TaxTMI 
TaxTMI 
2014 (4) TMI 1096
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....arison made by TPO in his assessment order. 3. The Ld. CIT(A) erred in not considering the adjustment in the operating margin of CDR unit, as has been asked for by appellant, in relation to in-house work performed by CDR unit of the company for its manufacturing plant at Goa and thereby disregarding revenue to the extent of Rs. 24,11,233/-. while the Revenue has taken the following effective grounds of appeal : 1. In the facts and circumstances of the case, the learned CIT(A) erred in allowing marketing cost adjustment of 10.96% to the comparable uncontrolled price ignoring the fact that volume discount adjustment made by the TPO has already factored in this adjustment. 3. The brief facts of the case are that the Assessee is engaged in manufacture of fibre glass pressure vessel used for water treatment. Return showing income of Rs. 4,37,44,500/- was filed on 29.11.2006. The AO made reference to Joint Director of Income Tax (Transfer Pricing), Bengaluru for determination of the arm's price length in respect of the Assessee's transaction with associated enterprises. TPO passed order u/s 92CA on 30.10.2009 suggesting transfer price adjustment of Rs. 4,05,98,402....
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.... the Assessee has applied TNMM method for determining the ALP and selected 6 comparable companies of which the average operating profit to operating expenses ratio was 9.08%. The list of the comparable companies is given as under : S.No. Name of the Company Turnover (Rs.) Profit from Operations (Rs) Operating Margin to Sales (%) 1 ACF Software Exports Ltd. 54,982,366 3,393,105 6.17 2 Apex Advanced Technology P. Ltd. 48,963,534 7,906,382 16.15 3 Apex Knowledge Solutions P. Ltd. 49,216,221 7,149,832 14.53 4 CS Software 115,678,198 15,690,366 13.56 5 VAMA Industries Ltd. 70,968,208 8,035,310 11.32 6 VJIL Consulting Ltd. 153,813,632 2,638,204 1.72 Arithmetic Mean 9.08 TPO rejected the selection of the Assessee but he has selected a different set of comparables of 14 companies and worked out the operating margin @ 23.72%, the details of which are as under : S.No. Name of the Company Turnover (INR in Crs) Operating Margin on cost 1 Maple eSolutions Ltd. 7.43 32.66% 2 Allsec Technologies Limited 92.25 ....
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....he selected company reported an operating margin of 48.03% which is very high from the Industry Average of 23% (as determined by TPO). While disposing the appeal for AY 2007-08, in the case of the appellant itself, the Ld. CIT(A) agreed to allow relied by deleting Vishal Info on the ground of super profit earning company. That year the operating margin of Vishal Info was 51.19% and in AY 2006-07, the margin was 48.03%. Hence following the same analogy, it should be excluded. 3 Asit C Mehta Financial Services Limited This company belongs to a group called Asit C. Mehta who is a share broker and its primary business is stock market related activities like rendering services of Registrar to Share Issue etc. This company of the group does not even have a standalone website. In this backdrop whether the comparison has been rightly done by TPO? The ratio of operating margin to cost is 34.52%. 4 Goldstone Infratech Limited (Seg.) It is primarily a Polymer Insulation manufacturing company. It BPO segment worked only till 2007, as such not a consistent player in ITES/BPO segment. During the year 2006, its revenue from BPO segme....
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....er, 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-à-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 TP 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. DCIT vs. Reuters India (2013) ....
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.... Depreciation provided 3,114,059 Adjusted Operating Cost 42,657,315 Operating Profits 9,578,003 Net Operating Profit/Operating Cost 22.45% 4.2 The ld. DR relied on the order of the TPO. 4.3 We have heard the rival submissions, perused the material on record alongwith 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....
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....s to Goa Plant 4,870 527 2,566,471 Total 99,119 49,668,848 52,235,319 Total Operating Cost 45,771,374 45,771,374 Operating Profits 3,897,474 6,463,945 Net Operating Profit/Turnover 7.85% 12.37% Thus, the correct operating profit in the case of the Assessee from CDR unit, in our opinion, will be 12.37%. 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 6 comparable companies and has calculated the operating profit of these companies @ 9.08% but the TPO did not agree with the Assessee and has taken 14 comparable instances on the basis of which the arithmetic mean of the operating profit has been calculated at the rate of 23.72%. So far the selection of the 9 comparable companies by the TPO is concerned, the Assessee did not have any objection. The Assessee has objection in res....
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.... 42,657,315 Operating Profits 9,578,003 Net Operating Profit/Operating Cost 22.45% 4.3.1 Now, we will deal with each of the companies which the Assessee claims to be excluded from the comparables : i) Maple eSolutions Ltd. :- TPO has considered Maple eSolutions Ltd. as a comparable and computed the margin in respect of this company @ 33.66%. We noted that the Hon'ble Delhi Tribunal in the case of ACIT vs. CRM Services India Pvt. Ltd., 14 taxmann.com 96 has held that this company could 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 A.Y 2006-07 we noted that the profit margin has been taken by the TPO at 28.75%. When the Assessee went in appeal before CIT(A), CIT(A) has excluded this company for the purpose of comparison. No cogent ma....
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....he Assessee is primarily engaged in water filtration industry. It has a division which is engaged in IT related activities and this CDR division is functionally confined to providing engineering services in water treatment related line of activity. The prime function of Asit C. Mehta Financial Service Ltd. is share broking and it is rendering the services of Registrar to share issue. This company cannot be regarded to be an ITES related services company for selection of comparables. We do agree that the nature of the business and the nature of the services rendered by the two companies should be similar. Share broking activities cannot be compared with a company which is rendering IT related services for water treatment line of activity. This company, in our opinion, cannot be regarded to be a company which is rendering similar services as is being rendered by the Assessee. We, accordingly, exclude it from the comparables. iv) Goldstone Infratech Ltd. :- It is not denied by the ld. DR that the TPO has applied export turnover filter of 25% and in the case of this company, the export turnover filter was only 13.75% because the export revenue is only Rs. 4.25 crores as compar....
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....3.2 We noted that after excluding the 5 comparables, the cash PLI of 9 companies as computed by the ld. AR and submitted before us, copy of which is given to the ld. DR, comes to 26.78%. In the Assessee's case, the cash operating profit has been computed @ 22.45%. Therefore, the difference comes only 4.33% which is less than 5%. We noted that as per the proviso to Sec. 92C where more than one price is determined by the most appropriate method, the Arm's Length Price has to be taken to be the arithmetic mean of such prices. We also noted that the said proviso during the impugned assessment year also provides that at the option of the Assessee the price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean be taken to be the Arm's Length Price. Since the difference in the case of the Assessee is only 4.33% which is less than 5%, therefore, in our opinion, no addition on this account can be sustained in the case of the Assessee. We, accordingly, set aside the order of CIT(A) and delete the addition sustained by CIT(A) amounting to Rs. 65,01,783/-. Thus, ground nos. 1-3 taken by the Assessee is allowed. 5. Now, coming to the appeal of the Reve....
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....he marketing cost adjustment of 16.36% in the following manner should have been allowed. 1. Non-AE export sales (Rs.) 24,79,85,385 2. Non-AE domestic sales (Rs.) 21,38,54,506 3. Commission income from AEs (Rs.) 5,21,97,007 5. Expenses of marketing office in Dubai (Rs.) 3,47,79,102 6. Expenses of marketing representative in Europe (Rs.) 99,47,498 7. Expenses of international marketing from India office (Rs.) 43,90,104 8. Total expenses on international marketing [(4+5+6)] (Rs.) 4,91,16,704 9. Ratio of international marketing expenses to international [7/(1+3)] 16.36 CIT(A) after considering the submission of the Assessee and also the order for A.Y 2004-05 and 2005-06 directed the AO to allow adjustment of 10.96% for marketing cost in computing ALP for the finished goods export segment after verifying accuracy of the relevant figures as under : "17. I have carefully considered the appellant's submissions. In his remand report dated 24.05.2012 for AY 2005-06, the TPO has stated that the difference between the adjustment allowed by the TPO and the adjustment sought by the appellant was due to ....