TaxTMI 
TaxTMI 
TaxTMI 
2014 (11) TMI 587
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.... The case was referred to the Transfer Pricing Officer (TPO) u/s. 92C(1) with prior approval of CIT-II. The assessee submitted before the Assessing Officer/TPO that the assessee carried out the economic analysis and has summarised it as under: Sr. No. Nature of international transaction MAM PLI Margin of taxpayer Margin of compare-ables 1. Software development, software support and related services. TNMM OP/TC 25.34% 9.80% 3. It was submitted that after applying certain filters, the assessee has short-listed around 13 comparables, arithmetic mean PLI (OP/TC) was computed at 9.80% s against the PLI of the taxpayer at 25.34%. Accordingly, it was stated that the transactions pertaining to purchase and sale are at arm's length. Therefore, no adjustment is proposed to the transactions pertaining to operations. 4. Further it was submitted that as per the audited statement of accounts the financials of the assessee are as under: Description Amount (Rs.) Operating Revenue 42,69,56,940 Operating Cost 40,01,48,084 Operating Profit 2,68,08,856 OP/OR (%) 6.28 OP/OC (%) 6.70 5. The TPO rejected the Transfer Pricing (TP) Study of the assessee on the....
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....ave export sales less than 75% of the safes were excluded. 5. Companies that are functionally different from the taxpayer were excluded. 6. Companies that are having peculiar economic circumstances were excluded. 7. The TPO shared information obtained u/s. 133(6) from the comparable companies with the assessee and on this basis rejected claim of the assessee that the comparable data used was not in public domain. The TPO further rejected the claims of the assessee for working capital adjustment and risk adjustment. The TPO also rejected the segmental accounts (AE and Non-AE segments) of the assessee while computing margins. The TPO also held a number of items of income of the assessee to be non-operative in nature such as interest, dividend, provisions no longer written back, gain on sale of assets, income from investment, gain on re-valuation of assets, other incomes pertaining to operations and excluded the same from operating revenue as well as held a number of expenditures to be non-related to operations and excluded the same from operating expenses. The TPO also held that the foreign exchange loss which the assessee had claimed as non-operative to be related to operations a....
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....ssed u/s. 153(3) r.w.s. 144C(1) of the Act before the DRP. The DRP considered each of the grounds of the assessee consisting of 23 grounds and concluded as follows: "Based on the above discussion, the directions of the Panel as per the provisions of s. 144C(5) of the Act is as follow: All the objections of the assessee are rejected." 13. Aggrieved, the assessee filed the present appeal before this Tribunal by raising the following grounds of appeal: 1. That the order of the Deputy Commissioner of Income Tax, Circle 2( I), Hyderabad (hereinafter referred to as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP'), Hyderabad in so far as it is prejudicial to the Appellant, is contrary to law, facts and circumstances of the case. 2. Transfer Pricing Adjustments 2.1. General Grounds 2.1.1 The assessment order passed by the AO under section 143(3) read with section 144C and read with the order passed by the Learned Transfer Pricing Officer (hereinafter referred to as 'TPO'), under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') is bad in law and void ab-initio. 2.....
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.... granting the working capital adjustment. 2.4 Grant of Working Capital Adjustment 2.4.1 Based on the facts and the circumstances of the case and in law, the Learned AO/DRP/TPO erred in not granting the working capital adjustment to the net profit margins of the comparable companies as provided under Rule IOB(l)(e) read with Rule 10B(2)(b). 2.4.2 Based on the facts and the circumstances of the case and in law, the Learned DRP/AO/TPO erred in not allowing working capital adjustment to the margins of the comparable companies by ignoring the fact that the Appellant is a captive service provider and furnished the quantum of working capital adjustment. 2.5 Filters 2.5.1 The Learned AO/ DRP erred in confirming the TPO's stand in adopting the following filters for selection of comparable companies, which have been objected to by the Appellant: 2.5.1.1 Rejection of comparable companies which have onsite revenues greater than 75% of the export revenues. 2.5.1.2. Rejection of comparable companies which have more than 25% related party transactions of the total operating income. 2.5.1.3. Rejection of comparable companies which have diminishing revenue /persistent losses for the per....
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....tions of the Software Development Services business of the Appellant. 2.8.2 The Learned AO/DRP/TPO erred in disregarding the differences in risk profile of the Appellant and the alleged comparable companies selected by him, by not allowing the risk adjustment claimed by the Appellant 2.8.3 Without prejudice to ground no. 2.8.2, the Learned AO/DRP erred in not granting an adjustment of I per cent which was granted by the Jurisdictional Tribunal in case of Hellosoft India Private Limited (ITA No. 645/HYD/2009), which is binding on the Learned AO/DRP/TPO. 3. The Learned DRP erred in law and on facts by summarily rejecting the Appellant's objections and disregarding the material placed on record thereby not following the procedure laid down u/s 144C(5), 144C(6) & 144C(7) of the Act. 4. The Learned AO erred in granting credit in respect of taxes deducted at source ('TDS') only to the extent of Rs. 18,66,654 as against Rs. 18,94,969 claimed in the Return of Income. 5. The Learned AO/ DRP erred in computation of interest liability under sections 234B and 234C. 14. We have heard both parties. 15. Ground No. 1 and 2.1 which consists of ground Nos. 2.1.1 up to 2.1.3 are ge....
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....nancials, the TPO considered the expenditure on the pro-rata basis. This Panel and the earlier Panel have upheld the action of the TPO in similar other cases and accordingly, we decline to interfere on this ground." 18. In 3i Infotech Ltd. v. ITO in ITA No. 21/Mds/2013 dated 7.5.2013, the ITAT Chennai Bench held that segmental information provided must be taken and only the AE transactions ought to be considered, unless it was shown by the TPO/DRP that there were specific issues with the same. The ITAT Chennai Bench held as follows: "29. We, thus, find that the lower authorities were not justified in not excluding profit or loss in respect of domestic transactions for determining the profit declared by the assessee in respect of AE transactions. They were not justified in adopting the profit level achieved by the assessee in respect of all its transactions including domestic transactions as the profit level declared in respect of AE transactions. Further, we find that the assessee had furnished separately its working of the profit declared by it in respect of its AE transactions before the TPO as well as before the DRP. The lower authorities could not point out any specific defec....
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....in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by bringing any material on record before us. It is the contention of the learned counsel for the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the p....
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....erent. 25. The co-ordinate Bench of the Tribunal in Capital IQ Information Systems India Pvt. Ltd. v. DCIT, in ITA No. 1961/Hyd/2011 dated 23.11.2012 has held as follows: "The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd. (supra), while considering a dispute of similar nature, observed as follows- "The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company......" Following the aforesaid decision of the Bangalore Bench of the Tribunal, the Hyderabad Bench of the Tribunal held in the case of Four Soft Ltd. (supra) in the following manner- "16. With regard to the exclusion of gain on account of foreign exchange fluctuation while computing the net margin, as claimed by the assessee, we find that the exchange fluctuation gains arise out of several factors, for instance, realisation of export proceeds at higher rate, import dues p....
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....s which materially affect the profit margin in the open market." 28. Hence in the instant case, we are of the opinion that appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied. Hence we set aside this issue to the TPO with a direction to allow requisite adjustments on account of the impugned "working capital" while determining the margins of comparable. 29. With respect to ground No. 2.5, with regard to filters, the assessee has objected to the filters adopted by the TPO specifically the onsite revenues greater than 75% of the export revenues filter, 25% related party transactions filter and diminishing revenue persistent losses filter. The assessee has in ground No. 2.5.2 has raised the ground that the TPO has not correctly applied certain filters such as employees cost less than 25% of the total turnover and export sales less than 75% of the turnover. The assessee has also objected to the filters applied by the TPO. 30. We find that the TPO has discussed about the filters in details their applicability from page Nos. 29 to 41 of the T....
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....ssessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company." 33. Following the decision in the case of CISCO Systems (India) Pvt. Ltd. (supra), we reject the Bodhtree Consulting Ltd., as a comparable in the instant case. Hence ground No. 2.6.1 of the assessee is allowed. 34. Ground No. 2.6.2.. In this ground the assessee objected to TPO selection of three comparable companies viz., CompU-Learn Tech India Ltd., (2) Infosys Technologies Ltd. and (3) Kals Information Systems Ltd., on the ground that these are functionally different from the assessee-company. 35. The Bangalore Bench in the case of CISCO Systems (India) Pvt. Ltd. (supra) for A.Y. 2009-10 while rejecting Infosys Systems as comparable has stated as follows: "26.2 Infosys Ltd.: As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns sign....
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....software products and the break up of such revenues is not available; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and h....
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....it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made o....
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.... considering the provision for bad and doubtful debts and bad debts as non-operative expenditure. 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. v. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not see any justification for excluding provisions written back in the profit and loss account as not forming part of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted. 107. The next item relates to balances written back. In our considered opinion, finding given in respect of prov....
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....priate to direct the TPO to consider including this company as a comparable afresh in the light of the facts brought to our notice by the ld. counsel for the assessee. We hold and direct accordingly.: 44. Following the decision cited above, we set aside the issue of comparability of CG-Vak Solutions & Exports Ltd. to the TPO for correct application of employee cost filter. 45. With respect to Prithvi Information Solutions Ltd., we remit the issue back to the TPO for fresh application of employee cost filter and onsite revenue filter after giving opportunity for the to submit its claim that Prithvi Information Solutions Ltd., is a correct comparable which satisfied the filters of the TPO. 46. Ground No. 2.7 is not pressed by the assessee and the same is dismissed as not pressed. 47. With respect to ground NO. 2.8, the assessee has sought for risk adjustment due to difference in risk profile of the assessee and the comparable cases selected. We rely on the decision in the case of Excellence Data Research v. ITO, ITA No. 159/Hyd/2014 for A.Y. 2009-10 wherein it has been held as follows: "21. With reference to ground No. 2.5 on risk profile, learned counsel for the assessee conten....