TaxTMI 
TaxTMI 
2017 (3) TMI 1533
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....etermine arm's length price for its international transactions. International transactions pertaining to overall turbocharger business Ground 2 Rejection of combined operating margins of HTI and Honeywell Turbo Technologies India Private Limited ('HTTI') Erred in rejecting the Appellant's methodology of comparing combined operating margins of HTI and HTTI with operating margins of the comparable companies. Ground 3 Assignment fees considered as a part of operating cost of HTI Erred in considering the apportioned amount of assignment fees as a part of operating cost of HTI for AY 2008-09 in spite of the fact that the entire amount was considered as a part of operating cost of HTI by the AO in AY 2006-07. International transaction pertaining to rendering of supply base development and other back office services Ground 4 Inclusion of a non-comparable company in the final set of comparable companies Erred in including a non comparable company ICRA Online Limited in the final set of comparable companies for the financial year ended 31 March 2008. Ground 5 Selection of companies having super normal profits Erred in including comparable companie....
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....ellant in the manufacturing segment vis-a-vis comparable companies be allowed to the Appellant Adjustment should be restricted to international transactions with AE 15. Without prejudice to the above, erred in computing adjustment on the total turnover of the manufacturing segment of the Appellant instead of computing the same on the value of AE related international transaction pertaining to Overall turbocharger business; Grounds in respect of international transaction pertaining to provision of Business support services ('BSS Segment') Functionally not similar should be rejected 16. erred in not excluding companies, which are not functionally comparable to the Appellant (i.e. TSR Darashaw Limited, Saket Projects Limited, Access India Advisors Limited) Working capital adjustment 17. erred in not granting working capital adjustment to the operating margins of the comparable companies to account for difference in the working capital of the Appellant in the BSS segment vis-a-vis comparable companies be allowed to the Appellant; Grounds in respect of international transaction pertaining to provision of Application Engineering services ('AE Segment') C....
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....de the following adjustments to the income of assessee. a. Manufacturing operations: transactions pertaining to turbocharges business OP/OC of the assessee - 3.66% Margins of comparables - 8.54% TP adjustment made by the TPO - Rs. 9,53,57,800/- b. Business Support Services: Margins of assessee - 7.85% Mean Margins of comparables - 47.33% TP adjustment determined by TPO - Rs. 3,63,87,000/- c. Provision of Application Engineering Services: Margins of assessee - 9.85% Mean margins of comparables - 27.14% TP adjustment - Rs. 66,72,350/- 6. The TPO accordingly proposed upward adjustment of Rs. 13,84,17,150/-. The assessee filed objections before the Dispute Resolution Panel (in short 'the DRP'), who vide its directions dated 05.09.2012, upheld the adjustment made by the TPO. 7. The Assessing Officer consequently, issued order under section 143(3) r.w.s. 144C(13) of the Act by making the aforesaid addition of Rs. 13,84,17,150/-. 8. The assessee has raised several grounds of appeal against the TP adjustment made. The first ground of appeal raised by the assessee is general against the TP adjustment. The other grounds raised are spec....
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....ld get deleted, hence the other grounds of appeal pertaining to the said segment were not being pressed as these would resultantly become academic in nature. 12. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below. 13. We have heard the rival contentions and perused the record. The benchmarking of international transactions have been carried out by the TPO in the case of assessee which in turn has been approved by the DRP and applied by the Assessing Officer while passing the order under section 143(3) r.w.s. 144C of the Act. The assessee was engaged in the business of manufacturing of turbocharges which have application in automobile engines for supply to domestic customers and also to the associate enterprises. The assessee also provided application engineering and supply base development services to overseas related group entities. The TPO while benchmarking international transactions entered into by the assessee had considered the transactions under the head 'Manufacturing operations i.e. transactions pertaining to turbocharges business' on account of export of manufactured goods and payment of royalty.....
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....for the assessee in this regard, which we shall deal with in the following paras. The first concern which the assessee wants to be excluded is ICRA Online Ltd., since it was not only functionally different, but had exceptional year of operations and was earning super normal profits. The learned Authorized Representative for the assessee pointed out that ICRA Online Ltd. was rating agency, which was owned by several institutions and had developed its own tools. The learned Authorized Representative for the assessee pointed out that the said concern was picked up in the preceding year also and against its exclusion, two grounds of appeal were raised i.e. (a) the said concern was functionally different and (b) it had earned abnormal profits. Our attention was drawn to the decision of Tribunal in ITA No.03/PN/2012 , relating to assessment year 2007-08, order dated 15.06.2015. The learned Authorized Representative for the assessee pointed out that during the year under consideration, the first objection that the said concern was functionally different is being pressed though the Tribunal had decided the issue on abnormal profits earned by ICRA Online Ltd. in the preceding year, but had ....
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....to by the assessee with its associate enterprises at arm's length price. However, the TPO directed the Assessing Officer to apply only margins of current year in order to work out the margins of comparables. The assessee thus, recomputed the margins of comparables but in the process excluded certain concerns and applied the margins of few concerns and the average margins worked out at 7.85%, which was found to be at arm's length of PLI declared by the assessee. The TPO however, applied the margins of the concerns originally picked up by the assessee as functionally comparable and updated the margins by applying single year's data. The arithmetic mean of final list of comparables worked out to 47.33%, against which the TPO proposed adjustment of Rs. 3,63,87,000/-, against which the assessee is in appeal. 19. The first plea raised by the assessee is against exclusion of ICRA Online Ltd. from the final set of comparables. The assessee had in first instance, adopted the margins of said concern as its FAR analysis found the said concern to be functionally comparable. However, during the course of proceedings before the TPO, the assessee submitted that ICRA Online Ltd was functi....
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....ndertaken by the assessee was provision of specialized base knowledge connected to IT services, then even ICRA Online Ltd. was rate agency and was providing certain services of conducting research and preparing reports which were being provided to its customers. The assessee himself had picked up the said concern to be functionally comparable not only in the year under consideration but also in the earlier years. The said concern was excluded from the final list of comparables by the Tribunal in assessment year 2007-08 on the premise that the said concern for the said year had earned abnormal profits. However, for the year under appeal, the plea of assessee is not of abnormal profits but of it being functionally different. We find no merit in the plea of assessee in this regard, since the assessee has not brought on record any evidence to prove that the nature of business undertaken by ICRA Online Ltd. has changed during the year as against the activities carried on in the preceding year. The onus was upon the assessee to establish the same and in the absence of the same, we find no merit in the plea of assessee and accordingly, we uphold the inclusion of ICRA Online Ltd. in the fi....
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....such software. The Tribunal in turn, relying on the ratio laid down by Delhi Bench of Tribunal in Premier Exploration Services Pvt. Ltd. Vs. ITO in ITA No.4935/De/2011, relating to assessment year 2007-08, order dated 31.05.2013 applied the said ratio, wherein the Delhi Bench of Tribunal had analyzed the functional profile of TSR Darashaw Ltd. for the same financial year and held that the functions performed by the said company were similar to the companies providing services of IT / ITES. The Tribunal also held that the change in profile of the company in comparison to the earlier two years makes it non-comparable and just because it had been selected by the assessee itself in its TP study, such company could not be made comparable. Following the said decision, the Tribunal in assessee's own case for assessment year 2007- 08, directed the Assessing Officer / TPO to exclude TSR Darashaw Ltd. from the final set of comparables. The said company in the year under consideration is also engaged in the same business as in the earlier year, wherein it is earning revenue by using software developed for payroll processing. The said concern is functionally different from the activities carri....
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....s not functionally comparable and hence, cannot be included in the final list of companies and we hold so. We are not addressing the other issues raised in respect of the said concern in view thereof. 28. The last concern which the assessee wants to be excluded in BSS Segment is Access India Advisors Ltd. on the ground that it is super normal profit making concern and by way of additional ground of appeal No.16, being functionally not comparable. The first objection of the TPO for exclusion of the said concern was it is included by the assessee in its TP study report. As was held by us in the paras hereinabove, in case the assessee is able to bring on record any evidence to prove its case that the said concern which was considered to be functionally comparable to it, is now not functionally comparable because of the changed circumstances or changed activities, then such concern can be excluded from final set of comparables. We have held so in respect of TSR Darashaw Ltd. and also in respect of Saket Projects Ltd. The assessee though has challenged the said concern to be functionally noncomparable but the learned Authorized Representative for the assessee has failed to point out ho....
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....al Representative for the Revenue fairly admitted that the TPO has failed to address the said issue of whether risk adjustment is to be allowed. 32. Under the TP provisions, where in the facts of the present case, the assessee is risk mitigating entity, wherein all the risks are taken care of by the associate enterprises, then adjustment on account of difference in the risk profile of comparable companies merits to be allowed while benchmarking the international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation considering the aforesaid rule, which reads as under:- Particular % Average prime lending rate during AY 2008 -09 (A) 12.93 percent Average bank rate during AY 2008 -09 (B) 6.00 percent Difference between the prime lending rate and bank rate C = (A-B) 6.93 percent Risk Adjustment (C) 6.93 percent 33. Further, the Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 has allowed ....
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....le and where the said concern was not persistently loss making, then the results of the said concerns for the year under consideration should be picked up in the list of comparables for benchmarking international transactions. The second concern which the assessee wants to be excluded from the final list of comparables is Vardan Projects Ltd. for being functionally not comparable and being super normal profits making concern. The learned Authorized Representative for the assessee pointed out that the said concern had varying profits and hence, is to be excluded from the list of comparables. 38. The learned Departmental Representative for the Revenue pointed out that the concern Ace Software Exports Ltd. was excluded by the TPO being not functionally similar and also being consistently loss making concern. He further pointed out that in the last year, the Tribunal said that the said company was functionally similar but if such loss making companies are excluded, then such companies make higher profits, but margins of functionally similar should also be applied. He pointed out that if Ace Software Exports Ltd. is to be excluded, then Vardan Projects Ltd., cannot be excluded on the p....
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....l and in the absence of the same, there is no merit in the plea of assessee that it is not functionally comparable and hence, to be rejected. The operating margins shown by Ace Software Exports Ltd. do not reflect it to be persistently loss making concern and accordingly, we hold that Ace Software Exports Ltd. is to be included in the final set of comparables. On the similar anomaly, Vardan Projects Ltd. which is showing higher margins of 96.33% cannot be excluded on the ground that it was showing high profit margins, if it satisfies the comparability analysis. The assessee has failed to satisfy that high profit margins does not reflect the normal business condition. In the absence of the same and following the principle laid down by Special Bench of Tribunal, we hold that Vardan Projects Ltd. is to be included in the final list of comparables. 43. The third concern which is under discussion is Artefact Project Ltd. Both the learned Authorized Representatives have admitted that in case the said concern does not fulfill the RPT filter, then the same merits to be excluded. Accordingly, we direct the Assessing Officer to verify the claim of assessee in this regard and decide the issu....