TaxTMI 
TaxTMI 
2016 (4) TMI 1280
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....y of the Appellant 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 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 l....
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....transfer pricing adjustments. 14. Each one of the above grounds of appeal is without prejudice to the other. 3. Briefly, in the facts of the present case, the assessee is a joint venture company between TATA AutoComp System Limited (TACO) with Visteon 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 e....
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....e and applying different turnover filter and other filters and objected to the selection of comparables by the TPO. After analyzing the reply of assessee on each of account, the TPO found that there were certain errors in computation of PLI by him and certain errors in the computation of PLI of assessee also. 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....
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....lity of division of export to its associate enterprises should be considered since the profitability of domestic sales does not reflect any profits earned from any international transactions. The assessee also submitted before the authorities that there were differences in operating margins earned by the assessee in these 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....
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....13) 35 taxmann.com 582 and Honeywell Electrical Devices & Systems India Ltd. Vs. ACIT (2014) 64 SOT 118. Following the same parity of reasoning, we hold that segmental profitability in respect of provision of engineering design services by the assessee to its associate enterprises, should be considered to work out the PLI of international 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....
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.... for it is the fairness and reasonableness of furnishing of an explanation before the TPO/AO which is the issue. In-fact, in a somewhat similar situation the Hon'ble Supreme Court in the case of Tin Box Company vs. CIT (2001) 249 ITR 216 (SC) held that once it is established that the Assessing Officer had not given to the assessee an appropriate opportunity 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....
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....ther words, the addition is to be confined only to the component of transactions with associate enterprises alone and not to the entire segmental results. The ground of appeal No.3 raised by the assessee is thus, allowed. 18. The issue in grounds of appeal No.4 and 5 raised by the assessee is against selection of comparable companies. 19. The learned Authorized Representative 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 ow....
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.... for assessment year 2010-11, specific show cause notice was given to the assessee and the same was excluded after considering the detailed reply filed by the assessee. In assessment year 2011-12, the said company was not included as comparable company even in the show cause notice. Further, reliance was placed on the ratio laid down by Hyderabad Bench of Tribunal in Hyundai Motors 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....
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....pointed out by referring to the website of the said concern that it was engaged in the diversified business activity. It was also pointed out that though the activities of the said concern are in medical transcription, consultancy, translation and Accounts BPO services but there was no segmental information available in the Annual accounts of the said concern. Apart therefrom, it has been pointed out that the 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 totall....
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.... has also been upheld by the Hyderabad Bench of the Tribunal in the case of Brigade Global Services Private Limited (supra). Having regard to the aforesaid discussion, in our view, the said concern is not a good comparable to be included for the purposes of comparability analysis as it operates under a different business model which impacts operating margins. As a consequence, we direct the Assessing Officer to exclude the 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 ....
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....the exclusion of M/s Cosmic Global Ltd. from the final set of comparables. The Hyderabad Bench of the Tribunal considered an earlier decision of the Delhi Bench of the Tribunal in the case of M/s Mercer Consulting (India) P. Ltd. vs. DCIT vide ITA No.966/Del/2014 dated 06.06.2014 wherein also the said concern was found to be incomparable with an ITES provider. The following discussion in the order of the Hyderabad Bench of the Tribunal is worthy of notice :- "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....
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.... apply to hold Cosmic Global Limited as incomparable. This case is, therefore, directed to be excluded from the list of comparables. " In view of the detailed analysis of the coordinate Bench of the Tribunal in the above referred case, in this case also we accept the contentions of assessee and direct the Assessing Officer/TPO to exclude this comparable for the same reasons." 19. The aforesaid discussion made by the respective Benches of the Tribunal reveals that in relation to 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,....
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.... risk adjustment to the assessee. 34. On perusal of the order of Tribunal in assessee's own case relating to assessment year 2008-09, we find that similar issue of denial of risk adjustment benefit arose before the Tribunal. The Tribunal after considering the issue, directed the Assessing Officer to allow risk adjustment to the assessee and decide the issue in accordance with law by observing as under:- "50. We have considered the rival arguments made by both the sides. The Bangalore Bench of the Tribunal in the 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 ....
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....ign currency amounting to Rs. 8.43 crores from the total turnover as well as export turnover and had worked out the excess benefit amounting to Rs. 10,14,115/- under section 10A of the Act. The claim of the assessee before the Assessing Officer was that the said expenditure of Rs. 8.43 crores was incurred on salary, travelling, deputation cost, interest on other expenditure in relation to on-site development of engineering design services. The assessee further claimed that since it was engaged in the business of providing engineering and design services for auto sector, invoices were raised on the customers only in respect of engineering design provided to them and no separate charge was made on account of salary and travelling expenditure incurred for the company. Since these items were not included in the turnover, there was no question of reducing the same from export of total turnover. The claim of the assessee was not allowed by the Assessing Officer or DRP. 38. We find that similar issue of computation of deduction under section 10A of the Act was raised by the assessee before the Tribunal in assessment year 2008-09. The said claim of the assessee was rejected, in view of ....