TaxTMI 
TaxTMI 
2014 (8) TMI 863
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....IT (A) erred in neither considering nor passing a speaking order on the adjustment in the operating margin of CDR unit, as has been asked for by appellant, in relation to in- house work performed by CDR unit of the company for its manufacturing plant at Goa and thereby disregarding revenue of Rs. 23,03,510/-. 4. The Ld. CIT (A) erred in applying the upper filter for turnover of Rs. 200 crore for selecting comparable companies as against the turnover of the appellant unit that was only Rs. 1.34 crore. 5. The Ld. CIT (A) erred in confirming the stand of AO on selecting Vishal Information Technologies and Tulsyan Technologies as comparable companies (vide para 38 on page 13 of the appeal order). 6. The Ld. CIT (A) erred in neither considering nor passing a speaking order on the relief for business & operational risk adjustment @ 5.25%, as was asked for by the appellant. 7. The Ld. CIT (A) erred in not considering the functional differences between the appellant's CDR unit and comparable companies selected by TPO." 3. In Revenue's appeal, the Revenue has taken the ....
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....1.1.2008 suggesting transfer price adjustment of Rs. 3,75,96,334/-. The AO added the said amount in the order passed u/s 143(3). Besides this, the AO also disallowed depreciation on the Goodwill amounting to Rs. 47,19,133/-. The Assessee went in appeal before the CIT(A). CIT(A) has partly allowed the appeal of the Assessee. Both the parties have come in appeal before us. 5. Ground no. 3 in Revenue's appeal filed originally and ground nos. 1-4 in the grounds of appeal filed by the Revenue on 7.2.2013 and ground nos. 2-7 in the Assessee's appeal relate to the common issue relating to adjustment in the operating margin of CDR unit and thereby making addition therein to the extent of Rs. 19,05,947/- by the AO which was by taking average operating margin @ 23.68% while the CIT(A) directed the AO to take this margin @ 20.96% and sustained the addition on that basis by holding as under : "28. I have considered the appellant's arguments on the turnover filter adopted by the TPO. While I consider that use of this filter is valid, I am of the opinion that if there is a limit at the lower end of turnover for identifying comparables, there is no reaso....
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....sp; 31. The appellant further submitted that the comparables selected by the TPO were incorrect and liable to be rejected for the following reasons: M/s Allsec Technologies Ltd. 32. It was argued that M/s Allsec Technologies Ltd. had a turnover of Rs. 57.56 crore and should therefore be rejected, applying the upper turnover filter of Rs. 20 crore. The TPO had incorrectly computed the margin of this company at 29.85%, as against the correct margin of 26.91%. 33. I am not in agreement with the appellant that given its segmental turnover of Rs. 1.34 crore, a turnover range of Rs. 1 crore to Rs. 20 crore ought to be adopted. As this goes against the basis laid down in Genisys Integrating Systems (India) (P.) Ltd. (supra) for considering companies within the turnover range of Rs. 1 crore to Rs. 200 crore, I reject this argument. However, I find from a perusal of the company's profit and loss account that its operating income was Rs. 57,55,24,067, as against operating expenses of Rs. 45,35,00,314, resulting in an operating profit of Rs. 12,20,24,293. Thus the ratio of operating margi....
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....chnologies Ltd. were concerned, it was noticed from their annual accounts that these companies had outsourced a considerable portion of their business and as the assessee had carried out the entire operations by itself, these two cases were rightly excluded. 38. I have carefully considered the appellant's submissions. Though employee cost may form a significant portion of the total costs of a software company, the problem lies in correctly gauging such costs. All companies do not follow a uniform policy in classifying employee cost, but categorise it variously as administrative, marketing, operating, or software development expenses and not necessarily as personnel expenses in the profit and loss account. Further, as in these two cases, companies may outsource tasks rather than employ their own personnel and outsourcing costs may be disclosed under heads like legal and professional charges, contracts costs, etc. As there is no way of tracking or identifying employee costs, companies may not be particularly amenable to be used as a filter in the selection or rejection of comparables. I therefore reject the appellant's argument that the two compani....
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....e hon'ble Delhi Bench of ITAT had held in the case of ACIT v. CRM Services India P. Ltd. 14 Taxmann.com 96, that RPT of the company was 22.28% of its operating income in AY 2004-05, which rendered it incomparable as the tolerable limit of related party transactions would be in the vicinity of 10% to 15%. As M/s Nucleus Netsoft had substantial RPT in the earlier year, it was logical to conclude that the company would have had substantial RPT in the current year as well, as facts and circumstances of the case had remained same, as evident from the annual report of the company. In the absence of adequate details for analysis, this company should be rejected as comparable. 44. I do not agree with the appellant's argument about the export revenue filter. The TPO has mentioned on page 63 of his order that he had thought it proper to exclude companies that did not have export turnover that was at least 25% of their total turnover in view of the fact that the appellant was a 100% export company. The appellant has misinterpreted the filter to imply that companies with export turnover of more than 25% of total revenue were rejected, whereas the actual impl....
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....product manufacturer and derives 98% of its revenue from manufacturing operations. It has set up a division in the year 1998-99 for providing in-house support engineering services in the field of product quality assurance, designing and product development. The said division is internally named as CDR Division. From this division, the Assessee has generated revenue from export services amounting to Rs. 1,34,20,939/-. This division was also rendering services to the other divisions of the Assessee in India. The total operating costs incurred by the Assessee was to the extent of Rs. 1,23,92,372/- which has not been disputed by the TPO. For this, our attention was drawn towards the order the TPO and it was contended that while computing the operating margin, the AO has computed the operating profit only in respect of the said activities by reducing from the revenue received from support services, the operating margin @ 8.30% while in fact if the notional revenue was worked out in respect of the services rendered to the Assessee's Goa plant at the same rate at which services were rendered to the AE abroad, the operating profit would have come @ 26.06%. It was contended that on an a....
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.... 26.91% Objection of Appellant -There was a calculation mistake in the computation of Operating margin by TPO. TPO calculated margin percentage @ 29.85% while the correct calculation comes to 26.91%. It was pointed out by appellant to CIT(A) and he agreed to correct it. (para 32 & 33 of appeal order). Relief was granted by CIT(A). 2 Saffron Global Ltd 27.78 24.88% No issue 3 Vishal Information Technologies Ltd 20.82 45.62% Objection of Appellant - Company's business model is different from that of assessee and the selected company had super profit. But CIT (A) did not agree to the objection of the appellant. Company enjoying tax free platform - income exempt u/s 10A. Relief was denied by CIT(A). 4 Cosmic Global Ltd 1.9 17.02% Objection of Appellant - Company's business model is different from that of assessee - But CIT(A) did not agree to the objection of the appellant. Company enjoying tax free platform - income exempt u/s 10A. Relief was denied by CIT(A). 5 Transworks Information Services Ltd 108.23 2.81% No issue 6 Wipro BPO Solutions Ltd 617.71 0.00% Objection of Appellant - Select....
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....g with selecting or rejecting potential comparables. The ld. AR also relied in this regard on the following decisions of the Tribunal in which criteria of size has been recognised as one of the selection criteria : (i) DCIT vs. Quark Systems Pvt. Ltd., 2010-TIOL-31-ITAT-CHD-SB (ii) Genisys Integrating Systems (India) (P.) Ltd. v. DCIT [2012] 20 taxmann.com 715 (Bang.)- Super profit making companies to be excluded. (iii) E- gain Communications Pvt. Ltd. v. ITO 118 TTJ 354 (Pune)- the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. (iv) M/s. Sony India (P) Limited v DCIT, 114 ITD 448 (Delhi) (v) ITO v CRM Services India P Ltd. ITA No. 4068/Del/2009 Whether where turnover of assessee in inst ant year amounted to Rs. 31.64 crores, whereas turnover of comparable case from similar business was Rs. 91.24 lakhs only and thus, having difference of about 33 times in turnover from same business, such a case could not be taken as a comparable case (14.2) ....
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....nformation Technologies Ltd. should also be ignored. In this regard reliance was placed on the following cases : (i) ACIT v. Maersk Global Services Centre (ITA No. 3774/M/2011 & CO 111/M/2011) "48. Insofar as the cases of Tulsyan Technologies Limited and Vishal Information Technologies Limited are concerned, it is noticed from their annual accounts that these companies outsourced a considerable portion of their business. As the assessee carried out entire operations by itself, in our considered opinion, these two cases were rightly excluded." (ii) Sapient Corporation Pvt. Ltd. vs. DCIT (ITAT Delhi) - held that loss - making & super - profit companies are not comparable. In brief, it was contended at the cost of repetition that :- 1. Companies having turnover exceeding 20 crore should not considered as comparable to that of the assessee's unit that had a turnover of Rs. 1.34 crore only. 2. Vishal Information Technology that earned operating margin of 45.62% should be considered as super profit making company ....
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....harge more for its services and adjustment for the risk factor should also be made. The Assessee has taken the risk factor also before the CIT(A) but CIT(A)'s order is silent on this aspect. Reliance was also placed in this regard on the decision of the Bangalore Tribunal in the case of Philips Software Centre Pvt. Ltd. (supra) in which it was held that the difference between the prime lending rate and the bank rate can be considered as risk premium. Thus, it was contended that the grounds taken by the Assessee be allowed. 5.2 The ld. DR, on the other hand, relied on the order of the TPO and vehemently contended that the CIT(A) was not correct in even allowing relief to the Assessee. In this regard an adjustment u/s 92CA was required to be made. The Assessee has incurred operating costs of Rs. 1,23,92,372/- in the CDR unit and if the adjustment at arm's length margin @ 23.68% is made, the revenue received should have been Rs. 1,53,26,886/- against which the Assessee has received revenue of Rs. 1,34,20,939/- from the associated enterprises. It was contended that the transfer pricing cannot be an exact science. Evaluation of the transaction through which process of determi....
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....oad is Rs. 1,34,20,939/-, if we apply the same rate in respect of the services rendered to Goa plant, the nominal revenue which should have been credited to CDR unit and debited to the Goa plant comes to Rs. 22,01,240/-. In our opinion, while computing the true profit of a particular division, it is necessary that the value should be assigned in respect of services received by the other unit and it should be taken as part of the revenue of that particular unit. In this case, we noted that the TPO has taken the total operating cost of the CDR unit which consists of the cost not only in respect of the services rendered to the associated enterprises but also in respect of the services rendered to the Goa plant by the CDR unit. Since the total cost of the CDR unit has been taken, therefore, the notional revenue in respect of Goa plant should also be considered while computing the net operating profit. If the notional revenue for rendering services to the Goa plant is taken into account, we noted that the operating profit on the basis of the formula adopted by the TPO from the CDR unit will work out as under : Before considering In House service to Goa Plant After consid....
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....atio of the marketing expenses to non-AE sales worked out to 22%, the Assessee made a conservative downward adjustment of 20% to the sale price of unrelated parties for applying the comparable uncontrolled price method. The TPO has considered only the net marketing expenses of Rs. 50,18,384/- relating to the Dubai office as a like amount had been debited under the head advertisement, publicity and other selling expenses in the Profit & Loss account and allowed an adjustment in ALP of only 4.08%. Before CIT(A), it was contended that the Assessee had marketing office at Dubai which also rendered services to other AEs worldwide to market their product in Middle East region. The Assessee had charged commission from such AEs @ 10% and earned income of Rs. 2.02 crore therefrom. The TPO had deducted this income from the marketing expenses of Dubai office and taken the net balance for working out the expense ratio. However, it could not have been done. Office expenses remained unchanged irrespective of the income or recovery. Pentair Italy had only compensated the Assessee @ 10% of its sales in the region and the correct ratio of the expenses to revenue was claimed @ 17.64% instead of 4.08....
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....ed in the current AY, the adjustment for marketing expenses ought to be as follows : 1 Expenses of marketing office in Dubai (Rs.) 2,52,83,510 2 Commission income from AEs (Rs.) 2,02,65,126 3 Net expenses of Dubai office (Rs.) [1-2] 50,18,384 4 Expenses of marketing representative in Europe (Rs.) 54,07,237 5 Expenses of marketing from India office (Rs.) 1,81,57,262 6 Total marketing expenses attributable to non-AE exports (Rs.) [3+4+5] 2,85,82,883 7 Non-AE export sales (Rs.) 23,21,91,702 8 Ratio of net marketing expenses to non-AE export sales (%) [(6/7)*100] 12.31 16. It is to be inferred from the TPO's remand report discussed above that in allowing an adjustment of 4.06% for marketing expenses, the TPO had wrongly considered the expenses incurred by the appellant only in Dubai office, while the CIT(A)'s direction was to adopt total marketing expenses, including those incurred in the company's European and Indian offices. Secondly, the TPO had netted off the Dubai office expenditure against the Dubai office income, without considering the ratio of total marketing ....
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....t in appeal before the CIT(A). CIT(A) deleted the addition by observing as under : "23. On a careful consideration of the appellant's arguments, I find little substance in the TPO's analysis in this segment. He has observed on page 20 of his order that the taxpayer company had selected RPM in respect of purchases made from its AEs, but on page 53 of the TP documentation, the appellant has clearly stated that CUP method was applied for imports made by the company from the AEs. Annexure-5 to Form 3CEB gives details of comparative prices of imports from AEs and purchases from direct vendors for analysing prices under CUP method. Further, on page 21 of his order, the TPO himself mentions that the ALP of international transactions representing purchases from AEs was determined under CUP method. 24. He has considered only eight out of 19 products listed in Annexure-5 where prices paid to the AEs happened to be higher than those paid to local vendors, but has simply ignored 11 other products where prices paid to the AEs happened to be much lower than domestic prices. If the average of prices paid for all the 19 products were ....