TaxTMI 
TaxTMI 
2015 (8) TMI 703
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....are development (IT) to its overseas group companies. The Assessee is organized into two operating divisions one in Bangalore and one in Mumbai. The Bangalore division primarily provides Software and BPO Services while Mumbai division is primarily engaged in purchase and resale of Unisys Products and Provision of Support Services. 4. The international transactions with associated enterprises (AEs) reported in Form 3CEB relevant to this appeal were as follows:- S. No. Nature of transaction Amount (INR) Method Used PLI 1 Provision for BPO services 184,661,067 TNMM OP/TC 2 Provision of Software Development Services 331,562,802 TNMM OP/TC 3 Allocation of Human Resources and Administration costs 938,937 CUP NA 4 Reimbursement of expenses 13,825,805 NA NA 5 Interest on overdue out standings 300,959 CUP NA 6 Import and resale of hardware and software 6,628,593 RPM CP/Sales 7 Export of spares parts 685,749 TNMM OP/Sales 8 Provision of software maintenance services 13,497,927 TNMM OP/Sales 9 Availing of administrative support services 5,879,022 CPM OP/Sales 10 Import of fixed assets 850,475 CUP NA 11 Availing of consultancy services ....
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....evelopment services segment. The ld. counsel for the assessee prayed that Infosys Technologies Ltd., which was a comparable chosen by the TPO and which is at Sl.No.3 of the list of comparables drawn by the TPO should be excluded. In this regard, the ld. counsel for the assessee placed reliance on the decision of the ITAT Delhi Bench in Agnity India Technologies Pvt. Ltd. v. ITO, ITA No.3856Del/2000 for A.Y. 2006-07. In the aforesaid decision, the Delhi Bench of the Tribunal in the case of a software development services company such as the assessee, observed in para 5.2 of its order as follows:- "5.2 Various arguments, as stated earlier, were taken before the DRP which inter-alia included rejection of comparable cases; application of arbitrary filter of wage to sales ratio; ignoring that the assessee is a limited risk company; inclusion of Infosys Technologies Ltd.; and inclusion of Satyam Computers Services Ltd. in spite of the fact that its data is not reliable as publicly known. On the basis of these arguments, the DRP excluded the case of Satyam Computers Services Ltd., thereby reducing the arm's length margin to 25.6%. It is argued that the case of the assessee is not compara....
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....o.15 of the list of comparables chosen by the TPO. The assessee's objection is with regard to computation of margins for the purpose of comparison as done by the TPO was as follows:- "Incorrectly computing the OP/TC margin for Visualsoft Technologies Ltd.; 3 168 In the TP order the Ld TPO has considered the OP/TC margin of the IT services segment of this company at 36.89%. 3.169 In this regard, it may be noted that the correct OP/TC margin of the IT services segment of this company is provided below for your Honours' ready reference: Particulars Amount (in Rs. crore) Total Sales (Company level) 160.25 Segmental Sales (IT Services segment) 157.05 Allocated Expenditure (IT Services segment) 114.73 Unallocated Expenditure for Segment 16.37 Total Cost (TC) 131.11 Operating Profit (OP) 25.94 OP/TC 19.79% 3.170 It is submitted that the above margin of 19.79% should be considered while adjudicating on the transfer prices followed by the assessee in respect of its software development services." 14. On the above objections, the DRP has observed that the margin of this company provided before the DRP were segmental margins and the TPO has taken entity level marg....
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....tors and creditors measured as a percentage of the total cost varies. There is an effect on profits from investing in different levels of working capital due to differences reflected in cash collection cycle. Such differences in collection cycle imply differences in credits granted to customers and such a credit function is akin to an additional service for which markets are willing to pay. High levels of working capital create costs ether in the form of incurred interest or in the form of opportunity costs. Therefore no profit maximizing/entrepreneurial firm would hold working capital without a return. A working capital adjustment analysis seeks to adjust the profitability of each comparable company based on the working capital position of the assessee to reflect the differences in working capital investment. Thus, the adjustment tries to isolate the interest effects (taking into account the time value of money) that result from the opportunity costs of holding working capital. The interest effects in the comparable company's data are not completely eliminated hut rather adjusted to the assessee's level of interest effects. Prime lending rate (PLR) is used as the appropriate cost ....
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....ssessee was 7.90% after working capital adjustment and thus the Assessee claimed that the price charged by it was at Arm's Length. 24. The TPO rejected the claim of the assessee and he chose a set of 6 comparable companies as follows:- 25. The TPO after denying the benefit of working capital adjustment determined the ALP in the ITES segment as follows:- Total cost of Provision of Services by the Assessee (a) Rs. 16,39,64,751 OP/OC 20.03 Margin @ 20.03% as discussed above (b) Rs.3,28,42,140 Arm's Length Price A (a+b) Rs.19,68,06,890 Price at which international transaction has been undertaken B Rs.18,46,61,067 Difference A - B Rs.1,21,45,823 % of difference with B above 6.57% 26. Adjustment on account of determination of ALP of Rs. 1,21,45,823 was added to the total income by the AO in the final assessment order. On appeal by the assessee, the DRP confirmed the order of TPO. Before us, the limited prayer of the ld. counsel for the assessee is to exclude Allsec Technologies Ltd., which was a comparable chosen by the TPO from the list of comparables. In this regard, it transpired in the course of hearing that before the TPO, the assessee did not object to this....
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....of the view that Allsec Technologies Ltd. should be excluded from the list of comparable companies. 30. The next claim of the assessee with regard to the action of the Revenue in not allowing working capital adjustment. While deciding similar ground in software development services segment, we have already held that working capital adjustment needs to be allowed, subject to verification of details filed by the assessee in this regard. We are of the view that the said directions will hold good for ITES also. The TPO/AO is accordingly directed to allow working capital adjustment after verification of details filed by the assessee. 31. We shall now go to non-TP related issues raised by the assessee. 32. The first ground in this regard is with regard to action of the AO and the DRP in not allowing club expenses of Rs. 89,746 as a deduction u/s. 37(1) of the Act. On the above issue, the Revenue authorities disallowed the claim of the assessee on the ground that the same were personal in nature and cannot be regarded as expended wholly and exclusively for the purpose of business. Before us, the ld. counsel for the assessee brought to our notice that the Hon'ble Supreme Court in the ca....