCULAR NO. 14/2001 AND INSTRUCTION NO. 3 OF 2003 WHICH REAFFIRM THE LEGAL POSITION THAT IF CONDITIONS MENTIONED IN CLAUSES (A) TO (D) OF SECTION 9 2C(3) ARE SATISFIED, THE ALP DETERMINED BY THE TAX PAYER CAN BE REJECTED. THE AO'S ACTION IS CORRECT IN ACCORDANCE WITH THE RATIO OF THE SPECIAL BENCH OF THE HON'BLE ITAT IN THE CASE OF M/S AZTECH SOFTWARE [294 ITR 125 (AT)] WHEREIN IT HAS BEEN HELD THAT WHEN TAX AUTHORITIES A RE OF THE OPINION THAT THE ALP HAS NOT BEEN CORRECTLY DETERMINED BY THE TAX PAYER, THEY CAN SUBSTITUTE THEIR OWN ALP ON THE BASIS OF MATERIAL OR INFORMATION FURNISHED BY THE ASSESSEE OR COLLECTED BY THEM. BASED ON THE ABOVE, I AM OF THE VIEW THAT THERE WER E FLAWS ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 13 IN THE SEARCH PROCESS CARRIED OUT BY THE APPELLANT. THE ACTION OF THE TPO IS UPHELD. 6. GROUND NO. 4 & 7 ARE INTERRELATED AND TAKEN UP TOGETHER FOR ADJUDICATION. IN GROUND NO. 4 THE APPELLANT HAS STATED THAT THE AO ERRED IN FAILING TO APPRECIATE T HAT THE APPELLANT HAS EARNED ARM'S LENGTH PROFITS, AND ERRONEOUSLY CONCLUDED THAT THE APPELLANT SHOULD EARNED A NET OPERATING MARGIN OF 20.3% ON OPERATING COST, SINCE APPLICATION OF THIS APPROACH WOULD RESULT IN A SITUATION WHERE PROFITS ATTRIBUTABLE TO TH E APPELLANT WOULD BE MORE THAN THE COMBINED PROFITS ACTUALLY EARNED BY THE APPELLANT AND ITS ASSOCI ATED ENTERPRISE ( 'AE') FROM THE SAID TRANSACTION. IN GROUND NO. 7 THE APPELLANT HAS STATED THAT THE AO FAILED TO APPRECIATE THAT THE APPELLANT DID NOT HAVE A NY INCENTIVE TO SHIFT PROFITS OUT OF INDIA DUE TO THE FACT THAT THE HEAD OFFICE ACTUALLY SUFFERED LOSSES IN ITS BUSINESS WITH RESPECT OF THE TRANSACTION WHERE IT PROVIDED SERVICE INCOME TO THE APPELLANT. I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT. T HE APPELLANT HAS NOT SUBMITTED THE RELEVANT FACTS AND DATA IN SUPPORT OF THIS GROUND OF APPEAL. NEITHER THE APPELLANT NOR ITS AE HAS CARRIED OUT ANY STUDY TO SUBSTANTIATE THE STAND OF THE APPELLANT. IN VIEW OF IT, THIS GROUND OF APPEAL IS DISMISSED. 7. IN GROUND NO. 5, 6 & 12, THE APPELLANT HAS OBJECTED TO THE REJECTION OF THE USE OF PROJECTED OPERATING MARGINS OF THE APPELLANT FOR THE PURPOSE OF DETERMINING ARM'S LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISIONS OF SALES AND MARKETI NG SUPPORT SERVICES AND PROVISION OF MARKET RESEARCH/DEVELOPMENT SERVICES TO ITS AES ON THE GROUND THAT FY 2007 - 08 WAS THE FIRST YEAR OF ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 14 OPERATIONS. THE APPELLANT HAS OBJECTED TO THE REJECTION OF THE QUANTITATIVE ADJUSTMENTS CLAIMED BY THE APPELLANT IN ACC ORDANCE WITH THE TRANSFER PRICING PROVISIONS ON ACCOUNT OF SIGNIFICANT DIFFERENCES IN CAPACITY UTILIZATION OF THE APPELLANT VIS - A - VIS THE COMPARABLE COMPANIES. THE APPELLANT HAS ALSO STATED THAT THE AO DID NOT CONSIDER THE UPDATED MARGINS OF COMPARABLE COM PANIES FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISION OF SALES AND MARKETING SUPPORT SERVICES AND PROVISION OF MARKET RESEARCH /DEVELOPMENT SERVICES TO ITS AE. 7.1 IN MARKET SUPPORT SERVICES SEGMENT THE APPELLANT COMPANY HAS MADE PROVISION OF SALES AND MARKETING SUPPORT SERVICES DURING FY 2007 - 08. M/S. HITACHI INDIA BO HAS RENDERED SALES, MARKETING SUPPORT AND MARKET RESEARCH SERVICES TO ITS AE AND HAS RECEIVED RS. 2,64,99,480 / - FROM THE AE. THIS TRANSACTION HAS BEEN BENC HMARKED BY THE APPELLANT USING TNMM METHOD WITH OP/OC AS THE PROFIT LEVEL INDICATOR. THE APPELLANT HAS SELECTED 13 COMPARABLES AND HAS TAKEN WEIGHTED AVERAGE OF 3 YEARS TO JUSTIFY THE ARM'S LEN GTH NATURE OF THE TRANSACTION. I N ADDITION TO IT, THE APPELLANT HAS TAKEN THE PROJECTED FINANCIAL STATEMENT OF FY 2009 - 10, 2010 - 11 AND 2011 - 12 TO COMPUTE THE OP/OC OF THE TESTED PARTY FOR FY 2007 - 08 . DURING THE ASSESSMENT PROCEEDINGS, THE APPELLANT SUBMITTED THAT OUT OF 13 COMPARABLES TAKEN IN THE TP REPORT, 6 WERE NO T COMPARABLE TO THE APPELLANT. THE APPELLANT WAS USING MULTIPLE YEAR DATA FOR BENCHMARKING. THE APPELLANT HAS CONTENDED THAT THIS BEING THE FIRST YEAR OF OPERATION, THE SCALE OF OPERATION WAS QUITE LOW, WHILE THE COMPARABLES SELECTED IN THE TP REPORT WERE COMPANIES WHICH WERE ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 15 IN THE BUSINESS FOR A FEW YEARS NOW. ON THIS PRETEXT, THE APPELLANT HAS SOUGHT THE ADJUSTMENT ON THE BASIS OF CAPACITY UTILIZATION. THE APPELLANT HAS SOUGHT TO ADJUST T HE COST BY A RATIO OF 60% AND HAS REC OMPUTED ITS MARGINS AT. 20.73% . THE APPELLANT HAS SELECTED THE COMPARABLES IN ITS TP REPORT AFTER CAREFUL CONSIDERATION BY DOING PROPER ANALYSIS. THE APPELLANT HAS STATED THAT COMPARABLES ARE ESTABLISHED PLAYERS AND THE APPELLANT IS NEW, IS ONLY AN AFTERTHOUGHT. IN SERVICE SECTOR THE C APACITY UTILIZATION DOES NOT CARRY ANY MEANING, AS THE CONCEPT OF CAPACITY UTILIZATION IS MORE RELEVANT IN MANUFACTURING SECTOR, WHERE HEAVY PLANT & MACHINERY ARE INSTALLED. THE ADJUSTMENT FOR CAPACITY UTILIZATION IS ALWAYS CALCULATED WITH RESPECT TO THE C APACITY UTILIZATION OF THE COMPARABLES. THE APPELLANT HAS NOT DONE ANY SUCH ANALYSIS AND HAS SOUGHT FOR 60% ADJUSTMENT PURELY ON AD - HOC BASIS WITHOUT REFERRING TO THE FINANCIALS OF THE COMPARABLES. IT IS EVIDENT THAT THE APPELLANT HAS MADE THIS CLAIM TO AR TIFICIALLY BRING THE OPERATING MARGINS IN CLOSE RANGE OF THAT OF COMPAR A BLES. THE APPELLANT HAS CLAIMED WORKING CAPITAL ADJUSTMENTS. THE AO HAS COMPUTED THE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLES, AS SUBMITTED BY THE APPELLANT VIDE ITS SUBMISS ION DATED 23.12.2010: NAME OF THE COMPANY UNADJUSTED OP/OE WORKING CAPITAL ADJUSTED OP/OE ACCESS INDIA ADVISORS LIMITED 45.97% 42.52 EDUCATIONAL CONSULTANTS (INDIA) LIMITED (SEGMENTA L) 5.20% 12.64 ICC INTER NATIO NAL AGENCIES LTD (SEGMENTAL ) 55.28% 49.98 I DC INDIA LIMITED 14.87% 13.91 INDIA TOURISM DEVELOPMENT CORPORATION LIMITED (SEGMENTAL ) 9.40% 11.91 PRI YA INTERNATIONAL LTD. (SEGMENTAL ) 18.15% 17.07 ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 16 IN H OUSE PRODUCTIONS LTD. (SEGMENTAL ) 0.56% - 5.90 ARITHM ETIC M EAN 21.35% 20.30% 7.2 THE APPELLANT HAS SUBMITTED THAT IN ORDER TO EARN THE MARKET SUPPORT AND RESEARCH SERVI CES CHARGES OF RS.2,64,99,480/ - , THE APPELLA NT HAS INCURRED EXPENSES OF RS. 3,15,02,986/ - . IT IS EVIDENT THAT THE APPELLANT HAS INCURRED LOS SES IN THIS SEGMENT AND BECAUSE OF THE LOSSES IN THIS SEGMENT, THE APPELLANT HAD USED DATA FOR FUTURE YEARS FOR ESTABLISHING COMPARABILITY. IN EFFECT, THE APPELLANT HAS SUBMITTED THAT THE FINANCIALS OF FY 2009 - 10, 2010 - 11 AND 2011 - 12 OF THE TESTED PARTY SH OULD BE COMPARED WITH THE FINANCIALS OF COMPARABLES OF FY 2005 - 06, 2006 - 07 AND 2007 - 08. AS PER THE PROVISIONS OF INDIAN TRANSFER PRICING REGULATIONS, THE COMPARABILITY ANALYSIS HAS TO BE OF CONTEMPORANEOUS DATA ONLY, I.E. THE FINANCIALS OF THE TESTED PARTY OF FY 2007 - 08 ARE TO BE COMPARED WITH FINANCIALS OF C OMPARABLES FOR FY 2007 - 08 ONLY. CONSIDERING THE FACTS OF THE CASE, I AM OF THE VIEW THAT THE AO HAS CORRECTLY REJECTED THE USE OF PROJECTED OPERATING MAR GINS OF THE APPELLANT FOR THE PURPOSE OF DETERMIN ING ARM'S LENGTH PRICE FOR THE INTERNATIONAL TRANSACTIONS PERTAINING TO PROVISIONS OF SALES AND MARKETING SUPPORT SERVICES AND PROVISION OF MARKET RESEARCH/DEVELOPMENT SERVICES TO ITS AES. THE ORDER OF THE AO REJECTING THE CLAIM OF THE APPELLANT FOR QUANTI TATIVE ADJUSTMENTS FOR CAPACITY UTILIZATION IS UPHELD. AS DISCUSSED ABOVE, THE AO HAS COMPUTED THE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLES, AS SUBMITTED BY THE APPELLANT VIDE ITS SUBMISSION DATED 23.12.2010. ACCORDINGLY, THESE GROUNDS OF APPEAL ARC DISMISSED. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 17 11. THE LD. CIT(A) ALSO UPHELD THE ADJUSTMENT OF RS.20,85,690/ - MADE BY THE AO ON ACCOUNT OF COST ALLOCATION IN RESPECT TO SHARED SERVICES FROM AE BY FOLLOWING THE RATIO LAID DOWN BY THE ITAT IN THE FOLLOWING CASE LAWS: GEM PLUS INDIA P VT. LTD. VS ACIT IN ITA NO. 352/BANG/2009 KNORR - BREMSE INDIA PVT. LTD. VS ACIT (2012) 27 TAXMANN.COM 16 (DEL.) 12. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUB MITTED THAT THE TPO/AO HAD NOT ALLOWED THE ADJUSTMENT IN REGARD TO THE START UP PHASE AND THAT THE ASSESSEE IS IN THE FIRST YEAR OF ITS OPERATIONS , THEREFORE, LOSSES WERE INCURRED , UNDER THESE CIRCUMSTANCES, T HE TPO SHOULD HAVE ALLOWED THE ADJUSTMENT BECAU SE IT IS WELL SETTLED COMMERCIAL PRINCIPLE THAT BREAK EVEN COULD REACH ONLY AFTER A SUFFICIENT PERIOD OF OPERATIONS BY WHICH TIME THE INCOME IS SUFFICIENT TO CONTRIBUTE TOWARDS FIXED COST AND ALSO START UP EARNING PROFIT. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE R AISED SPECIFIC POINTS ON THIS ISSUE BEFORE THE LD. CIT(A) BUT THE SUBMISSIONS MADE BY THE ASSESSEE WERE NOT CONSIDERED IN RIGHT PERSPECTIVE. A REFERENCE WAS MADE TO PAGE NOS. 178 TO 248 OF THE ASSESSEE S COMPILATIONS AND SPECIFIC REFERENCE WAS MA DE TO PAGE NOS. 187 & 188 OF THE ASSESSEE S PAPER BOOK WHICH READ AS UNDER: ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 18 THE LEARNED AO DID NOT GIVE COGNIZANCE TO THE FACT THAT EVEN THE WELL ESTABLISHED COMPANIES IN A GROWING SECTOR, WHICH UNDERTAKES MORE COMPLEX FUNCTIONS THAN THE APPELLANT, DO NOT EARN SUCH HIGH OPERATING MARGIN. HENCE, THE LEARNED AO APPLIED INCORRECT PRINCIPLES WITH A SOLE INTENTION OF MAKING ADJUSTMENT TO THE INCOME OF THE APPELLANT. WE FURTHER WISH TO SUBMIT THAT THE COMPARABLES SELECTED BY THE LEARNED AO ARE PERFORMING MORE C OMPLEX FUNCTIONS AS COMPARED TO THE ASSESSEE. A BRIEF DESCRIPTION OF BUSINESS PROFILE OF THE COMPARABLES SELECTED BY THE LEARNED AO IS GIVEN BELOW: COMPANY BUSINESS DESCRIPTION ACCESS INDIA ADVISORS LIMITED PROVISION OF SERVICES SUCH AS STATUTORY, LEGAL AND ACCOUNTING FILINGS, RELATIONSHIP MANAGEMENT FOR CLIENTS, FEASIBILITY STUDIES, DETAILED POSITION PAPERS, POLITICAL INSIGHT AND ANALYSIS, BUSINESS PLAN AND MARKET ENTRY STRATEGY, WEEKLY INTELLIGENCE UPDATES, BREAKING NEWS UPDATES, COMPETITIVE POSITIONIN G ANALYSIS, RESEARCH, LEGAL POSITIONING, MEDIA INTERVENTION AND DISCRETE LOBBY GROUPS AND UNION BUDGET INSIGHT AND ANALYSIS. EDUCATIONAL CONSULTANT (INDIA) LIMITED PROVISION OF SERVICES SUCH AS TECHNICAL ASSISTANCE, SECONDMENT/ RECRUITMENT OF TEACHERS & E XPERTS FOR CLIENTS IN INDIA AND ABROAD. ICC INTERNATIONAL AGENCIES LTD. PROVISION OF COMMISSION AND SERVICE ACTIVITY, AND IS ALSO INTO TRADING OF EMBROIDERY ACCESSORIES AND EMBROIDERY MACHINES . IDC INDIA LIMITED PROVISION OF RESEARCH AND SURVEY SERVICE AND PRODUCTS. THE COMPANY PROVIDES USER RESEARCH, VERTICALS RESEARCH, GO - TO - MARKET SERVICES AND THE CONSULTING SERVICES INCOME. INDIA TOURISM DEVELOPMENT CORPORATION LIMITED PROVISION OF EVENT MANAGEMENT SERVICES. THE COMPANY ORGANIZES CONFERENCES AND EX HIBITIONS OF VARYING SIZES PRIYA INTERNATIONAL LTD. PROVISION OF SUPPORT SERVICES TO CHEMICAL CONSUMERS IN IDENTIFYING RELIABLE SOURCES OF SUPPLY FROM INDIA, ESTABLISHING PRODUCT STANDARDS AND SUPPORTING SYSTEMS AND LOGISTICS. IN HOUSE PRODUCTIONS LTD PROVISION OF INFORMATION SERVICES. THE COMPANY SPECIALIZES IN MARKETING OF KNOWLEDGE DATABASES TO THE HEALTHCARE INDUSTRY, AND IN PROVIDING ASSISTANCE IN BUSINESS PROCESS OUTSOURCING . ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 19 THE APPELLANT, ON THE OTHER HAND IS ENGAGED IN RENDERING LESS COMPLEX MARKETING RESEARCH AND RESEARCH/ DEVELOPMENT: SERVICES. HOWEVER, THE LEARNED AO FAILED TO TAKE COGNIZANCE OF SUCH FACT AND DETERMINED ARM'S LENGTH MARGIN AT 20.3 PERCEN T ON OPERATING COST. YOUR GOODSELF WOULD ALSO APPRECIATE THAT ANY NEW COMPANY CANNOT BE EXPECTED TO EARN PROFITS IN THE FIRST YEAR OF OPERATIONS. IT REQUIRES A REASONABLE PERIOD OF TIME (DEPENDING UPON THE INDUSTRY) TO BREAK - EVEN. THE APPELLANT'S OFFICE WAS SET - UP WITH THE MODEL OF ACHIEVING BREAK - EVEN POINT IN FIVE TO EIGHT YEARS. HOWEVER, THE LEARNED AO FAILED TO TAKE COGNIZANCE OF SUCH FACTS AND MADE ADJUSTMENT BY COMPARING THE OPERATING MARGIN OF THE APPELLANT WITH THE OPERATING MARGIN OF WELL ESTABLISHED COMPARABLE COMPANIES. HENCE, WE HUMBLY REQUEST YOUR GOODSELF TO TAKE AN OBJECTIVE V IEW OF THE CASE AND ACCEPT THE TRANSFER PRICING ANALYSIS PERFORMED BY THE APPELLANT (WHICH TAKES IN TO CONSIDERATION THE DIFFERENCE IN BUSINESS MODEL OF THE APPELLANT AND COMPARABLES). 13 . IT WAS FURTHER SUBMITTED THAT THE ARGUMENTS OF THE ASSESSEE WER E SUPPORTED BY THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF GLOBAL VANTEDGE (P) LTD. IN ITA NOS. 2763 & 2764/DEL/2009 WHEREIN IT WAS HELD AS UNDER: THE INDIAN TP REGULATIONS REQUIRE ONLY AN ANALYSIS OF THE TRANSACTIONS BETWEEN AES AND NOT THE TRANS ACTIONS WITH THIRD PARTIES, SINCE EXTRANEOUS FACTORS CANNOT BE CONTROLLED. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 20 MOREOVER, IF AN ENTITY IS UNABLE TO EARN ADEQUATE PROFITS ON ACCOUNT OF LEGITIMATE BUSINESS EXIGENCIES AND NOT DUE TO MANIPULATION OF TRANSACTIONS UNDERTAKEN BY THE AES, SUCH AN ENT ITY CANNOT BE PENALIZED. HAVING REGARD TO THIS, IT WAS HELD THAT THE TOTAL ADJUSTMENT MADE IN THE HANDS OF THE TAXPAYER, TOGETHER WITH THE ALP ALREADY REPORTED BY IT, CANNOT EXCEED THE TOTAL REVENUES EARNED BY THE TAXPAYER AND ITS AE FROM THE TH IRD PARTY I NDEPENDENT CLIENTS. THE ALP CANNOT BE EQUIVALENT TO 100% OF THE REVENUES EARNED BY RCS FROM THIRD PARTY INDEPENDENT CLIENTS, AS THIS WOULD IMPLY THAT RCS PERFORMS THE MARKETING ACTIVITIES WITHOUT ANY CONSIDERATION, WHICH IS AN ABSURD AND AN IMPROBABLE BU SINESS PROPOSITION. 14. IT WAS FURTHER SUBMITTED THAT THE COMPARABLE CHOOSEN BY THE ASSESSEE WERE WELL ESTABLISHED AND THEIR INFORMATIONS WERE AVAILABLE IN THE PUBLIC DOMAIN WHICH EARLIER WERE NOT AVAILABLE DURING THE PREPARATION OF TP STUDY AND THAT IN THIS REGARD SPECIFIC CONTENTION WAS RAISED BEFORE THE LD. CIT(A). A REFERENCE WAS MADE TO PAGE NOS. 199 TO 201 WHICH READ AS UNDER: 3.6 GROUND 6: THE LEARNED AO ERRED IN LAW BY NOT ACCEPTING THE QUANTITATIVE ADJUSTMENTS CLAIMED BY THE APPELLANT IN ACCORDA NCE WITH THE TRANSFER PRICING PROVISIONS ON ACCOUNT OF SIGNIFICANT DIFFERENCES IN CAPACITY UTILIZATION OF THE APPELLANT VIS - A - VIS THE COMPARABLE COMPANIES, AND ALSO FAILED TO APPRECIATE AND GIVE DUE COGNIZANCE TO FACTUAL DATA SUBMITTED ON ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 21 THE NUMBER OF YEA RS OF OPERATIONS OF THE COMPARABLE COMPANIES. IN THIS REGARD, WE WISH TO SUBMIT THAT FY 2007 - 08 WAS THE FIRST YEAR OF OPERATIONS FOR HITACHI INDIA BO AND IT WAS STILL IN THE START - UP GESTATION PHASE. THE SCALE OF OPERATIONS WAS ALSO QUITE LOW. HOWEVER, TH E COMPARABLES SELECTED IN THE TRANSFER PRICING REPORT, THROUGH THE SEARCH ' PROCESS, WERE COMPANIES WHICH HAVE BEEN IN THE BUSINESS OF RENDERING BUSINESS SUPPORT SERVICES FOR A FEW YEARS NOW. THESE COMPANIES OPERATED AT A HIGHER LEVEL OF CAPACITY UTILIZ ATION . IN THIS REGARD, WITHOUT PREJUDICE TO OUR PREVIOUS SUBMISSION, WE WISH TO SUBMIT THE FOLLOWING INFORMATION REGARDING FIRST YEAR OF OPERATIONS OF THE COMPARABLES FINALLY SELECTED BY THE LEARNED AO, IN THE TABLE GIVEN BELOW: COMPANY OPERATING MARGIN OF FY 2007 - 08 YEAR IN WHICH ESTABLISHED ACCESS INDIA ADVISORS LIMITED 45.97% 1996 EDUCATIONAL CONSULTANT (INDIA) LIMITED 5.20% 1981 ICC INTERNATIONAL AGENCIES LTD. 55.28% 1995 IDC INDIA LIMITED 14.87% 1986 INDIA TOURISM DEVELOPMENT CORPORATION LIMIT ED 9.43% 1966 PRIYA INTERNATIONAL LTD. 18.15% 1976 IN HOUSE PRODUCTIONS LTD 0.56% 2007 AS DEPICTED IN THE TABLE GIVEN ABOVE, ALL COMPANIES (EXCEPT IN HOUSE PRODUCTIONS LIMITED) ARE WELL ESTABLISHED COMPANIES WHO HAVE SPENT AN AVERAGE OF ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 22 MORE THAN TEN Y EARS IN THEIR RESPECTIVE INDUSTRIES. HENCE, WITHOUT PREJUDICE TO THE FACT THAT SOME OF THESE COMPANIES NEED TO BE REVISITED ON THE COMPARABILITY CRITERIA AND IN LIGHT OF INFORMATION NOW AVAILABLE IN THE PUBLIC DOMAIN, SIMPLY COMPARING THE OPERATING MARGIN OF SUCH COMPANIES WITH THAT OF THE APPELLANT WOULD NOT BE FAIR AND AN INFORMED VIEW NEEDS TO BE TAKEN BEFORE DECIDING ON THE ARM'S LENGTH CHARACTER OF THE TRANSACTIONS OF THE APPELLANT. THEREFORE, FOR A VALID AND PRUDENT TRANSFER PRICING ANALYSIS, IDEALLY ONLY IN HOUSE PRODUCTIONS LIMITED, WHICH COMMENCED ITS OPERATIONS IN 2007, SHOULD BE CONSIDERED AS COMPARABLE TO THE APPELLANT. THE OPERATING MARGIN EARNED BY THE APPELLANT (BASED ON PROJECTED FINANCIAL STATEMENT) IS 10.61% ON OPERATING COST. THEREFORE, SI NCE THE OPERATING MARGIN EARNED BY THE APPELLANT IS MORE THAN THE OPERATING MARGIN EARNED BY COMPARABLE (0.56%), THE SUBJECT INTERNATIONAL TRANSACTION COULD BE CONSIDERED TO BE AT ARM'S LENGTH FROM INDIAN TRANSFER PRICING LEGISLATION PERSPECTIVE. WITH RES PECT TO ACTUAL WORKING OF TESTED PARTY MARGIN WE WISH TO SUBMIT THAT THE RULES PROVIDE THAT AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF NONE OF THE DIFFERENCES BETWEEN THE TRANSACTIONS BEING COMPARED OR BETWEEN THE EN TERPRISES ENTERING INTO THE TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. WHERE THERE ARE MATERIAL DIFFERENCES BETWEEN THE TRANSACTION UNDER EXAMINATION AND THE UNCONTROLLED TRANSACTION, REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 23 THE APPELLANT COMMENCED IT S OPERATIONS IN ONLY FY 2007 - 08. ACCORDINGLY, THE APPELLANT BELIEVES THAT DUE TO UNDER - UTILIZATION O F ITS CAPACITY, ITS FINANCIAL STATEMENTS DO NOT REFLECT THE TRUE PROFITABILITY. HENCE, TO IMPROVE THE RELIABILITY OF THE RESULTS, WE HAVE ADJUSTED THE APPELLANT'S REPORTED FINANCIAL DATA TO ACCOUNT FOR UNUTILIZED OR UNABSORBED CAPACITY. THE ADJUSTMENT METH ODOLOGY IS DESCRIBED BELOW: THE COSTS FOR THE TESTED PARTY WAS CATEGORISED INTO FIXED AND VARIABLE COSTS BASED ON THE NATURE OF EXPENSES. THE FIXED COST OF APPELLANT WAS ADJUSTED USING THE RATIO OF CAPACITY UTLISATION OF 60% LASTLY, THE ADJUSTED FIXED CO STS ARE CONSIDERED AS PART OF COSTS TO ARRIVE AT THE ADJUSTED OPERATING PROFITS THE APPELLANT. THE ADJUSTED OPERATING PROFIT IS COMPUTED AS FOLLOWS: ADJUSTED OPERATING PROFIT = OPERATING INCOME - VARIABLE COST - ADJUSTED FIXED COST THE COMPUTATION OF AD JUSTED OPERATING MARGIN OF THE APPELLANT IS GIVEN IN THE TABLE BELOW: PARTICULARS OPERA TING ITEMS (A) EXCESS COST DUE TO UNUTILIZED CAPACITY (TO BE EXCLUDED) (B) NON OPERATING ITEMS NOT CONSIDERED (C) TOTAL (D=A+B+C) AS PER P & L ( E) INCOME SERVICE INCOME 24,893,357 - - 24,893,357 24,893,357 OTHER INCOME 917,620 - 917,620 917,620 TOTAL OPERATING INCOME 25,810,977 - - 25,810,977 25,810,977 EXPENDITURE PERSONNEL EXPENSES 8,723,692 5,815,794 - 14,539,486 14,539,486 RENT 3,977,773 2,651,849 - 6.629,622 6,629,622 AUDITOR REMUNERATION 235,956 157,304 - 393,260 393,260 ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 24 OFFICE MAINTENANCE CHARGES 528,052 352,034 - 880,086 880,086 ADMINISTRATION AND MANAGEMENT SUPPORT CHARGES 1,251,234 834,156 - 2,085,390 2,085,390 OTHER OPERATI NG EXPENSES 6,379,348 - 17,750 6,397,098 6,397,098 DEPRECIATION 308,748 205,832 - 514,580 514,580 FINANCIAL EXPENSES 38,078 25,386 - 63, 464 63, 464 TOTAL OPERATING COST 21,442,881 10,042355 17,750 31,502,986 31,502,986 OPERATING/NET PROFIT 4368,096 (10, 042355) (17,750) (5,692,009) (5,692,009) OPERATING PROFIT/OPERATING COST 20.37% AS DEPICTED ABOVE, THE ADJUSTED OPERATING MARGIN OF THE APPELLANT IS 20.37 PERCENT ON OPERATING COST. WITHOUT PREJUDICE TO THE FACT THAT THE COMPARABLES USED BY TH E LEARNED AO NEED TO BE EVALUATED AND REVISITED FOR COMPARISON WITH THE APPELLANT, EVEN IF ONE WERE TO COMPARE THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SELECTED BY THE LEARNED AO OF 20.3%, SINCE THE ARITHMETIC MEAN OF OPERATING MARGIN OF COMPARABLE CO MPANIES IS LESS THAN THE APPELLANT'S OPERATING MARGIN, THE SUBJECT TRANSACTIONS CAN BE CONSIDERED TO BE AT ARM'S LENGTH FROM AN INDIA TRANSFER PRICING PERSPECTIVE. 15. THE RELIANCE WAS ALSO PLACED ON THE DECISION OF THIS BENCH OF THE ITAT IN THE CASE OF MGE UPS SYSTEM INDIA PVT. LTD. VS DCIT, CIRCLE - 6(1) IN ITA NO. 5773/DEL/2011 FOR THE ASSESSMENT YEAR 2007 - 08 VIDE ORDER DATED 27.05.2016. 16. IN HIS RIVAL SUBMISSIONS THE LD. DR STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A) AND SUBMITTED THAT ALL THE ARGUMENTS OF THE ASSESSEE WERE CONSIDERED BY THE LD. ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 25 CIT(A) AND EVEN THE FIRST YEAR OF OPERATIONS OF BUSINESS PER SE IS NOT AN EXTRAORDINARY EVENT AND IT IS ONLY WHEN THE ASSESSEE SATISF IED THE BASIC CONDITION OF SHOWING PRESENCE OF SOME SPECI FIC EXPENSES CONFINED TO INITIAL PHASE THEN IT BECOMES ENTITLED TO CLAIM ADJUSTMENT. THE RELIANCE WAS PLACED ON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF JCB INDIA LTD. (2015) 59 TAXMANN.COM 211 . IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD NOT SHOWN THE REASON FOR CLAIMING THE AD - HOC ADJUSTMENT OF 60%. THEREFORE, THE AO RIGHTLY MADE THE ADDITIONS AND THE LD. CIT(A) WAS FULLY JUSTIFIED IN CONFIRMING THE SAME. 17. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL A VAILABLE ON THE RECORD. IT IS NOTICED THAT A SIMILAR ISSUE HAS BEEN DECIDED BY THIS BENCH OF THE TRIBUNAL IN THE CASE OF MGE UPS SYSTEM INDIA PVT. LTD. VS DCIT, CIRCLE - 6(1), NEW DELHI (SUPRA) WHEREIN THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 14 & 15 W HICH READ AS UNDER: 14. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. 14.1 WE FIND CONSIDERABLE FORCE IN THE SUBMISSION OF ID. COUNSEL FOR THE ASSESSEE THAT FOR DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIO NAL TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES IF THE COMPARABLE ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 26 SELECTED ARE OPERATING SINCE LONG AND THE ASSESSEE IS IN THE INITIAL STAGES OF OPERATION THEN CONSIDERABLE ADJUSTMENTS HAS TO BE MADE TO THE OPERATING EXPENSES IN ORDER TO GIVE DUE LEVERAGE TO THE CONTRIBUTION OF INCOME TO THE FIXED COST. UNLESS THE FIXED COST IS FULLY RECOVERED, THE BREAK EVEN CANNOT BE ARRIVED AT. 14.2 UNDER SUCH CIRCUMSTANCES, THE LOSSES INCURRED BY THE ASSESSEE CANNOT BE THE BASIS FOR FINDING OUT THE ARM'S LENGTH PRICE W ITHOUT MAKING DUE ADJUSTMENTS TO THE OPERATING EXPENSES SO AS TO BRING IT AT THE LEVEL PLAYING FIELD WITH THE COMPARABLES. IN THE COURSE OF HEARING THE ID. COUNSEL POINTED OUT THAT BREAK EVEN WAS ARRIVED AT IN NEXT YEAR AND ID. TPO HAS ACCEPTED THE TRANSAC TIONS BEING AT ARM'S LENGTH PRICE IN NEXT YEAR. ONE OF THE CONTENTIONS OF THE ID. CIT DR WAS THAT THIS PLEA WAS NOT TAKEN BEFORE ID. TPO BUT, AS REPRODUCED EARLIER, BEFORE ID. DRP, SPECIFIC OBJECTION TO THIS EFFECT HAD BEEN TAKEN. THEREFORE, MERELY ON THE GROUND THAT THIS PLEA WAS NOT TAKEN, ASSESSEE'S CLAIM CANNOT BE DENIED MORE PARTICULARLY BECAUSE NOT ALLOWING FOR THIS ADJUSTMENT WOULD GO AGAINST THE VERY PRINCIPLE OF COMPARABILITY CRITERIA CONTEMPLATED UNDER RULE 10B OF THE I.T. RULES. WE FURTHER FIND T HAT THOUGH ID. DRP HAD GIVEN DIRECTION FOR INCLUSION OF COMMISSION INCOME AS PART OF THE OPERATING INCOME BUT EXCEPT PAE LTD. ALL OTHER COMPARABLES WERE NOT HAVING ANY COMMISSION INCOME. 14.3 UNDER SUCH CIRCUMSTANCES, AS RIGHTLY SUGGESTED BY THE ID. COUNS EL FOR THE ASSESSEE, THE PROPER COURSE WOULD BE TO RESTORE THE MATTER TO THE FILE OF ID. TPO TO FIND OUT FRESH COMPARABLES HAVING TRADING AND COMMISSION INCOME BOTH AND INCLUDE THE SAME AFTER ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 27 MAKING ADJUSTMENTS AS MANDATED BY THE LAW. LD. TPO WILL ALSO EXA MINE THE DETAILS AS PER ANNEXURE 3 AND ANY FURTHER DETAILS AS MAY BE NECESSARY TO CONSIDER AND WILL MAKE ADJUSTMENTS TO SALARY AND RENTAL INCOME AND OTHER ADJUSTMENTS SO AS TO BRING THE PROFITABILITY OF ASSESSEE INCONFORMITY WITH THE PROFITABILITY OF THE C OMPARABLE AFTER PROVIDING DUE OPPORTUNITY OF HEARING TO THE ASSESSEE. 15. IN THE RESULT, THE GROUNDS RELATING TO TRANSFER PRICING ADJUSTMENTS ARE ALLOWED FOR STATISTICAL PURPOSES IN TERMS OF AFOREMENTIONED OBSERVATIONS. 18. IN THE PRESENT CASE ALSO THE ASSESSEE HAS POINTED OUT SPECIFIC INSTANCES WHICH WERE NOT CONSIDERED BY THE LD. CIT(A) AND CERTAIN INFORMATIONS RELATING TO COMPARABLES WHICH WERE AVAILABLE AT THE TIME OF PREPARING THE TP STUDY WERE NOT LATER ON AVAILABLE AND FURNISHED TO THE LD. CIT(A), BUT THOSE WERE NOT APPRECIATED IN RIGHT PERSPECTIVE. MOREOVER, FROM THE SUBMISSIONS OF THE ASSESSEE BEFORE THE LD. CIT(A) AS DISCUSSED IN THE FORMER PART OF THIS ORDER, IT IS CLEAR THAT THE COMPARABLES SELECTED BY THE TPO WERE OPERATING SINCE LONG AND THE ASSESSEE IS IN THE INITIAL STAGES OF ITS OPERATION THEN CONSIDERABLE ADJUSTMENTS HAS TO BE MADE TO THE OPERATING EXPENSES IN ORDER TO GIVE DUE LEVERAGE TO THE CONTRIBUTION OF INCOME TO THE FIXED COST SO AS TO BRING IT AT THE LEVEL PLAYING FIELD WITH THE C OMPARABLES. WE, THEREFORE, CONSIDERING THE TOTALITY OF THE FACTS AND BY KEEPING IN VIEW THE DECISION OF THE ITA NO. 3333 /DEL /201 4 HITACHI HIGH TECHNOLOGIES 28 CO - ORDINATE BENCH IN THE AFORESAID REFERRED TO CASE OF MGE UPS SYSTEM INDIA PVT. LTD. VS DCIT, CIRCLE - 6(1), NEW DELHI (SUPRA), DEEM IT APPROPRIATE T O SET ASIDE THIS CASE BACK TO THE FILE OF THE AO/TPO TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 19 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ( ORDER PRON OUNCED IN THE COURT ON 28 /0 8 /2017 ) SD/ - SD/ - ( AMIT SHUKLA ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DAT ED: 28 /08 /2017 *SUBODH* COPY FORWARDED TO: 1 . APPE LLANT 2 . RESPONDENT 3 . CIT 4 . CIT(APPEALS) 5 . DR: ITAT ASSISTANT REGISTRAR