TaxTMI 
TaxTMI 
2016 (7) TMI 238
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....ar. 2.1 In response to the notice u/s.92CA(2) of the I.T. Act the assessee submitted various details. The TPO noted that during the year the assessee had undertaken the following international transactions : Sr.No. Nature of transaction Amount Method 1 Provision of IT based engineering services 258507362 TNMM 2 Receipt of managerial services (paid) 4553207 TNMM 3 Reimbursement Expenses (paid) 8016243 NA 27,10,76,812 3. So far as the provision of IT based engineering services is concerned, the TPO noted that the assessee has selected TNM method as the most appropriate method to benchmark the international transaction relating to rendering of IT based engineering services. The operating profits earned by comparables have been computed on operating revenue. However, during the course of TP proceedings the assessee submitted the details of PLI of the assessee as well as comparables with PBIT/operating cost. For benchmarking the international transactions, the assessee identified comparable companies from the field of ITEs and engineering design services listed in the prowess and capitaline ....
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....onal Corporation Ltd. can be considered as comparable. The TPO thereafter adopted new filters. He noted that the assessee company is a service providing entity. One of the criteria is selection of companies with turnover exceeding Rs. 2 crores and lower than Rs. 200 crores. After applying the quantitative and qualitative filters the TPO selected the following companies as the final set of comparables, the details of which are as under : Sr.No. Name of the company PLI margin (OP/OC) 1 Genesys International Corporation Ltd. 47.40% 2 HDO Technologies Ltd. 22.33% 3 Acropetal Technologies Ltd. 39.47% 4 C.S. Software Ltd. 21.15% 5 Vama Industries 5.69% Arithmetic Mean (136.04/5) 27.21% 8. Since the assessee's PLI margin is 11.67% whereas the average PLI margin of the comparables comes to 27.21% the TPO proposed adjustment of Rs. 4,02,74,292/- to the ALP which is as under : i. Operating revenue from ITES Rs.28,95,10,000 ii. Operating cost Rs.25,92,44,000 iii. Operating Profit shown by Assessee Rs.3,02,66,000 iv. Arm's Length Price (259244000 x 127.21/100) Rs.32,97,84,292 ....
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....e learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs. 6,04,43,374 to the value of international transactions entered into by the Appellant with its Associated Enterprise in respect of provision of Engineering Design Services. 2. Erroneous rejection of segmental profitability of the Appellant The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the segmental profitability of the Appellant in respect of provision of Engineering Design Services to its Associated Enterprises. 3. Erroneous computation of adjustment in respect of provision of Engineering Design Services to Associated Enterprises at the entity level. The learned CIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in computing the transfer pricing adjustment on the entity level income of the Appellant instead of computing the transfer pricing adjustment on international transactions pertaining to provision of Engineering Design Services to its Associated Ent....
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....transfer pricing adjustment. The Ld. ACIT erred on the facts and in law while levying interest u/s.234A and section 234B of the Act, on account of the unanticipated transfer pricing adjustment. 14. Each one of the above grounds of appeal is without prejudice to the other. 15. The Appellant reserves the right to amend, alter or add to the grounds of appeal." 13. Ground of appeal No.1 being general in nature is dismissed. 14. So far as ground of appeal No.2 is concerned the Ld. Counsel for the assessee submitted that the TPO made an adjustment to the assessee's international transaction of the provision of IT based Engineering Services considering the operating margin of 11.67% of the whole entity. Although the assessee had stated that adjustment should be made only on segmental profitability of "Exports to AE" as profitability to domestic sales does not reflect profits earned from any international transactions the TPO had rejected the same. Before the DRP it was submitted that the differences in operating margins earned by the assessee in these 2 segments are because of the different billing rates as well as difference in skill sets of the employees, who provide serv....
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.... of the whole entity. While doing so, he rejected the contention of the assessee that adjustment should be made only on segmental profitability of "Exports to AEs" as profitability of domestic sales does not reflect profits earned from any international transactions. We find the DRP agreed in principle that PLI should be computed only on international transaction and accordingly held that it should be computing according to the segment consisting of the international transactions with the AEs. Accordingly, they directed the AO to work out PLI of the segment consisting of the international transactions only if such segmental data is available. 18. It is the submission of the Ld. Counsel for the assessee that he has filed such segmental profitability before DRP, copies of which are placed at pages 73 to 80 of the paper book. From pages 73 to 80 of the appeal memo we find the assessee has given segmental profitability based on scientific and consistent methodology. No mistakes have been pointed out by the DRP/TPO. The Various Benches of the Tribunal are consistently taking the view that PLI should be considered only for the segment pertaining to international transactions with AEs.....
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....s of the co-ordinate Benches, finally accepted the plea of the assessee in the following words: "49. All these cited decisions in general and the decision in the case of M/s.Jt .Jin Electronics I P. Ltd. Vs. ACIT 36 SOT 227, in particular are uniform in asserting that the TP adjustments are to be computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the imports from the AEs, i.e. controlled cost. The principle of proportionality is relevant here and it is a settled law in this regard. In the situation like the one in the instant case of the assessee, there is data relating to controlled and uncontrolled cost particulars. This undisputed data is suffice to arrive the proportionate sales relatable to the international transaction with the AEs i.e. controlled cost . Accordingly, the ground no. 10 relating to incorrect computation of transfer pricing adjustment to the manufacturing activity is allowed pro tanto. " 15. In view of aforesaid discussion we therefore, hold that the assessee has to succeed on the said plea and as a result Ground no. 7 raised by the assessee stands allow....
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.... Ground of appeal No.3 by the assessee is accordingly allowed. 22. So far as Ground of appeal No.4 is concerned it is the submission of the Ld. Counsel for the assessee that sundry credit balances written back at Rs. 29,33,688/- was not considered by the AO as operating income. Referring to the ledger account of the prior period expenses the Ld. Counsel for the assessee submitted that the detailed break-up of the amount of Rs. 29,33,688/- was given which shows that the amount pertains to revenue items and is clearly operating in nature and ought to be considered as such. He accordingly submitted that a direction may be given to the AO to look into the same and decide accordingly. 23. The Ld. Departmental Representative on the other hand submitted that it is not a part of the operating profit. The safe harbour rule excludes such type of expenses. Therefore, this ground raised by the assessee should be dismissed. 24. We have considered the rival arguments made by both the sides. It is not in dispute that no details were filed either before the AO or before the DRP. However, since it involves computation of operating profit of the assessee and since the assessee has filed cer....
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....tted that the TPO, based on the submissions made by the assessee, has dropped Genesys International Corporation Ltd. from the final set of comparables. Referring to the decision of the Hyderabad Bench of the tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd. Vs. ITO vide ITA No.1850/Hyd/2012 order dated 21-02-2014 he submitted in that case Genesys International Corporation Ltd. was excluded from the list of comparables on the ground that this company is a Geospatial services content provider specialising in land based technologies. Further, the business of this company requires skilled manpower and scientists and Civil Engineers etc. It also carried out R&D services and own intangibles. Following the decision of the Bangalore Bench of the Tribunal in the case of Sumphony Marketing Sales India Pvt. Ltd. reported in 38 taxmann.com 5 (Bangalore) order dated 14-08-2012 the Tribunal has held that this company cannot be regarded as comparable and deserves to be excluded from the list of comparables. 28. The Ld. Departmental Representative on the other hand while supporting the order of the TPO/DRP referred to page 101 of the appeal memo and submitted that from the segmental ....
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....ogrammetry, remote sensing cartography, data conversion related computed based services and other related services. Further the business of this company requires skilled manpower and scientists, civil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables." 33. Since the assessee company is engaged in providing Engineering Design Services and since the Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd. (Supra) has excluded Genesys International Corporation Ltd. from the list of comparables on the ground that the company is functionally different, therefore, following the decision cited (Supra) and further considering the fact that Genesys International Corporation Ltd. was not included as comparable company in A.Yrs. 2010-11 and 2011-12 by the AO himsel....
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....3/PN/2013 order dated 13-01-2015. It has been held in the said decision that if sufficient number of 100% uncontrolled comparables are not found then comparables having similar transactions should be considered. When sufficient comparables are not available, then the threshold should be relaxed and only gradually to the extent that sufficient comparables are found the limit should be relaxed. He submitted that since in the case of the assessee only 4 comparables were available, therefore, the filter has to be relaxed. 37. The Ld. Departmental Representative on the other hand submitted that the TPO has rejected Ace Software Exports Ltd. not only for abnormal loss, but he had also given various other reasons such as nature of business of the company which relates to database creation (e-publishing) pertaining to Information Technology Enabled Services. Further, it is reported in segment/product-wise performance that the company's operations falls under single segment namely software and services exports. Segment-wise performance has not been furnished. The Ld. Counsel for the assessee was unable to counter the findings given by the TPO, therefore, Ace Software Exports Ltd. has rig....
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....herefore, it was rightly rejected as comparable company. The decision of the Tribunal in the case of Approva Systems Pvt. Ltd., (Supra) as relied on by the Ld. Counsel for the assessee is not applicable to the facts of the present case. In that case the threshold filter of 75% was adopted by the AO which was upheld by the CIT(A). The Tribunal after considering the totality of the facts of the case held that Export filter should be relaxed to 50% from 75%. Here, in the instant case the RPT filter has been considered by the AO at 25% and above. Therefore, the said decision, in our opinion, is not applicable to the facts of the present case. Accordingly, we hold that AO/TPO/DRP are justified in rejecting Geometric Software Solutions Co. Ltd. from the list of comparables. Ground of appeal No.6 by the assessee is accordingly dismissed. 41. In ground of appeal No.7 the assessee has challenged the erroneous computation of operating margin of C.S. Software Ltd. 42. The Ld. Counsel for the assessee referred to page 17 of the TPO order and submitted that the TPO in the final set of comparables has taken the PLI margin of C.S. Software Ltd,. at 21.15%. The AO in the assessment order at ....
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.... 49. The Ld. Counsel for the assessee in his rejoinder submitted that the prime lending rate was considered as the normal risk bearing rate of return, i.e. rate at which all commercial banks in India would ideally land the independent customers. The bank rate was considered as the risk free rate of return. Therefore, the difference between the PLR and bank rate is the risk premium which was considered as the adjustment on account of risk profile between the taxpayer and the comparables. Considering the PLR as 12.61 and the bank rate at 6% the risk premium comes to 6.61%. He accordingly submitted that adopting the above approach the risk adjustment for the year ended March 31st 2008 is 6.61%. In case the same is not acceptable he submitted that risk adjustment based on CAPM can be computed. 50. We have considered the rival arguments made by both the sides. The Bangalore Bench of the Tribunal in the case of Intellinet Technologies India Pvt. Ltd. (Supra) at para 7.1 of the order has observed as under : "7.1 As seen from the records, the assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assess....
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....as not excluded the expenditure incurred in foreign currency for the purpose of calculating export turnover as provided in Explanation 2 (iv) of section 10A. On being questioned by the AO it was submitted that while considering deduction u/s.10A of the Act all the funds to be considered as expenses in foreign currency as well as receipts against the same needs to be ignored. Relying on the decision of the Chennai Special Bench of the Tribunal in the case of ITO Vs. Sak Soft Ltd. it was submitted that the expenditure incurred in foreign currency is to be deducted not only from export turnover but also from total turnover. Since the assessee itself has agreed to exclude the expenditure incurred in foreign currency from export turnover and total turnover the AO disallowed an amount of Rs. 4,73,965/- being excess benefit claimed and disallowance u/s.10A was reduced by Rs. 4,73,965/-. 56. Against the draft order the assessee approached the DRP who decided the issue against the assessee holding that assessee had agreed to exclude the expenditure incurred in foreign currency from the export turnover and the total turnover. Therefore, the factual objections raised by the assessee before....