TaxTMI 
TaxTMI 
2011 (9) TMI 453
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....which was duly served upon the assessee. The assessee company at the relevant time was engaged in providing software development services. It has provided services to its associate enterprises only. Assessing Officer found value of international transactions representing services provided by the assessee to its associate enterprises at Rs. 6,65,81,615. He made a reference to the learned TPO for determining arm's length price in respect of the international transaction under sec. 92CA(3) of the Income-tax Act, 1961. Learned TPO on an analysis of the record found that assessee has used transactional net margin method (TNMM) for determination of its arm's length price of the international transaction undertaken by it with its associated enterprises. It chose profit level indicator by dividing operating income with operating cost. In its TP study report, assessee has selected six comparable for the purposes of bench marking. Learned TPO did not find any defect in the method of TNMM adopted by the assessee for computation of arm's length price. He also accepted the manner in which assessee calculated the PLI i.e. operating profit/operating cost. He also considered four comparable out of....
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....ine Media Solutions 13.29 4 ICSA Software 14.72 Mean 10.41% 3. The assessee has shown its operating profit at 1.96% whereas the mean operating profit margin of comparables worked out by him is of 10.41%. He calculated the arm's length price as under: "4.2 The arm's length price of services provided to its associated enterprises is calculated as under: Total cost as calculated above Rs. 6,53,56,481 (a) Operating Profit @ 10.41% Rs. 68,03,610 (b) Arm's Length Sales (a) +(b) Rs. 7,21,60,091 (c) 95% of (c) Rs. 6,85,52,086 (d) Sales booked by the assessee Rs. 6,65,81,615(e) Since the sales is less than the permissible limit in the tolerance band the Arm's Length value of sales is to be taken at the arithmetic mean which is (c) above. Difference (c) - (e) Rs. 55,78,476" 4. On the basis of the recommendations made by the TPO, learned Assessing Officer has made adjustment in the arm's length price shown by the assessee. Dissatisfied with the action of the Assessing Officer, assessee carried the matter in appeal before the learned CIT(Appeals). It con....
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....e Software Exports Ltd., he pointed out that the assessee did not consider the stock adjustment of Rs. 4,02,370. Similarly, assessee has included the miscellaneous expenses of Rs. 3,52,262 but did not include other income of Rs. 5,70,928. If these adjustments are carried out in a logical way then a higher profit margin would come up. After going through the details submitted by the Learned DR, we confronted the assessee and directed learned counsel for the assessee to prepare a chart in tabular form exhibiting all these details and how assessee has included or excluded certain items. The learned counsel for the assessee has placed on record two charts which read as under: - FIRST RAIN SOFTWARE CENTRE PRIVATE LIMITED 8 A/Y- 2003-04 PLI OF COMPARABLES Operating Income sales Other Income (Note 1) Stock adjustment Operating Cost Purchases Stock Adjustment (Note 2) operating expenses/ personnel exp Administration expenses (Note 3) Depreciation Miscellaneous expenses (Note 4) Operating Profit OP/TC ACE Software Exports Limited Online Media Solutions Assessee 42,184,267 - TPO (in crores) 4.22 0.06 ld.DR 42,184,267 ....
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..... In that case the OP/TC of four comparables would be as follows: FIRST RAIN SOFTWARE CENTRE PRIVATE LIMITED A/Y-2003-04 PLI COMPARABLES Operating Income sales Other Income Stock adjustment Operating Cost Purchases Stock Adjustment operating expenses/personnel exp Administration expenses Depreciation Miscellaneous expenses Operating Profit OP/TC ACE Software Exports* Limited Online Media Solutions ICSA Ld DR 42,184,267 570,928 402,370 Alternative 42,184,267 - 402,370 Ld. DR 17,058,988 726,942 Alternative 17,058,989 - Ld. DR 34,191,030 70,000 Alternative 34,191,030 - 43,157,585 42,586,637 17,785,931 17,058,989 34,261,030 34,191,030 (402.370) 24,720,037 9,421,351 4,553,622 - 24,720.037 9,421,351 4,553,622 347,602 1,976,078 8,317,697 5,477,415 1,976.078 8,317.697 5,477,415 946,437 23,110,589 2,349,152 3,160,564 1,230,584 23,110,589 2,349,152 3,160,564 1,230,584 237,320 38,292,640 39,042,612 15,771.190 16.717.627 29,850,889 30,085,209 4,864,925 12.70 3,544,025 9.08 2,014,741 12.77 341.362....
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....ome. It could not be included in the operating cost. On this, Learned DR did not dispute. The only dispute now remains how much miscellaneous expenses are to be excluded from the operating cost. There is no dispute that expenses which are not relatable to earning of operating income are to be excluded for working out the profit margin. The learned counsel for the assessee demonstrated that all the expenses debited under the head "miscellaneous expenses" cannot be said that they have no nexus with operating income. There are certain expenses which are necessary for maintaining the status of the company. We find that exact details of expenses could not be ascertained in respect of comparables. These details have been taken out from capital line database and not directly from there books of account. There are small adjustments. The determination of arm's length price is not based on any mathematical formula which could be achieved with mathematical precession. It is a scientific mechanism based on comparables data which on small variation give different results. Such as, had the filter claimed by the assessee in respect of employees cost is being adjudicated then there would not be an....