TaxTMI 
TaxTMI 
2016 (4) TMI 1280
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....f 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 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not computing the transfer pricing adjustment on international transactions pertaining to provision of engineering design services to its Associated Enterprises only. 4. Search Matrix and FAR Analysis for fresh search carried out by learned TPO not shared The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not sharing the search matrix and FAR analysis for fresh search carried out by learned Transfer Pricing Officer ("TPO"). 5. Erroneous selection of comparable company The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in selecting the following companies ....
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....International Holdings, USA (Visteon). The assessee was in the business of rendering designing and developing services relating to products in CAD/CAM of auto parts and also customer support servicing and techno marketing services to its associate enterprises i.e. TACO and Visteon International Holdings, USA. Since the assessee had entered into international transaction, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under section 92CA of the Act. The assessee had selected TNMM method as most appropriate method to benchmark its international transactions relating to provision of engineering design services, Receipt on account of Desk utilization charge, Payment of fees Managerial and technical fees. In respect of reimbursement of expenses to associate enterprises and reimbursement of expenses from associate enterprises, no method was selected. Further, in TNMM analysis, the operating profits earned by comparables have been computed on operating cost. The assessee had identified comparable companies on the basis of FAR analysis and had referred prowess and capitaline plus database to get the information of comparable companies. The assessee in its TP st....
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....o. The TPO thus, re-computed PLI margins of 5 comparables selected by him and arithmetic mean worked out at 34.86%. 5. With regard to the objection regarding PLI computation of the assessee that only segmental profitability in respect of export to associate enterprises should be considered as profitability of the assessee since the profits earned by domestic sales do not reflect profits earned from any international transaction, was not accepted by the TPO, in view of the DRP rejecting the said claim of assessee in assessment year 2008-09. The assessee also requested that working capital adjustment should be re-worked, but the TPO noted that certain figures of PLI margins were incorrect and the TPO re-worked the working capital adjustment. Accordingly, PLI of the comparables were computed after working capital adjustment and the arithmetic mean worked out to 32.87%. As against this, PLI margins of assessee was 19.84% and an adjustment of Rs. 3,80,04,052/- was proposed to the arm's length price of international transaction of the assessee. The Assessing Officer proposed draft assessment order, against which the assessee filed objections before the DRP, Pune, who in turn, dismis....
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....e two segments because of different billing rates as well as difference in skill sets of employees, who provides services in the respective segments. It was stressed by the assessee that the transfer pricing provisions were applicable only to the international transactions for working out the arm's length price of providing services to its associate enterprises. Consequently, the economic analysis and functional comparability should be made only for the international transactions and not for the whole entity. 12. We find that similar adjustment of the PLI by only considering the segmental profitability of exports made by the assessee to its associate enterprises to be considered for working out the PLI of assessee company, arose before Pune Bench of Tribunal in assessee's own case in assessment year 2008-09 and the Tribunal vide order dated 21.10.2015 held as under:- "17. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO in the instant case made an adjustment to the assessee's international transa....
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.... transactions undertaken by the assessee. The Assessing Officer/TPO is thus, directed to re-work the PLI of segment consisting of international transactions and we direct the Assessing Officer to work out the same after affording reasonable opportunity of hearing to the assessee. The ground of appeal No.2 raised by the assessee is allowed for statistical purposes. 14. The issue in ground of appeal No.3 raised by the assessee is against computation of adjustment in respect of provision of engineering design services to its associate enterprises at entity level. 15. The Assessing Officer/TPO while computing transfer pricing adjustment had computed the same in respect of all the transactions of assessee and not limited itself to the transactions with associate enterprises. Under section 92C(1) of the Act, any income arising from an international transaction is to be computed having regard to the arm's length price. The objective of computing arm's length price is to determine income arising from any international transaction undertaken by the person, hence while working out the adjustment required to be made, the same is limited to the international transactions with associa....
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....of being heard, that the assessee had an opportunity before the higher appellate authorities was really of no consequence, for it was the assessment order that counted inasmuch as the assessment order was required to be made only after the assessee had been allowed a reasonable opportunity of being heard. Considered in the aforesaid light, in the present case it is axiomatic that so far as the issue of the PLI adopted by the assessee in respect of Tools manufacturing segment of Operating Profit/Operating Revenue is concerned, the same has been altered by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on this aspect also assessee succeeds. 21. By way of Ground of Appeal Nos. 7 and 8, assessee has assailed the addition of Rs. 30,70,02,006/- made by the Assessing Officer by holding that international transactions of the Tools manufacturing segment were not at arm's length. The appellant-company has assailed the said addition on three aspects. The first aspect is that the Assessing Officer erred in rejecting the segmental results of Rajasthan Ud....
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....resentative for the assessee pointed out that the TPO had revised the filters to be applied and picked up new set of comparables in order to benchmark the international transactions of the assessee with its associate enterprises. The learned Authorized Representative for the assessee further pointed out that the concern Acropetal Technologies Ltd. selected by the TPO was functionally different and there was difference in business model. The said company was showing super normal profits and further, there was low employee cost. It was further pointed out by the learned Authorized Representative for the assessee that the consideration of only engineering design services segment for PLI computation of Acropetal Technologies Ltd. was directly covered in favour of the assessee by the decision of Tribunal in assessee's own case for assessment year 2008-09. 20. On perusal of order of Tribunal in assessment year 2008-09, we find that the Tribunal had held that the said concern Acropetal Technologies Ltd. was functionally comparable to the assessee. However, since the TPO had considered entity level profit margins of the comparable company in respect of engineering design services segment ....
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....s India Engineering P. Ltd. Vs. ITO in ITA No.1850/Hyd/2012, relating to assessment year 2008-09, order dated 21.02.2014. It was noted that the said company was a geospatial services content provider specializing in land based technologies. Further, the said company also carried out R&D services and owned intangibles. The functional profile of the said company is same in assessment year 2009-10 also. Further, the Hyderabad Bench of Tribunal in assessment year 2009-10 in Hyundai Motors India Engineering (P.) Ltd. Vs. DCIT (supra) has rejected the said concern being functionally different, first on account of its technical software services being provided and also having super normal profits. Following the same line of reasoning as in the earlier year and since the said concern functionally is not comparable to the assessee, we direct the Assessing Officer/TPO to reject the same from final set of comparables. We hold so. 25. The next concern to which objections have been raised by the learned Authorized Representative for the assessee is exclusion of Cosmic Global Ltd. being functionally not comparable and having super normal profits. 26. In this regard, the learned Authorized Repr....
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....he said concern has incurred a substantial expenditure of Rs. 2,86,29,348/- towards translation charges as is evident from the Annual Report of the said concern. The said translation charges are approximately 60.17% of the total cost incurred by the said concern and the employee cost comprises of merely 17.32% of the total cost. It was therefore contended that the aforesaid facts justify an inference that the said concern was not adopting the normal and routine business model for an otherwise normal ITES provider. The proportion of expenditure incurred on outsourcing and employee costs show that the said concern seems to have outsourced the functions to different vendors. The aforesaid was highlighted to point out that the operating business model of Cosmic Global Ltd. was totally different from that of the assessee. In this context, the Ld. Representative pointed out that the TPO had rejected the Ace Software Exports Limited from the list of comparables and one of the reasons ascribed was that the said concern was incurring major expenditure on software sourcing charges. The TPO in the context of Ace Software Exports Limited came to conclude that the said concern was not a service....
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....he said concern from the final set of comparables." 17. We further find that the Tribunal in PTC Software (India) Private Limited vs. DCIT (supra) and BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) and also in M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT (supra) while deciding the appeals of the relevant assessees in assessment years 2009-10 had held that M/s Cosmic Global Ltd. is not to be considered as a comparable. The relevant observations of the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) are as under :- "16. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. Before the TPO also, assessee had canvassed that the said concern was functionally not comparable to the assessee. It was pointed out that the said concern is engaged into translation, transcription of data which is entirely different from the functions being performed by the assessee. The TPO has rejected the plea of the assessee by merely noticing that in the preceding assessment year 2008-09, the stated concern was selected by the assessee as a comparable concern. 17. Before us, th....
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....19. The main objection of assessee with reference to the inclusion of this company is with reference to outsourcing of its main activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- "13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a co....
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....the financial year under consideration, the business model in which M/s Cosmic Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables, in view of the aforesaid discussion. Thus, assessee succeeds on this aspect." 18. Since the said concern, M/s Cosmic Global Ltd. was operating in different business model than the assessee in the year under consideration also, the same needs to be excluded from the final set of comparables and accordingly we direct the Assessing Officer to exclude the same from the final set of comparables. Following the same parity of reasoning, we hold that M/s Cosmic Global Ltd. is to be excluded from the final set of comparables." 28. The issue be....
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.... 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 assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company. The assessee's contention that the risk adjustment should be at 5.5% or....