AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 251
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....ces rendered to the associated enterprise on the basis of order passed by the Transfer Pricing Officer („TPO‟) under section 92CA(3) of the Act. 2.1 That the DRP/TPO erred on facts and in law in not appreciating that in terms of Rule 10B(1)(e) of the Income Tax Rules, while applying Transactional Net Margin Method ("TNMM"), net profit margin (Operating profit margin) earned by the tested party from transaction undertaken with associated enterprise only is ought to be benchmarked. 2.2 That the Dispute Resolution Panel („DRP‟) erred on facts and in law in upholding the treatment given by the TPO to consider foreign exchange fluctuation income as non operating item of income for the appellant as well as comparable, and thereby re-computing the operating profit to cost ratio of the appellant at 6.54% as against 7.91% considered in the transfer pricing documentation. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that exchange fluctuation income or expense is an integral part of the sales made or expense incurred by the appellant during the course of its business and accordingly shall be considered as operating income/e....
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....leave to add, alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing." 3. Ground Nos. 2 to 2.10 of the Grounds of Appeal relate to adjustment of Rs. 1,26,14,209/- to the arm‟s length price of the international transaction of provision of software development services provided by the appellant company. 3.1 The facts in brief are that the appellant is a company incorporated on July, 2004, as a wholly owned subsidiary of Agilis International Inc. The appellant is engaged in providing software development services to its AE i.e. Agilis International Inc. During the relevant previous year, the assessee received a total consideration of Rs. 12,50,07,838/- in respect of international transaction of provision of software development services to its AE. For the purpose of benchmarking the international transaction of provision of software development services, the assessee applied Transactional Net Margin Method as the most appropriate method by considering itself as the tested party and operating profit to operating cost ratio (OP/OC) as the most appropriate Profit Level Indicator ("PLI"). The PLI of the assessee is computed at 7.91....
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....e under section 92CA of the Act by the Assessing Officer for determination of arm‟s length price for the international transaction undertaken by the assessee during the instant year. The TPO after considering the submission of the assessee rejected the comparables selected by the assessee and prepared a fresh set of eight comparables and determined the PLI of the comparables at 29.45%. The list of comparables as prepared by the TPO is as under: S.No. Company Name OP/OC(%) 1. Evoke Technologies Limited 18.56% 2. CTIL Limited 18.11% 3. Sankhya Infotech 18.11% 4. Infinite Data Systems Pvt. Ltd. 88.25% 5. Persistent Systems and Solutions Ltd. 11.37% 6. Sonata Software Ltd. 35.87% 7. Tata Elxsi Ltd. (Seg) 20.29% 8. Zylog Systems Ltd. 25.07% Average 29.45% 3.5 Further, the TPO re-computed the operating profit to cost ratio of the assessee at 6.54% after excluding foreign exchange fluctuation income from total operating income considering the same to be non-operating income, as under: Particulars Amount (Rs.) Revenue from software development services 125,007,838 Others 11,112 Operating revenue 125,018,950 Operating cost 117,34....
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....d accordingly should be considered as operating income/expense. It was further submitted that application of TNMM involves comparison of net profit i.e. operating profit margin, being the ratio of operating profit to sales as an indicator of the total return of the business activity of the tested party, viz., the assessee and the comparable uncontrolled entities. It was submitted that in terms of Rule 10B(1)(e) of the Rules for the purpose of undertaking benchmarking analysis applying TNMM the net profit from the international transaction is to be considered and there is no scope for arbitrarily excluding any item of income or expense for the purpose of making the comparison of the net profit from the international transaction with that of the unrelated parties. Reference in this regard is also made to the OECD Guidelines on transfer pricing, wherein, it has been held that foreign exchange gains and losses should be included or excluded for the determination of the net profit depends on whether the foreign exchange gain or losses are of a trading nature and whether or not the tested party is responsible for them. Reliance was placed on the decision of Delhi Bench of the Tribunal in....
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....t or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expense that a business incurs as a result of performing its normal business operations. As the business of 'Assembly' done by the assessee under this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost." 15 The learned DR during the course of arguments, supported the action of the authorities below only on the ground that DRP has rejected the contention of the appellant by observing as under: "The operating income/expenditure was never defined in any ....
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.... crore. It was submitted that increase in threshold limit of turnover filter from 1 crore to 5 crore is not at all indicative of the functions performed by the company and hence, rejection of the companies on the basis of such quantitative filters, rather than functional or asset profile, would not meet the comparability standard required in application of TNMM. It was submitted that the assessee is itself having a turnover of Rs. 12.50 crores and accordingly, increasing the threshold limit to 5 crore would further narrow down the list of potential comparable companies. It is thus prayed that the following comparable companies having turnover greater than 1 crore ought to be considered in the final set of comparable companies: S.No. Company Name Sales (in cr.) 1. B2B Software Technologies Ltd. 4.19 2. Cressanda Solutions Ltd. 1.41 6.1 Having considered the rival submissions, we find that the DRP rejected the contention of the appellant for inclusion of M/s. B2B Software Technologies Ltd. and Cressanda Solutions Ltd. as comparable for the following reasons:  The companies having turnover of less than Rs. 5 crore are generally excluded because the margins e....
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....rability laid down under Rule 10B(2) of the Rules. The TPO in respect of the aforesaid comparables held that all the activities of M/s. Tata Elxsi Limited are part of software development industry and therefore, distinction claimed by the taxpayer is incorrect. The DRP rejected the contention of the appellant that it is functionally different by concluding that the company provides software development services which are quite similar to the taxpayer and therefore, the objection of the appellant was rejected. Before us, the learned counsel for the appellant submitted that the company is not comparable for the reason that Tata Elxsi Ltd. is having a high turnover of 376.37 crores. It was submitted that the companies with such high turnover cannot be considered comparable to the assessee since the scale of operations would differ significantly. Reliance in this regard was placed on the decision of the Delhi bench of the Tribunal in the case of Agnity India Technologies Pvt. Ltd. vs. ITO (ITA No. 3856/Del/2010) and it was submitted that the appeal preferred by the revenue against the exclusion of M/s. Infosys Technologies Ltd. has been dismissed by the Hon‟ble High Court. It was....
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....s a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be excluded from the list of comparable parties." 7.3 Having regard to the above judicial pronouncements, we hold that Tata Elxsi Limited cannot be considered as comparable for the purpose of benchmarking international transaction of the assessee. 8. Ground No. 2.8 of the Grounds of Appeal relates to the rejection of M/s. CG VAK Software & Exports Limited from final set of comparables by holding that such company is not passing the filter of employee cost to total cost less than 25%. 8.1 Having considered the rival submissions, we find that this issue has been considered by the Hyderabad Bench of the Tribunal in the case of Kenexa Technologies Pvt. Ltd. vs. DCIT in ITA No. 243/Hyd./2014 for assessment year 2009-10 by observing as under: "43. In ground No. 2, 6, 5, the assessee has objected to the rejection of comparable companies by TPO in the course of applying employee cost filter. The ITAT Bangalore Bench in the c....