AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 1363
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....stered with Software technology Park of the 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 intern....
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....ng comparables for the benchmarking of the international transaction: S. No. Financial Head Year End OP/TC % 1 Ace Software Exports 2005 March 14.92% 2 Allsec 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 ....
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....d.) 15. Further, he allowed the working capital adjustment only in regard to interest on loans taken by both the comparables as well as the assessee. 16. Ld. CIT(A) further examined the TPO's computation of operating profit and held that stock adjustment and misc. income is to be treated as operating income and finance charges and misc. expenses were to be treated as operating expenses for both the 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. Bein....
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....nt of working capital the need for the adjustment arises only if the elements of working capital i.e. debtors and creditors are affected by the international transactions, which the tested party undertakes with its AEs. He further observed that as a first step if the international transactions with AE do not impact any of the elements of the working capital there should be no need for a working capital adjustment. 25. Ld. counsel pointed out that the basic premise on 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....
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....ns were recomputed for all comparables without affording any opportunity to assessee. He submitted that no reason has been given by ld. CIT(A) for rejecting three comparables on the ground that foreign exchange earnings was less than 50%. Further, he rejected Tech Mahindra n(R&D), on the ground that the same was functionally not comparable to assessee. He referred to page 57 of CIT(A)'s order where ld. CIT(A) has given findings on various items in regard to determination of operating 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 pla....
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....wherein at page 289, chart was filed for determining the operating profit margins. Ld. counsel referred to page 55 of TPO's order and pointed out that after considering these mistakes, ld. TPO determined the PLI at 17.53% as against 15.83% in show cause notice. Ld. counsel referred to PB II, filed on 22.8.2016 and referred to page 72 of the same wherein in regard to ground no. 4.6 raised before ld. CIT(A) in regard to computation of operating profit/ total cost earned by the comparable company for 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 submission....
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....T(A). 41. Now coming to the issue of comparables, we find that as far as rejection of three comparables viz. Ace Software Exp., C S S Technergy Ltd. and KLG Systel is concerned, ld. CIT(A) has rejected these comparables for the reason that it had no foreign exchange earnings. This has been done because BT TechNet Ltd. was rejected by ld. TPO on the ground that it had no foreign exchange earnings. We do not find any reason to interfere with the order of ld. CIT(A) on this count because ld. TPO was required 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 b....
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.... 'Income' side or adjusted in 'Expenditure' side. Different companies adopt varying presentations for disclosing 'Change in Stock'. Difference in disclosure/ presentation should not lead to different PLI calculations of companies. Accordingly, it is necessary to adopt a consistent way of treating change in stocks for PLI computation purposes. Based on the various accounting principles and standards, I am of the view that 'Change in Stock' should ideally be adjusted in expenditure so that one 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 ....