TaxTMI 
TaxTMI 
2015 (7) TMI 251
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....ansaction‟ of software development services 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 a....
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.... in levying interest under Section 234B and Section 234C of the Act. The appellant craves 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/....
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....7.91% was higher than the average operating profit to cost ratio of comparable uncontrolled enterprises at 7.83%, therefore, the international transaction of provision of software development services entered into by the assessee with its associated enterprises was at arm‟s length price. 3.4 A reference was made 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.....
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.... the Ground of Appeal, he contended that DRP has erred on facts and law in upholding the treatment given by the TPO to consider foreign exchange fluctuation income as non operating item 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. It was submitted that exchange fluctuation income/expenses is an integral part of the sales made or expense incurred by the appellant during the course of its business and 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 ....
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.... that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of goods is nothing, but inherent part of the price of import or the value of export. The Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. VS. CIT 116 ITR 1 (SC) has held that : 'where profit or loss arises to an asssessee on account of appreciation or depreciation ITA Nos.4446 & 4447/Del/2007 in the value of foreign currency held by it, on conversion into another currency, such profit 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.....
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....ales turnover less than 5 crore not appreciating that the said companies were otherwise functionally comparable to the appellant. It was submitted that in the Transfer Pricing Documentation, the assessee has applied the turnover filter, wherein the companies having turnover less than 1 crore and greater than 50 crores were rejected. It was submitted that the TPO, however in the impugned order increased the threshold limit of turnover filter from 1 crore to 5 crore and further, rejected the upper threshold limit of 50 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 ....
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....port filter which filter has not been challenged before us and has been accepted by the taxpayer. Thus, having regard to the above, we direct the inclusion of M/s. Cressanda Solutions Ltd. as a comparable for the purpose of determining the arm‟s length price. The grounds raised are partly allowed. 7. Taking up ground no. 2.7 of the grounds of appeal. It was contended by the learned counsel that Tata Elxsi Limited was erroneously considered in the final set of comparable companies despite the fact that it did not satisfy the test of comparability 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 ....
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....bsp;"7.7 Tata Elxsi Limited.: From the facts and material on record and submissions made by the learned AR, it is seen that the Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as 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 comp....