TaxTMI 
TaxTMI 
2015 (3) TMI 839
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....h an associate enterprise, the Assessing Officer called for the necessary information/ details for application of transfer pricing provisions. The assessee conducted its transfer pricing study in which transactional net margin method was used for benchmarking the international transaction. The assessee in the transfer pricing study identified 39 comparables out of which 9 companies were selected as per details given below : Sl. No. Name of the company Operating cost PBIT % of PBIT 1 Allsec Technologies Ltd. 88.60 24.79 27.98% 2 Ask Me Info Hub. Ltd. 2.98 0.01 0.34% 3 Godrej Upstream Ltd. 17.97 0.46 2.56% 4 NIIT Smartserve Ltd. 53.85 2.21 4.10% 5 Nipuna Services Ltd. 172.57 0.59 0.34% 6 Optimus Global Services Ltd. 33.07 (1.42) -4.29% 7 Transwork Information Services Ltd. 176.03 21.12 12.00% 8 Sparsh BPO Services Ltd. 81.70 5.76 7.05% 9 HTMT Global Solution Ltd. 253.16 12.32 4.87% Arithmetic mean 6.10% 3. The assessee submitted that the price charged by the assessee from the associated enterprise was cost plus a 7 per cent. mark-up. It was pointed out that margin on operating cost in case of compara....
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....PO segment were doing high end job, and therefore, these companies were not functionally comparable. The assessee referred to the comparative billing rates as per NASSCOM report 2003-04 as per which the billing rates in respect of high end services such as content development and knowledge process outsourcing (KPO), which were very high. In relation to Maple E Solution Ltd., it was submitted that business operations of this company were controlled by Triton and, therefore, it was submitted that this company should be excluded on the ground of related party transactions. The assessee also requested for working capital adjustments and submitted that after making such adjustments, the margin in the case of the assessee would be 8.86 per cent. after including Spanco Ltd. which was comparable to the assessee. It was also submitted that in case the adjustment was made on account of cost incurred by the associated enterprise, the margin would be 17.04 per cent. The Assessing Officer, however, did not accept the contentions raised. It was observed by him that transaction of Maple E Solution Ltd. with Triton were only on capital account and, therefore, it will not have any impact on the rev....
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.... Consulting Ltd. (Seg). 29.58% 27 ICRA Techno Analytics Ltd. (Seg) 12.24% 28 Infosys BPO Ltd. 28.78% 29 Maple E Solutions Ltd. 34.05% 30 Triton Corp. Ltd. 34.93% 31 Wipro Ltd. (Seg). 29.70% Arithmetic mean 25.25% 5. The Transfer Pricing Officer accordingly made adjustment on account of transfer pricing at Rs. 50,22,36,923 on the basis of mean margin at 25.25 per cent. The Assessing Officer, thus, in the assessment order passed made an addition of Rs. 50,22,36,923 to the total income. 6. The assessee disputed the decision of the Assessing Officer making adjustment on account of transfer pricing and raised several objections before the Commissioner of Income-tax (Appeals). The first objection was regarding applicability of transfer pricing provision in the case of the assessee whose income was exempt under section 10A of the Income-tax Act. It was submitted that the assessee had no advantage in transferring profit to low tax jurisdiction as the income of the assessee was exempt. The assessee placed reliance on the decision of the Tribunal of the Bangalore Bench in the case of Philips Software Centre P. Ltd. v. Asst. CIT [2008] 26 SOT 226 (Bangalore....
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....the Transfer Pricing Officer on the ground that these were cases of exceptionally high profit margins as per details given below, reproduced from page 10 of the Commissioner of Income-tax (Appeals). Sl. No. Name of the company Operating profit (%) 1. Eclerx Services Ltd. 90.34% 2. I Services India P. Ltd. 50.27% 3. Moldtek Technologies Ltd. 113.49% 4. Vishal Information Technologies Ltd. 51.19% 8.1. The assessee requested that the above exceptionally high profit cases should be excluded. The assessee placed reliance on several decisions of the Tribunal in support of the said proposition. The Commissioner of Income-tax (Appeals) however, did not accept the contentions raised. It was observed by him that the high/low profit alone was not a factor for excluding the comparables and only in cases where such high/low profit was on account of factors affecting to the comparability of the companies, these cases could be excluded. The Commissioner of Income-tax (Appeals) placed reliance on the decision of the Mumbai Bench of the Tribunal in the case of Deputy CIT v. BP India Services P. Ltd. [2011] 48 SOT 253 in I.T.A. 4425/Mum/2013. The Commissioner of Income-tax (A....
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....l companies selected by the Transfer Pricing Officer were in information technology enabled services/BPO segment and therefore these were functionally comparable. The Commissioner of Income-tax (Appeals) also observed that the assessee had submitted functional details of the companies on the basis of the details available on the website which was not correct as details only from audited accounts should be taken. After considering the details as per audited accounts, the Commissioner of Income-tax (Appeals) observed that in many cases functions of the company had been mentioned as computer software but in fact these were not in the development of computer software. He referred to Accentia Technologies Ltd. which had most of the revenue from medical transcriptions and therefore it was not a software company. Similarly Apex Knowledge Solution Ltd. was engaged in contact management and not providing any computer software services. The assessee had mentioned that Genesys International Corporation Ltd. was providing computer software services but actually the company was helping in the management of information creation flow and analysis through information technology and therefore the f....
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.... also to be excluded from the comparables. 11. The assessee also pointed out errors in the margin of comparables computed by the Transfer Pricing Officer. It was pointed out that based on data available in the public domain, margins were found to be different than those computed by the Transfer Pricing Officer on the basis of information obtained under section 133(6) in case of four companies, i.e., Flextronics Software (Seg), HCL Comnet (Seg), Moldtek Technologies Ltd. and R. Systems International Ltd. It was pointed that in case correct margin was taken the mean margin of comparables would come to 29.26 per cent. against 30.75 per cent. computed by the Transfer Pricing Officer. 11.1. The Commissioner of Income-tax (Appeals) after considering the submissions of the assessee directed the Transfer Pricing Officer to look into the margin computation given by the assessee and rectify the same if required at the time of giving effect to the appellate order. 12. The assessee also requested that adjustment may be allowed on account of working capital and linked cost and other costs incurred by the associated enterprise on behalf of the assessee. It was pointed out that after m....
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....peals) however observed that the second proviso to section 92C(2) was amended by the Finance Act, 2009 to provide that the standard deviation can be allowed only if the arm's length price was within the 5 per cent. of the transfer price. It was further clarified by the Finance Act, 2012 that the said amendment would apply to all assessments and reassessments pending before the Assessing Officer as on October 1, 2009. Since in this case, the proceedings were pending before the Assessing Officer/the Transfer Pricing Officer as on October 1, 2009 and the arm's length price determined by the Assessing Officer exceeded the transfer price by more than 5 per cent., the Commissioner of Income- tax (Appeals) did not allow the claim of the assessee. 14. The assessee further argued before the Commissioner of Income-tax (Appeals) that in transactional net margin method the net profit margin could be computed in relation to cost incurred, sales affected or asset employed as provided in rule 10B(1)(e)(i). It was submitted that though the assessee had computed the margin on the operating cost, it had requested the Transfer Pricing Officer to compute the same on assets employed. It was po....
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....ables selected by the assessee, i.e., Optimus Global Services Ltd. The learned authorised representative submitted that the 15 comparables selected by the Transfer Pricing Officer and upheld by the Commissioner of Income-tax (Appeals) were operating in different segments of information technology enabled services and were not providing services similar to that of the assessee, which was running a voice based call centre. The comparables selected by the Transfer Pricing Officer provided different services such as software services, geographical information service, medical transcription service, knowledge process outsourcing services etc., which were not comparable to the case of the assessee. It was pointed out that under rule 10B(2) the comparability of international transaction with uncontrolled transaction has to be judged with reference to characteristics of the services rendered and the functions performed. Since the functions performed and the services rendered were different, these cases were not comparable. It was pointed out that some of the comparables were engaged in high end information technology enabled services such as KPO, medical transcription, etc., requiring skil....
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....i) Revenue accounting ; (xiv) Support centres ; and (xv) Website services. 17.1. The learned Commissioner of Income-tax (Departmental representative) argued that the services provided by the comparables selected by the Transfer Pricing Officer fell in the category of information technology enabled services. It was pointed out that in a particular category of service no distinction can be made between high-end and low-end services as argued by learned authorised representative as in transactional net margin method which the assessee had followed, standard of comparability was relatively relaxed and broad similarity of function was required. It was also submitted that the comparables selected by the Transfer Pricing Officer broadly performed functions similar to that of the assessee and were part of information technology enabled services segments and therefore, these could not be rejected on the ground of high end activity. He referred to the decision of Hyderabad Bench of the Tribunal in the case of Deputy CIT v. Deloitte Consulting India P. Ltd in I.T.A. 1082/HYD/2010 [2012] 15 ITR (Trib) 573 (Hyderabad), in which the Tribunal held that "No two comparable companies could be rep....
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....IT in I.T.A. No.4547/Mum/2012 for the assessment year 2007-08. The learned Commissioner of Income-tax (Departmental representative) also supported the decision of the Commissioner of Income-tax (Appeals) to exclude the persistent loss making comparable, i.e., Optimus Global Services Ltd. He referred to the decision of the Hyderabad Bench of the Tribunal in the case of Brigade Global Services P. Ltd. v. ITO [2013] 28 ITR (Trib) 411 (Hyd) in which it was held that in case the company was incurring continuous loss year by year it should not be considered as comparable and following the said judgment, the Mumbai Bench of the Tribunal in the case of Goldman Sach (I) Securities P. Ltd. held that for excluding a comparable the persistent loss has to be for a period of three years. It was also submitted that there was no merit in the contention of the learned authorised representative that age and formation of the company should also be a criteria for comparability analysis as held by the Mumbai Bench of the Tribunal in the case of Firmenich Aromatics (1) P. Ltd. in I.T.A. No. 2056/Mum/2006. As regards the argument of the learned authorised representative that the said company had a profit....
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....sed for the purpose of comparison. 6. Cosmic Global Ltd. Translation charges-Medical transcription and consultancy services and accounts BPO The annual report of the company shows that the company is deriving income from medical transcription, translation charges and BPO Medical transcription is information technology enabled services as per notification No. 890 dated September 26, 2000. However the translation charges are not covered in notification No. 890 dated September 26, 2000. 7. Datamatics Financial Services Ltd. (Seg). Information technology enabled services/BPO-information technology enabled services in the field of financial accounting services and internet based research services as per the information collected by the Transfer Pricing Officer under section 133(6) Annual report of the company shows that it is deriving income from processing and printing and export of information technology enabled services. There are no segmental results available so the margins of information technology enabled services cannot be computed. 8. Eclerx Services Ltd. (i) Information techno-logy enabled services/BPO-BPO services The annual report of the company shows that it is ....
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.... held on page 92 (paragraph 100) that KPO is a term given to the branch of BPO. High profit margin Rely on discussion in paragraph 95 of Willis Processing Services India P. Ltd in which it was decided that a company cannot be excluded on the basis of high or low margin. 14. R. Systems International Ltd. (Seg.) Information technology enabled services/BPO-sale of software products and software development services In the annual report the BPO segment is available and the same can be used for the comparison. 15. Vishal Information Technologies Ltd. i. Information technology enabled services-BPO-digital library and print on demand The annual report of the company shows that the income of this company is derived from information technology enabled services activities. ii. High profit margin company Rely on discussion in paragraph 95 Willis Processing Services India P. Ltd. in which it was decided that a company cannot be excluded on the basis of high or low margin. 19. The learned authorised representative for the assessee in the reply to the arguments advanced by the learned Commissioner of Income-tax (Departmental representative), s....
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....TR (Trib) 39 (Mum), it was submitted that loss or extreme profit case should be further examined for such extreme results and they can be excluded if these are on account of difference in characteristics of services rendered or functions performed. It was also pointed out that in the case of Willis Processing Services India P. Ltd., comparables of HCL Comnet Services Ltd. and R. System International Ltd. had been excluded by the Tribunal on the ground of related party transactions. 19.1. The learned authorised representative further submitted that extraordinary profit in the case of Mold Tek Technologies was because in that case KPO division had been rendering engineering services to high rise buildings as was clear from the annual report of the company placed on record and, therefore, the case was not comparable to that of the call centre. Similarly, Eclerx Services Ltd. which had shown extraordinary profit had tremendous goodwill among the customers which was nothing but the asset employed, even if the same was not recorded in the books. Moreover, Eclerx Services Ltd. was operating in the field of KPO which was different from call-centre activity as was clear from the activities....
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....inted out that this aspect had not been examined and, therefore, it was requested that the case of Accentia Technologies and Mold Tek Technologies should be set aside to the Assessing Officer for examination of these aspects. 19.3. In regard to the submission of the learned Departmental representative that even activities of comparables selected by the assessee were not exactly the same, the learned authorised representative referring to the relevant portion of annual reports of the companies, pointed out that these companies were largely in the call-centre business either exclusively or predominantly. It was pointed out that the other activities listed by the learned Departmental representative may be only incidental activities. The learned authorised representative however admitted that the annual report was not clear on the exact nature of services rendered in the case of Transwork Information Services Ltd. However, the assessee being in the same business was aware that the nature of business of the said company was pre-dominantly call-centre and other activities were only incidental. In case of NIIT Smart Serve, the learned authorised representative referred to the relevant po....
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....member directory, in the relevant portion of which the assessee has been described as an information technology enabled services/BPO company. It is thus clear that the assessee is providing information technology enabled services/BPO services. The case of the assessee that information technology enabled services/BPO industry is divided into several segments and, therefore, assessee had selected only those companies which were pre-dominantly engaged in call centre business. It has also been submitted that information technology enabled services/BPO industry has several segments starting from low segment such call centre, customer care to high end segments such as KPO, content development etc. in which there is wide variation in the billing rates. NASSCOM report on billing rate for different segments has been placed on record. It has thus, been argued that high end services are not comparable to the case of the assessee. 20.2. The comparability of transaction or the selection of comparables in our view has to be examined in terms of the rules framed in this regard. Rule 10B(2) provides that the comparability of international transaction with uncontrolled transactions has among other....
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....ogy enabled services sector to point out that there is wide variation between low end and high end segments. However only on the basis of billing rates no conclusion could be drawn that margins in different segments of information technology enabled services is also different. This is because if the billing rate is high in the high end services, the cost of the employees who are highly qualified/ skilled also goes up steeply and, therefore, the margins are not much affected. In fact, no evidence has been produced before us to show that margins in the high end segments of information technology enabled services is high compared to low end services. Therefore, we are unable to accept the argument advanced by learned authorised representative that the comparables belonging to high end segments such as content development, KPO, medical transcription etc. should be excluded from the comparability list on this ground alone. In fact, this view is supported by the latest decision of the Mumbai Bench of the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT in I.T.A. No. 4544/Mum/2012 for the assessment year 2007-08 dated March 1, 2013 [2014] 30 ITR (Trib) 39 (Mum)....
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....itable for comparison : 21.1. Accentia Technologies Ltd. This comparable has been objected to by the assessee on the ground of functional differences. It has been pointed out that in addition to med ical transcription and billing and coding, this company is also involved in software sales. The learned Departmental representative has placed on record the profit and loss account of the company for the relevant year which shows that out of the total revenue of Rs. 50.2 crores a sum of Rs. 9.6 crores is from sale of software and revenue from medical transcription is 32.1 crores, which is about 67 per cent. of the total revenue. There is no segment wise result available in case of medical transcription and billing and coding. It is not known by how much the margin is affected by trading in software. Therefore in our view this company could not be considered as a good comparable. We therefore hold that this company has to be excluded. 21.2. Apex Knowledge Solutions Ltd. The assessee has objected to the selection of this comparable on the ground that it is engaged in computer software and data base creation services. The annual report of the company for the relevant year has been plac....
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....ed that company is not comparable as it is engaged in business process management and other activities. The learned Departmental representative has placed on record the annual report of the company which shows that segmental accounts are available in case of BPO segment. The Assessing Officer/the Transfer Pricing Officer has taken the entire revenue for the purpose of comparison which in our view will not be appropriate. We therefore, direct that the results of only BPO segment have to be considered for the purpose of comparability and subject to the above, the inclusion of this comparable is upheld. Argument based on high segment as held earlier has to be rejected. 21.6. Cosmic Global Ltd. The assessee has objected to the inclusion of this comparable on the ground that the company is not comparable as it is mainly engaged in translation business in addition to medical transcription, accounts BPO and consultancy. The learned Departmental representative has placed on record the annual report of the company which shows that the main revenue, i.e., Rs. 4.05 crores is from translation business where as revenue from medical transcription is only Rs. 9.72 lakhs and from BPO at Rs. 12.4....
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....er margins. No doubt goodwill is an asset which can bring more customers and can increase turnover but as we have discussed in the subsequent part of this order (paragraph 24.3.3), there is no linear relationship between margin and turnover and that the concept of economy of scale is not relevant in case of service companies. The argument thus, has no merit and has to be rejected. Therefore, in our view, this comparable has to be included and accordingly we uphold its selection. 21.9. Genesys International Corporation Ltd. The assessee has objected to the selection of this comparable on the ground that it is engaged in high end information technology enabled services, i.e., Geographical Information Service (GIS). As we have held earlier, only on the ground of high end or low end segment, comparable could not be excluded or included. GIS is an information technology enabled service. The entire revenue of the company as per the annual report placed on record is from GIS activities. We also note that the Tribunal in case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum) has accepted this company as a good comparable. We therefore uphold the inclus....
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....ould not be considered for the purpose of comparability as the activity could change in the subsequent year. Moreover, GIS is an information technology enabled service. In our view the annual accounts of the current year, i.e., assessment year 2007-08 are required to be seen to find out whether in the relevant year, the assessee was providing services as comparable to the case of assessee. The learned authorised representative has also raised objection on the ground of high profit margin. We have held earlier that a company could not be excluded only on the ground of high profit margins. The same view has also been taken in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). It has been pointed out that the margin in the immediate succeeding year was only 9.66 per cent. which showed that the margin this year was exceptional. We do not find the argument convincing. It is clear from the rules that for the purpose of comparability, data of current year and upto past two years in certain circumstances can only be considered and not the data of the subsequent year. It has not been shown before us that profit this year was exceptionally high co....
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....the Tribunal in the case of Actis Advisers P Ltd. The Tribunal also noted the argument advanced on the ground of merger during the year as recorded by the Tribunal in the case of Capital IQ Information Systems (India) P. Ltd v. Deputy CIT (International Taxation) [2013] 25 ITR (Trib) 185 (Hyd). The Tribunal held that only on the ground of merger/amalgamation the comparable could not be excluded unless it was held that the resulting company was functionally different. The Tribunal restored the merger aspect to the Assessing Officer/the Transfer Pricing Officer for verification and for fresh decision. The facts in this year are identical. Therefore following the decision of the Tribunal in the case of Willis Processing Services India P. Ltd., it is held that the company is a good comparable subject to the verification of merger aspect and its impact on functional comparability. 21.14. R Systems International Ltd. (Seg.) The assessee has objected to the inclusion of this comparable on the ground that the company is engaged in sale of software products and in software development services which are functionally different and, therefore, not comparable to the assessee-company. Howeve....
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....l outsourcing of work. We find that this argument has already been considered by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). In that case, the Tribunal had considered the argument of the learned Departmental representative that the company had seating capac ity of 75 out of which 60 had been utilised by the company and, therefore, it was pointed out that the argument that the company was outsourcing work was not correct. The Tribunal further noted the argument of the learned authorised representative that the said information which had been obtained by the learned Departmental representative under section 133(6) was not addressed to the Transfer Pricing Officer. The Tribunal, therefore, restored the issue of outsourcing to the Assessing Officer/the Transfer Pricing Officer for fresh examination of relevant facts. The facts in the present case are identical. We, therefore, restore the issue of outsourcing to the Assessing Officer/the Transfer Pricing Officer for fresh examination and order after hearing the assessee. 22. Optimus Global Services Ltd. This comparable had been selected by the assessee. However, both ....
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....or the last three years has to be excluded. The order of the Commissioner of Income-tax (Appeals) is, therefore, upheld on this point. 23. Comparables of the Transfer Pricing Officer excluded by the CIT (A) As pointed out earlier, out of 23 new comparables selected by the Transfer Pricing Officer, 2 comparables had been accepted by the assessee and out of the remaining 21, 15 comparables have been accepted by the Commissioner of Income-tax (Appeals) which have already been dealt with. The 6 comparables which have been excluded by the Commissioner of Income- tax (Appeals) are as under : Sl. No. Name of the company Margin 1. Bodhtree Consulting Ltd. (Seg). 29.58% 2. ICRA Techno Analytics Ltd. (Seg). 12.24% 3. Infosys BPO Ltd. 28.78% 4. Wipro Ltd. (Seg) 29.70% 5. Maple E Solutions Ltd. 34.05% 6. Triton Corp Ltd. 34.93% 24. We take up each company separately for examination and analysis with a view to decide its comparability to the case of the assessee. 24.1 Bodhtree Consulting Ltd. (Seg.) The Transfer Pricing Officer had selected the company as an informa tion technology enabled services company holding it comparable to the case of the assessee the C....
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....he case of Willis Processing Services India P. Ltd., the exclusion of this comparable by the Commissioner of Income- tax (Appeals) is held valid. 24.3 Infosys BPO Ltd. The company is engaged in BPO business which is an information technology enabled services activity. The assessee has objected to the inclusion of this company on the ground that the company had high brand value and incurred heavy expenditure on marketing and selling expenses and on acquisition of software package for its own use. The Commissioner of Income-tax (Appeals) has accepted the objections of the assessee and excluded this comparable. The learned Commissioner of Income-tax (Departmental representative) has argued that the arguments advanced by the assessee had been considered by the Tribunal in the case of Actis Advisers P. Ltd. v. Deputy CIT in I.T.A. No. 5277/Del/2011 and had not been accepted. The learned authorised representative, however, pointed out that brand was a valuable asset which as per rules is one of the factors for deciding the comparability. It was pointed out that this aspect had not been considered by the Tribunal in the case of Actis Advisers P. Ltd. Besides, it has also been argued tha....
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....ful in getting better business but the same may not be applicable in the case of service industries like information technology enabled services. The Department in that case had placed on record some instances in which companies with much lower marketing expenses had shown much higher margin. The Tribunal therefore, concluded that marketing intangibles such as brand could not be considered as a factor for raising the margin in a particular case. Brand is an asset which can bring in more business and can give more turnover but there is no evidence to show that it results in higher margin. Brand is no doubt an asset which is a relevant factor for deciding comparability but in the absence of any concrete material to show that it raises the margin, the argument based on branding cannot be accepted. We, therefore, follow the decision of the Tribunal (supra) and reject the arguments advanced based on high marketing expenses and branding. 24.3.3. The argument based on turnover has also been examined in detail by the Tribunal in the case of Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum) and in the case of Capgemini India P. Ltd. v. Asst. CIT in I.T.A. N....
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....ncome-tax (Appeals) has excluded this comparable on the ground that it has related party transactions. The Commissioner of Income-tax (Appeals) also noted that this company became subsidiary of Triton Ltd. with effect from January 1, 2007. Since, the Commissioner of Income-tax (Appeals) had excluded Triton Ltd. and therefore held that this company should also be excluded on this ground. The learned Commissioner of Income-tax (Departmental representative) pointed out, referring to the details given in the annual report of the company, that there were three related parties but there were no transactions with those parties on revenue account and the transaction were only on account of loan, etc. These factual details placed on record have not been controverted by the learned authorised repre sentative. Therefore, this company could not be excluded on the ground of RPT. We also note that this company had become a subsidiary of Triton Ltd. with effect from January 1, 2007. There was no merger or amalgamation of the two companies. The subsidiary company remains an independent company till it is merged. Therefore argument advanced by the learned authorised representative on the ground of ....
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....1 per cent. which in our view will not have much impact on the margin. It is also clear from the fact that the margin in case of Triton Corp. Ltd. is 34.93 per cent. which is almost similar to the margin in case of Maple E Solutions Ltd. which is wholly in call centre business, which shows that trading in IT peripherals has not impacted the margin. No details of merger/amalgamation as mentioned by the Commissioner of Income-tax (Appeals) has been placed before us to show that it has impacted the comparability. We, therefore, do not agree with the Commissioner of Income-tax (Appeals) for excluding this comparable. Accordingly, we set aside the order of the Commissioner of Income-tax (Appeals) on this point and include this case in the list of comparables. 25. The assessee has also disputed the decision of the Commissioner of Income-tax (Appeals) to reject the claim of the assessee that no transfer pricing adjustment could be made as income of the assessee was exempt under section 10A of the Income-tax Act. The assessee has placed reliance on the decision of the Bangalore Bench of the Tribunal in the case of Philips Software Centre P. Ltd. v. Asst. CIT [2008] 26 SOT 226 (Bangalore) ....
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....d that the assessee has the option to compute the margin on the basis of return on asset employed (ROA) or on capital employed (ROCA). It has been pointed out that on this basis margin of the assessee is higher than mean margin of comparables selected by the Transfer Pricing Officer and also higher than the mean margin of the comparables selected by the assessee. This argument has not been accepted by the Commissioner of Income-tax (Appeals) aggrieved by which the assessee is in appeal before the Tribunal. 26.1. The learned Commissioner of Income-tax (Departmental representative) has referred to the OECD transfer pricing provision paragraph (2.97) as per which return on asset or capital employed can be an appropriate basis only in cases where assets are a better indicator of the value added by the tested party. The method is therefore, suited to certain manufacturing or other asset intensive activities. He also referred to United Nations Practice Manual on transfer pricing provision paragraph (6.3.7.3) in which it has been mentioned that ROCA/ROA are typically used for manufacturing activities. He has also placed reliance on the decision of the Delhi Bench of the Tribunal in the c....
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....on the other hand submitted that in case working capital adjustment was considered appropriate, the adjustment may be made as per the OECD guidelines and not as per the method adopted by the assessee. In other words the adjustments should be made in relation to both payables and receivables. 27.1. We have perused the records and considered the matter carefully. Under the provisions of rule 10B(2)(d) the comparability has to be judged with respect to various factors such as marketing conditions, geographical locations, cost of labour and capital in the market, accounts receivable/payable affect the cost of working capital. The more accounts receivable would mean more capital blocked with debtors which may also mean higher sale prices. Therefore, in our view it will be appropriate to make working capital adjustment to improve the comparability. Further we agree with the submissions of the learned Commissioner of Income-tax (Departmental representative) that while making the working capital adjustment guidelines framed by OECD must be followed. We therefore, do not uphold the order of the Commissioner of Income-tax (Appeals) rejecting the working capital adjustment. The issue therefo....