TaxTMI 
TaxTMI 
TaxTMI 
2014 (5) TMI 1068
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....erating margin of CDR unit in computation of ALP for Transfer Price Adjustment, as asked for by appellant, in relation to work performed by CDR unit of the company for its manufacturing plant at Goa and disregarding revenue of Rs. 12,08,000/- (vide para 69 on page 21 of the appeal order). 5. The Ld. CIT(A) erred in not allowing the adjustment for differential rate of depreciation for calculating margin of CDR unit and of comparable companies (vide para 73 on page 22 of the appeal order). 6. The Ld. CIT(A) erred in not considering the functional differences between the appellant's CDR unit and comparable companies selected by TPO." while the Revenue has taken the following effective grounds of appeal:- 1. The ld CIT(A) has erred in holding that the TPO was not correct in applying diminishing revenue/persistent loss filter and different financial year filter. 2. The ld CIT(A) has erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s Wipro Ltd. and M/s Wipro BPO Solutions Ltd. in ITES segment as comparable companies. 3. In the facts and circumstances of the case, the decis....
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....sign services. Major revenue was derived by the Assessee (92.65%) from manufacturing division and balance (7.35%) from CDR division. The TPO has suggested vide his order dt. 27.10.2010 u/s 92CA(3) an addition of Rs. 1.68 crore on the international transaction of the CDR division consisting of engineering support services of Rs. 10,94,49,682/- rendered to the Assessee's AEs abroad. The Assessee has shown operating margin @ 12.49% (operating profit/operating cost) but the TPO had increased the same to 29.83% on the ground that the transaction with the AE was not at ALP. The Assessee went in appeal before CIT(A). CIT(A) after considering the submission of the Assessee and the various decisions in respect of the comparables directed the AO to compute the TP adjustment by taking the operating margin of the comparables @ 22.92%. 6.2 The ld. AR before us contended that the Assessee is an industrial product manufacturer and derives 92.65% of its revenue from manufacturing operation. It has set up a division in the year 1998-99 for providing in-house support engineering services in the field of product quality assurance, designing and product development. The said division is internall....
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....er Transworks Information Services Ltd.) 197.06 11.98% 3 Allsec Technologies Ltd. 113.28 27.31% 4 Apex Knowledge Solutions Pvt. Ltd. 6.64 12.83% 5 Appollo Healthstreet Ltd. 47.84 -13.55% 6 Asit C. Mehta Financial Services Ltd. 6.09 24.21% 7 Bodhtree Consulting Ltd (Seg.) 2.94 29.58% 8 Caliber Point Business Solutions Ltd. 39.3 21.26% 9 Cosmic Global Ltd. 4.28 12.40% 10 Datamatics Financial Services Ltd (Seg.) 2.92 5.07% 11 Eclerx Services Ltd 86.12 89.33% 12 Flextronics Software Systems Ltd (Seg.) 12.93 8.62% 13 Genesys International Corporation Ltd 19.17 13.35% 14 H C L Comnet Systems and Services Ltd (Seg.) 260.18 44.99% 15 I C R A Techno Analytics Ltd (Seg.) 7.23 12.24% 16 Informed Technologies India Ltd. 4.08 35.56% 17 Infosys BPO Ltd 649.56 28.78% 18 IServices India Pvt. Ltd. 16.29 49.47% 19 Maple Esolutions Ltd 12.21 34.05% 20 Mold-Tek Technologies Ltd (Seg.) 11.4 113.49% 21 R Systems International Ltd (Seg.) 17.34 20.18% 22 Spanco Ltd (Seg.) 35 25.81% 23 Triton Corp Ltd 53.37 34.93% 24 Vishal Information Technologies Ltd 30.6 51.19% 25 Wipro Ltd (Seg.) 939.78 29.70% 26 Nittany Out....
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....are Systems Ltd. (Seg.) 12.93 8.62% Objection of assessee: Nil 13. Genesys International Corporation Ltd. 19.17 13.35% Objection of assessee: Nil 14. HCL Corrmet Systems and Services Ltd. (Seg.) 260.18 44.99% Objection of assessee: High turnover: The TPO has selected this as comparable ignoring the fact that it is 20 times bigger than the appellant's segment. Though the CIT(A) agreed to on the application of lower and upper turnover filter, but did not exclude this company. Neither any reason was mentioned in the appeal order for doing so. The action of CIT(A) is wrong. 15. ICRA Techno Analytics Ltd. (Seg.) 7.23 12.24% Objection of assessee: Nil 16. Informed Technologies India Ltd. 4.08 35.56% Objection of assessee: Nil 17. Infosys BPO Ltd. 649.56 28.78% Objection of assessee: High Turnover: The TPO has selected this as comparable ignoring the fact that it is 59 times bigger than the appellant's segment. Relief was granted by CIT(A). 18. IServices India (P) Ltd. 16.29 49.47% Objection of assessee: Abnormal profit: TPO has selected the company which has very high margin ratio. It indicates extra ordinary business circumstances. CIT(A) did not....
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.... in excess of the upper filter of the turnover of Rs. 200 crores. CIT(A) has already accepted to apply lower and upper turnover filter and also excluded high turnover companies like Infosys and Wipro. This company should also have been excluded. (ii) In respect of IServices India (P) Ltd., it was stated that the operating margin of the company is 49.4 per cent. This is a high profit margin company. The average profit of the industry has been calculated by the TPO @ 30.21 per cent and therefore, all companies earning higher be categorised as exceptionally super profit making companies and be excluded on the basis of the super high profits. CIT(A) has excluded three companies viz. Eldrex (operating margin 89.33 per cent), Mold-Tek (sic Eclerx) Technologies Ltd., (operating margin 113.49 per cent) and Vishal Information Technologies (operating margin 51.19 per cent). Therefore, IServices India (P) Ltd., should also be excluded. (iii) M/s Maple E-solutions Ltd.- The management of this company was held to be tainted. The assessee relied on the decision of Delhi Tribunal in Asstt. CIT vs. CRM Services India (P) Ltd. 14 taxmann.com 96 and it was held that it should be exclud....
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....ing expense of Rs. 14,95,56,412 by an amount of Rs. 1,13,60,949 being provision for doubtful debt. This increased the operating profit of the segment by 3 per cent. Without going into the basic question of whether the provision for doubtful debt is an operating expense or not, the assessee contends on the method of deriving the figure of this provision-is it in respect of only those debtors that belong to the ITES segment of the company ? Thus, it was contended that this company be excluded from the list of comparable companies as selected by TPO for deriving ALP. 6.2.4 The learned Authorised Representative also objected suo motu action of CIT(A) of exclusion of Apollo Healthstreet Ltd. This company was considered by TPO in his calculation of ALP but deleted by CIT(A). It was contended that if only 16 companies listed herein out of the selection of 27 companies made by the TPO are considered, the operating margin will be 16.48 per cent. SL No. Company name Turnover (Rs. Crs) OP/OC by TPO OP/OC by CIT(A) OP/OC as per our prayer to Tribunal 1. Accentia Technologies Ltd. (Seg.) 16.57 30.61% 30.61% 30.61% 2. Aditya Birla Minacs Worldwide Ltd. 197.06 11.98% 11.98% 11.....
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....r to year operating margin of the companies. The ICAI guidance note on transfer pricing also recognises that the accounting treatment of expenses and depreciation is a critical factor in computing ALP. The reliability of the operating margin of comparable companies is severely affected if there are problems in the application of uniform depreciation policy. Reliance was placed on following case laws for adopting cash PLI/adjusting of the rate of depreciation for determining the ALP. 1. Dy. CAT vs. Reuters India (P) Ltd. (2013) 24 ITR (Trib) 231 (Mumbai); 2. BA Continuum India vs. Asstt. CIT (2013) 40 Taxmann.com 311 (Hyd); 3. Schefenacker Motherson Ltd. vs. ITO (2009) 123 TTJ (Del) 509: (2009) 24 DTR (Del)(Trib) 561; 4. Amdocs Business Services vs. Dy. CIT (2012) 54 SOT 46 (Pune). Our attention was drawn towards the chart tabulating the accounting policy relating to the depreciation as adopted by the various companies to prove that there are divergent/mix policy of charging depreciation followed by various companies. It was also contended that if these companies are excluded from the comparables and only the cash PLI is considered, the arithmetic mean of the margin in respect ....
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....e learned Departmental Representative relied on the order of the TPO. 6.4 We have heard the rival submissions, perused the material on record along with the order of the tax authorities below. We have also gone through the various case laws as has been relied on. We noted that in this case the TPO has computed the profit margin of the CDR unit, which was rendering the services not only to the associated concerns outside India but also to the other units of the assessee company, by taking the revenue received from the export of services to the associated concerns and without taking any revenue into consideration in respect of the services rendered by the CDR unit of the assessee to the other unit in Goa. We also noted that the TPO has considered the total operating costs of the CDR unit which has been incurred by the unit not only in respect of services rendered to the associated concerns outside India but also in respect of services rendered to the unit in India and on that basis the operating profit was worked out in the following manner: Description Amount (Rs.) Operating Revenues Rs. 10,94.49,682 Operating Expenses Rs. 9,72,89,193 Operating Profit (PBIT) Rs. 1,21,60.489....
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.....16 per cent. This operating profit ratio is based on the profit which has been computed after charging depreciation. We noted that there is no dispute so far method of determining the ALP is concerned. The assessee as well as the TPO both applied the TNMM method to be the most appropriate method. The assessee in this case has selected 8 comparable companies and has calculated the operating profit of these companies @ 11.31 per cent but the TPO did not agree with the assessee and has taken 27 comparable instances on the basis of which the arithmetic mean of the operating profit has been calculated @ 29.83 per cent. So far the selection of the 16 comparable companies by the TPO is concerned, the assessee did not have any objection. The assessee has objection in respect of the selection of 11 companies viz., Eclerx Services Ltd., HCL Comnet Systems and Services Ltd., Infosys BPO Ltd., Iservices India Pvt. Ltd., Maple Esolutions Ltd., Mold-Tek Technologies Ltd., R Systems International Ltd., Triton Corp. Ltd., Vishal Information Technologies, Wipro Ltd. and Accurate Data Converters Ltd. Selection of each comparable will be discussed by us separately. The common contention in respect....
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....The main objection of the assessee is that this company derives abnormal profit. The operating profit of this company comes to 89.33 per cent on a turnover of Rs. 86.12 crores. After hearing the rival submissions, we do not find any infirmity in the order of CIT(A) giving the relief to the assessee as we noted that the average operating profit in respect of the 27 companies selected by the TPO is only Rs. 30.21 per cent but this company has derived around 3 times the average profit of the 27 companies. This clearly denotes that the company has derived abnormal profit. We, therefore, confirm the order of CIT(A) deleting this company out of the comparables. (ii) HCL Comnet Systems and Services Ltd.: We find force in the submission of the learned Authorised Representative that this company cannot be a comparable as the turnover of this company is Rs. 260.18 crores while in the case of the assessee, the turnover is around Rs. 11 crores only. While making the selection of comparables, the turnover filter, in our opinion, has to be the basis for selection. A company having turnover of Rs. 11 crores cannot be compared with a company which is having turnover of Rs. 260 crores which ....
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.... not be selected as comparable for ITES Companies as the management of this company was tainted one as the directors of the company were involved in a fraud. The business reputation of the Rastogi group which owns Maple eSolutions was in serious indictment. In view of the question mark on the reputation of its owners, albeit for earlier years, it would be unsafe to take their results for comparison of profitability of the assessee. In asst. yr. 2006-07 we noted that the profit margin has been taken by the TPO at 28.75 per cent. When the assessee went in appeal before CITfA), CITfA) has excluded this company for the purpose of comparison. No cogent material or evidence was brought to our knowledge by the learned Departmental Representative how this company is not tainted one. The decision of the Co-ordinate Bench is binding on us. We, therefore, respectfully following the decision of the Co-ordinate Bench exclude this company from the comparables." Respectfully following the decision of this Tribunal in asst. yr. 2006-07, we exclude this company from the comparables. (vi) Mold-Tek Technologies Ltd.: After hearing the rival submissions, we noted that even though the turnover ....
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....company out of the comparables accepting the plea of the learned Authorised Representative. (ix) Vishal Information Technologies: The objection of the assessee is that this company is operating under outsourcing business model. Its salary cost is too less as compared to the data entry charges appearing in the financials. We noted that the CIT(A) has directed to exclude this company out of the comparables as the operating profit ratio of this company is 51.19 per cent. Even though this company fulfils the turnover filter, the learned Departmental Representative though vehemently relied on the order of the TPO, but could not bring to our knowledge any illegality in the finding of the CIT(A) when under para 67 he excludes this company from the comparables treating that this company has derived abnormally high margin as compared to the TPO's average of 30.21 per cent. We, therefore, confirm the finding of CIT(A) excluding this company out of the comparables. (x) Wipro Ltd.: After hearing the rival submissions, we noted that the CIT(A) applying the turnover filter has excluded this company out of the comparables. The turnover reported in the case of Wipro Ltd., is Rs. ....