AI Drafter 
TaxTMI 
TaxTMI 
2016 (7) TMI 1281
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....ertaken by the Appellant in accordance with the provisions of the Act read with the Rules and conducting a fresh economic analysis for the determination of the arm's length price in connection with the international transaction pertaining to provision of design engineering support services and international transaction pertaining to manufacturing segment of Appellant and in respect of royalty and service charges paid by the Appellant; B. Grounds of appeal in relation to TP adjustment in manufacturing segment of Appellant Ground No. 2- Non grant of working capital adjustment The learned TPO and the learned AO have erred in facts and in law, by not making suitable adjustments to account for differences in the working capital employed by the comparable companies despite the mandatory directions given by Honourable DRP to allow the same and thus erred in violating provisions of section 144C of the Act. Ground No. 3- Abnormal expenditure considered as operating in nature Erred, in law and in facts, by considering certain abnormal expenditure as part of operating costs for computation of margins of the Appellant; Ground No. 4- Non-allowance of capacity utilisation adjus....
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....ment for differences in function, asset and risk profile Erred in law and facts, by not making suitable adjustments for differences in function, asset and risk profile of the Appellant vis-à-vis the comparable; B. Corporate Tax grounds Ground No. 14 - Computation of losses and unabsorbed depreciation available for setoff Erred in law and facts in computing the losses and unabsorbed depreciation available for set off, without considering the brought forward losses and unabsorbed depreciation of earlier years; C. Other grounds of appeal Ground No. 15 - Transfer pricing adjustment without giving benefit of +/- 5 per cent as available under proviso to section 92C(2) of the Act. Erred in computing the arm's length price of the international transactions, without taking into account the benefit of +/- 5 per cent variation from the mean where it is within the range, which is permitted and opted for by the Appellant under the provisions of section 92C(2) of the Act; The Appellant prays that, while computing adjustment/relief, benefit of +/-5% should be provided as per section 92C(2) of the Act. Ground No. 16- Non consideration of multiple year data availab....
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....d based on the principle of consistent treatment of operating margins of the tested party as well as comparables. Hence in the facts and circumstances of the case, we admit the additional ground raised by the assessee for adjudication. 4. As we have already discussed that if the gain/loss is arising due to foreign exchange fluctuation in respect of sale proceeds that it would be part of the operating margin of the assessee as well as operating margins of the comparables. Accordingly, we direct the A.O./TPO to compute the operating margins of the assessee as well as comparable companies by including the gain/loss if any due to foreign exchange fluctuation in respect of the sale proceeds. 5. The assessee was incorporated as a subsidiary of R V Meritor Le Australia Pte Ltd. The assessee is engaged in providing design service relating to Light Vehicle System. During the year under consideration the assessee also commenced the activity of manufacturing from its new unit located in Pune. The Bangalore unit is involved in providing design engineering support service to its Associated Enterprise ('AE'). The Bangalore unit is a contract engineering support service provider. The assess....
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....owed by the TPO. However, we are of the view that the working capital adjustment needs to be computed in respect of comparables retained without putting any restrictions. Accordingly, the TPO is directed to compute mean of working capital adjustment in respect of comparables retained, after giving effect to the directions contained in this order." Since the TPO has not complied with the directions given by the DRP therefore, we set aside this issue to the record of the TPO/A.O. for giving the proper working capital adjustment without any restriction as held by the co-ordinate bench of this Tribunal in the case of Citrix R & D India Pvt. Ltd. in IT(TP)A No.1289/Bang/2014 wherein it was held that the TPO cannot restrict the working capital adjustment artificially from the actual computation. 11. Ground No.3 is regarding abnormal expenditure considered as operating in nature. 12. Ground No.4 is non-allowance of capacity utilisation adjustment. 13. The assessee has bench marked its international transactions in manufacturing segment by considering the composite transaction of sale as well as royalty paid to the AE. The TPO has separated the royalty from manufacturing transa....
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....nd thereby considering the 10 comparable companies for determining the ALP as under : Sl.No. Name of the Company Margin % 1 Acropetal Technologies Ltd. (Seg.) 22.27 2 Evoke Technologies Ltd. 18.75 3 e-Zest Solutions Ltd. 16.79 4 Infosys Ltd. 45.01 5 Kals Information Systems Ltd. 38.37 6 LGS Global Ltd. 11.95 7 Persistent Systems Ltd. 30.35 8 R S Softwre (India) Ltd. 10.29 9 Tata Elxsi Ltd. 21.88 10 Thinksoft Global Services Ltd. 17.05 Average PLI 23.71 Thus the TPO has computed the average PLI at 22.27% and after granting working capital adjustment @ 2.18% the adjusted mean margin was arrived at 20.09%. Accordingly, the TPO proposed the adjustment under Section 92CA of the Act of Rs. 3,24,44,613 in respect of the international transactions in software development segment. The assessee filed objections before the DRP. The DRP has excluded 6 comparable companies from the final set of the TPO which includes 2 companies viz. R S Software Ltd. and LGS Global Ltd from the list of assessee and remanding 4 viz. Infosys Ltd., Tata Elxsi Ltd., KALS Information....
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....esign engineering support service segment reported by the assessee in which the assessee has carried out international transactions. Since the assessee has also paid the royalty to its AE therefore the TPO has segregate Royalty as a separate international transactions from manufacturing segment and examine the same independently for the purpose of determining the ALP. The TPO has determined the ALP of royalty and service charges at Nil by recording the reasons that the assessee did not produce any evidence/document on how the Royalty rate is fixed and further to show the profitability from the future revenue stream before fixing the royalty rate. The TPO has also observed that there is no proof that the group concerns or third party are also charged identical royalty and the assessee has also failed to show that it derived any economic benefit from the know-how received from the AE. Accordingly, the TPO proposed the adjustment of the entire amount of royalty and service charges of Rs. 4,51,95,098. As regards the manufacturing segment, the TPO accepted the transaction with AE at arm's length. Thus the TPO did not accept the composite transaction of manufacturing segment including ro....
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....to show that the assessee has derived some benefit from the transfer of technology for which the royalty to be paid to the AE. As far as the justification and deriving the benefit from transfer of technology is concerned this is beyond the scope of the process of determining the ALP by the TPO, therefore we do not agree with the view of the TPO that the assessee was required to establish the benefit derived from the technology transfer by the AE against which the royalty has been paid. Once the assessee is under obligation as per the license agreement to manufacture the items under the license owned by the AE then it is irrelevant to prove that the assessee has derived special benefit from the technology transferred by the AE. When the manufacturing activity itself has been carried out as per the license granted by the AE under the terms and conditions of the license agreement then the TPO is not allowed to outrightly reject the claim of royalty. The jurisdiction and power of the TPO is only to determine the ALP of the royalty in comparison to the comparable price. The TPO has not made any endeavour or took any step to examine the royalty payment by considering with comparable pric....
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....ssessee that if sub-lease income is excluded from the operating profit then corresponding lease expenditure shall also be excluded from the operating cost while computing the operating margin of the assessee. Accordingly, we set aside this issue to the record of the A.O./TPO to compute the operating margin of the assessee after excluding the corresponding lease expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only. 24. The next grievance of the assessee in its appeal is regarding exclusion of 3 companies by the authorities below viz. (i) LGC Global Ltd. (ii) Akshay Software Technology Ltd. (iii) R S Software India Ltd. As it is apparent from the grounds raised by the assessee as well as revenue that they are not disputing the comparability of two companies viz. R S Software India Ltd. and LGS Global Ltd.. Accordingly, in view of the fact that both the assessee as well as revenue are seeking inclusion of these two companies in the set of comparables, we restore these two companies to the set of comparables. 25. The assessee is seeking inclusion of another company viz. Akshay Software ....
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....nue is regarding remaining four companies excluded by the DRP viz. Infosys Ltd., KALS Information Ltd., Persistent Systems Ltd. and Tata Elxsi Ltd which we will deal one by one as under : (i) Infosys Ltd. 30.1 The learned Departmental Representative has submitted that the DRP has rejected this company on the ground of huge on site revenue as compared to the services rendered within India and further the company has valuable intangibles, brand value, selling and marketing expenses, etc. He has submitted that merely high turnover and size of the company cannot be a ground for exclusion or inclusion of a company in the list of comparables. In support of his contention, he has relied upon the decision of the Mumbai Benches of this Tribunal in the case of Willis Processing Services India Pvt. Ltd. Vs. DCIT 57 SOT 339 and submitted that the economies of scales are not available in case of the services providing sector as there is no fixed cost impact on the price. He has further contended that the revenue from the product sale is only less than 5% which is insignificant and further the R & D expenditure is only 2.1% of the sale. Therefore more than 95% of the revenue is from the se....
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.... Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided me....
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....08 and 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 as per decisions of the co-ordinate benches (cited supra) also this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the list of comparable companies. It is ordered accordingly." We further note that the co-ordinate bench of this Tribunal in the case of Ikanos Communication India Pvt. Ltd. (IT(TP)A No.548/Bang/2015) for the Assessment Year 2010-11 has taken the same view. Accordingly, when no s....
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....Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 32.4 We have heard the rival submissions and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis. We hold that this company i.e. Persistent Sys....