TaxTMI 
TaxTMI 
2014 (5) TMI 1068
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....ed in not allowing an adjustment of 1.10% in the operating 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 compani....
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....t; manufacturing of water treatment component and IT-based engineering design 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 a....
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....er:- Sl.No. Company name Sales (Rs.cr.) OP to Total Cost% 1 Accentia Technologies Ltd. (Seg.) 16.57 30.61% 2 Aditya Birla Minacs Worldwide Ltd (Earlier 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 Eso....
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....aliber Point Business Solutions Ltd. 39.3 21.26% Objection of assessee: Nil 9. Cosmic Global Ltd. 4.28 12.40% Objection of assessee: Nil 10. Datamatics Financial Services Ltd. (Seg.) 2.92 5.07% Objection of assessee: Nil 11. Eclerx Services Ltd. 86.12 89.33% Objection of assessee: Abnormal Profit: TPO has selected the company which has very high margin ratio. It indicates extra ordinary business circumstances. Relief was granted by CIT(A). 12. Flextronics Software 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 ....
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....egment. Relief was granted by CIT(A). 26. Nittany Outsourcing Services (P) Ltd. 23.23 11.50% Objection of assessee: Nil 27. Accurate Data Converters Ltd. 4.33 50.68% Objection of assessee: Abnormal profit: TPO has selected the company which has very high margin ratio. It indicates extra ordinary business circumstances. Secondly, the company is engaged in software development activity. Relief was granted by CIT(A). Arithmetic mean 30.21% 6.2.3 In respect of 4 companies which were not considered by CIT(A), it was submitted that:- (i) Turnover of HCL Comnet Systems and Services Ltd., is Rs. 260.18 crores which is 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 therefo....
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....roduced by the TPO on segment information of this company is not verifiable- an amount of Rs. 14,95,56,412 for segment expenses (allocable) has been taken by the TPO. But there is no provision in AS-17 on the reporting of segment expenses. As such, none of the companies report this segment expense in their published accounts. In such a situation, how this figure has been derived by TPO remains unanswered. There is absence of uniformity in the financial year. The company follows calendar year. Besides this, the TPO has proportionately added unallocated expense of Rs. 60,88,787 in the operating expenses of the ITES segment which is not free from correctness. The TPO has reduced self-calculated operating 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 exclud....
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....hal Information Technologies 30.6 51.19% 25. Wipro Ltd (Seg.) 939.78 29.70% 26. Nittany Outsourcing Services (P) Ltd. 23.23 11.50% 11.50% 11.50% 27. Accurate Data Converters Ltd. 4.33 50.68% Arithmetic Mean 30.21% 22.19% 16.48% Further, it was submitted that the adjustment should be given for the depreciation anomaly arising out of the difference in the depreciation rates on computer hardware and software charged by the respective comparable companies (as was selected by the TPO/CIT(A) for making comparison to determine the ALP) vis-a-vis the rates charged by the assessee for its CDR unit. It was contended that the cash PLI be considered for determining the correct and fair calculation of ALP. The fundamental principles of comparability analysis is to compare like with like. Since different companies are charging different policies for depreciation accounting, this leads to larger differences in the year to year operating margin of the companies. The ICAI guidance note on transfer pricing also recognises that the accounting treatment of expe....
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.....0% 15. ICRA Techno Analytics Ltd. (Seg.) 7.23 22.9% 22.87% 16. Informed Technologies India Ltd. 4.08 41.2% 41.24% 17. Infosys BPO Ltd. 649.56 35.5% 18. IServices India (P) Ltd. 16.29 54.7% 19. Maple Esolutions Ltd. 12.21 44.6% 20. Mold-Tek Technologies Ltd. (Seg.) 11.40 126.5% 21. R. Systems International Ltd. (Seg.) 17.34 26.1% 22. Spanco Ltd (Seg.) 35.00 29.2% 29.18% 23. Triton Corp Ltd. 53.37 49.1% 24. Vishal Information Technologies 30.60 56.2% 25. Wipro Ltd (Seg.) 939.78 35.7% 26. Nittany Outsourcing Services (P) Ltd. 23.23 18.0% 17.98% 27. Accurate Data Converters Ltd. 4.33 58.9% Arithmetic Mean 38.35% 24.97% PLI (cash profit for CDR unit) Particulars Total Revenue from CDR operations 10.94.49,682 Notional revenue 16.29,003 Total 11,10.78.685 Total operating cost 9.72,89,193 Less: Adjustment for exc....
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....vices received by the other unit and it should be taken as part of the revenue of that particular unit. In this case, we noted that the TPO has taken the total operating cost of the CDR unit which consists of the cost not only in respect of the services rendered to the AEs but also in respect of the services rendered to the Goa plant by the CDR unit. Since the total cost of the CDR unit has been taken, therefore, the notional revenue in respect of Goa plant should also be considered while computing the net operating profit. If the notional revenue for rendering services to the Goa plant is taken into account, we noted that the operating profit on the basis of the formula adopted by the TPO from the CDR unit will work out as follows: Before considering in house service to Goa plant After considering in house service to Goa plant Particulars Hours Average per hour rate INR Assessee Assessee Revenue from rendering of engineering support services to AEs abroad 180,064 608 10,94.49,682 10,94,49,682 Notional revenue for rendering services to Goa plant 2.680 608 16,29,003 Total 1,82,744 10.94,49,682 ....
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....ing the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation. We have gone through the order of the Bombay Bench of this Tribunal in the case of Dy. CIT vs. Reuters India (P) Ltd. (supra) as has been relied on by the learned Authorised Representative. We noted that the Tribunal in this case has adopted the cash profit/operating cost as the correct profit level indicator under the TNMM method. If the net operating profit ratio is computed in respect of the CDR unit before depreciation, it will be as under: Particulars Total Revenue from CDR operations 10,94,49,682 Notional revenue 16,29,003 Total 11,10,78,685 Total operating cost 9,72,89,193 Less: Adjustment fo....
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....n of this company is 49.4 per cent while the TPO has calculated the industry average @ 30.21 per cent which is 160 per cent higher than the industry average. In the case of Vishal Information Technologies the CIT(A) excluded the company from the comparables on the basis of super profit. In the case of Vishal Information Technologies the profit is 51.19 per cent. In the asst. yr. 2006-07 while disposing of the appeal of the assessee in ITA Nos. 2 and 5/Pnj/2013, this Tribunal vide its order dt. 17th April, 2014 has taken the view that companies earning super profit cannot be part of the comparables. Since the profit earned is more than 160 per cent of the industry average, this company cannot, in our opinion, be taken as a comparable, especially when the industry average is also based on the basis of calculation made by the TPO by taking into account those companies which are having manifold turnover than the assessee and has also derived profit upto 113 per cent. We, accordingly, delete this company out of the comparables. (v) Maple eSolutions Ltd.: While deciding the appeal of the assessee for asst. yr. 2006-07 in ITA Nos. 2 and 5/Pnj/2013, this Tribunal has excluded this....
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....this company was also not disputed. The only objection which has been raised by the assessee for excluding this company out of the comparables is that the AO while working out the operating profit ratio excluded the provision for doubtful debt out of the expenses. CIT(A) did not allow the relief to the assessee. We have perused the order of the CIT(A). We do not find any illegality or infirmity in the finding of CIT(A) as no such plfea has been advanced by the assessee before the CIT(A) pointing out the mistake in the computation of the operating profit of this company. Even otherwise also, taking of this company as a comparable, in our opinion, will not make any difference as the profit shown in respect of this company is 20.18 per cent which is much below the arithmetic mean computed by the CIT(A) i.e., 23.3 per cent. We, therefore, reject the submission of the learned Authorised Representative. (viii) Triton Corporation Ltd.: We find force in the submission of the learned Authorised Representative on the basis of the decision of the Delhi Tribunal in the case of Asstt. CIT us. CRM Services India (P) Ltd. (supra) wherein it was held that M/s Triton Corporation should be ....