TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 1363
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....he Government of India. The assessee conducted research activities and provided knowledge management services to its associated enterprise. The assessee derived business from following major segments: - Business Information - Intellectual Property - Investment Research and financial analytics - Market Research (Primary) 3. In the business information segment, the assessee primarily rendered research service to its AE. Evalueserve analysts covered a range of industries, including - banking, insurance, telecommunications, pharma & bio-tech, chemicals, energy, consumer goods. It had performed research in around 200 countries. The assessee utilized primary and secondary sources to conduct its research and analysis in this segment. 4. In the Market Research (Primary) segment, the assessee acted as back office research centre (mainly a captive unit) and did not have any direct competition in India as it provided services mainly to its AE. 5. Further the assessee had no direct interaction with the market due to the fact that work was outsourced to the Indian entity from its AE. The assessee had entered into the following international transactions: S.No. Nature of Transaction Va....
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....Technologies Ltd. 2005 March 27.24% 3 Alphageo (India) Ltd. 2005 March 23.78% 4 C S S Technergy Ltd. 2005 March 11.15% 5 K L G Systel Ltd. 2005 March 7.95% 6 Transworks Information Services 2005 March 2.71% 7 Tutis Technologies Ltd. 2005 March 7.28% 8 Tech Mahindra (R&D) 2005 March 19.8% 9 ICRA Techno Analytics Ltd 2005 March 27.65% Average 15.83% 11. Before ld. TPO the assessee had, inter alia, submitted that the margin of these two additional comparables had to be recomputed. Ld. TPO accepted the assessee's contention as per his finding on pages 47 & 48 of his order in regard to Tech Mahindra (R&D Services Ltd.) and also in regard to ICRA Techno Analytics Ltd., the findings of which are contained at pages 49 & 50 of his order. He further pointed out that the margins of the remaining seven comparables, on the lines of the computation of these two comparables, is to be done again. He, accordingly, recomputed the margins of all the other seven comparables, the details of which are contained from pages 51 to 55 of his order and, accordingly, final selection of comparables was done as under: S. No. Financial Head Year End OP....
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.... tested party as well as the comparables. 17. Ld. CIT(A) computed the ALP on the basis of recomputed margins as under: S.No. Name of Company OP/TC 1 Alphageo (India) Ltd. 14.22% 2 Allsec Technologies Ltd. 23.34% 3 Transworks Information Serviecs Ltd. 1.41% 4 Tutis Technologies Ltd. 4.34% 5 I C R A Techno Analytics Ltd. 13.60% Average 11.38% 18. Accordingly, he held that since the OP/TC margin earned by the assessee was within +/-5% range permissible under proviso to section 92C(2) of the Arm's length margin, therefore, the international transactions of the assessee were held to be at arm's length. After adjudicating the corporate issues, ld. CIT(A) finally partly allowed the assessee's appeal. Being aggrieved with the order of ld. CIT(A), the department is in appeal before us and the assessee has filed cross objection. 19. ITA no. 393/Del/2010 ( Departmental appeal): 20. The department has filed additional ground of appeal, which is reproduced hereunder: 1. On the facts and in the circumstances of the case whether the Ld. CIT(A) erred in law and on facts in allowing working capital adjustments to the assessee without considering the detailed....
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....n which working capital adjustment has been considered by ld. CIT(A) is not correct because working capital adjustment is always in respect of comparables and not in respect of tested party. He pointed out that opening and closing working capital data is sufficient to allow adjustment, as has been held in the following orders of ITAT: - New River Software Services Pvt. Ltd. Vs. ACIT - ITA no. 451/Del/13 dated 27.3.2015. - Navisite India Pvt. Ltd. Vs. ITO - ITA no. 5329/Del/12 dated 31.5.2013. 26. The assessee has also filed cross objection on this issue. 27. We have considered the submissions of both the parties and have perused the record of the case. We are not in agreement with the findings of ld. CIT(A) that working capital adjustment cannot be computed on the basis of year end figures. We find that in the case of Navisite India Pvt. Ltd. (supra), it has been held that the opening working capital deployed and the closing working capital deployed has to be taken into consideration for meeting any adjustment to the working capital deployed in the case of a comparable. If we accept the contention of ld. CIT(A), then it will become impossible to allow any working capital adjust....
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.... profit. He pointed out that ld. TPO had never opportunity for considering adjustments allowed by ld. CIT(A). He pointed out that ld. CIT(A) had arrived at margins lesser than arrived at by assessee after working capital adjustment. He pointed out that the margins arrived at by ld. CIT(A) were 14.22% a against margins arrived at 21.88% by assessee itself after allowing working capital adjustment. Ld. DR further referred to page 6 of CIT(A)'s order wherein the ground raised before ld. CIT(A) are concerned, in which ground no. 4.1 reads as under: "4.1. The Ld. AO/Ld. TPO erred in interpreting that the IT Enabled Services activities of the appellant can e categorized as a high end service and can be placed high in the value chain of the IT enabled services industry in India and that the Appellant is engaged in software development and call centre activities." 30. Ld. DR submitted that ld. CIT(A) has not adjudicated this ground and there is no challenge in CO on this count. Therefore, the fact that assessee is KPO, rendering high end services, is not disputed. 31. Ld. counsel for the assessee submitted that Tech Mahindra (R&D) has been rejected by ld. CIT(A), which was an ITES and, ....
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.... making TP additions was mentioned. 36. Ld. CIT(A) considered these submissions and, thereafter, arrived at profit margin of 11.38% for which details were furnished at pages 122 to 122A of the submissions. He, therefore, submitted that only the computational errors were corrected by ld. CIT(A). 37. As regards the issue raised by ld. DR regarding KPO/BPO, ld. counsel submitted that ld. CIT(A) rightly treated the assessee as ITES. He pointed out that on this count there was no show cause issued by ld. TPO and there is no ground of appeal. He further pointed out that the concept of BPO and KPO is always overlapping. He referred to page 43 of PB-II dated 22.8.2016, wherein the submissions made before ld. CIT(A) are contained and pointed out that specific ground was taken before ld. CIT(A) that ld. AO/ TPO erred in interpreting that the IT enabled service activities of the assessee could be categorized as high end service and could be placed high in the value chain of the ITES industry. He pointed out that in this regard assessee had referred to TP documentation and had pointed out that assessee derived business from 4 major segments, which included business information and market res....
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....to be consistent in his approach in rejection/ selection of comparables. Tech Mahindra (R&D): 42. As far as this comparable is concerned, we find that ld. CIT(A) has observed at page 40 as under: Tech Mahindra (R&D): I have perused the annual report and website of Tech Mahindra (R&D). The notes to accounts clearly states that the company is engaged in software development services while Evalue Serve India is engaged in provision of IT enabled research services. Nasscom has distinguished between these two different set of service providers. I IT services or software services consist of applications software (enterprise, technical and entertainment software aimed at businesses and home users) and systems/database management software. On the other hand IT enabled services essentially includes back office services in the nature of Customer Support, Technical Support, Telemarketing, Insurance Processing, Data Processing, Internet / Online / Web Research and so on. Thus, it is evident that the functional profile of a company engaged in IT services and IT enabled services is different. Accordingly, based on the above, I reject Tech Mahindra (R&D) as a comparable company for the appel....
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....can have a better view of the cost incurred for making sales during a particular period. Therefore, in my view for calculating operating profit from TP perspective, one must arrive at the cost of goods sold and the following formulae gives the true and correct picture of cost of goods sold. Cost of goods sold Opening stock + Purchases + Direct expenses - Closing Stock Whereas, the Revenue is the gross inflow from sale of goo s or from rendering services and other revenue stream, which is linked with the business operations. Based on the above, I agree with the contention of the appellant that stock adjustments should be treated as a part of operating expenses." 45. The aforementioned reasoning given by ld. CIT(A) cannot be disputed because change in stock has been considered as an expenditure since this essentially refers to the cost of goods sold. It is not disputed that consistent method has been adopted for all the comparables under consideration in this regard. We do not find any reason to interfere with these findings of ld. CIT(A) ground no. 4 is dismissed. 46. As regards ground no. 5, seeking invocation of rule 46A, we find that computation of operating profit margin....