TaxTMI 
TaxTMI 
2017 (2) TMI 1337
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....sessee justified its transactions with its AE as one at an arm's length on the basis of Transaction Net Margin Method (TNMM). For this, operating margin data in respect of comparable Indian companies were identified by the assessee. Hence, TNMM, using operating margin on operating cost as the PLI (Profit Level Indicator) was selected as the most appropriate method. 4. Based on the above analysis, 20 companies were selected by the assessee and their net margin was analysed. It was seen that the average operating margin on operating costs percentage of these companies was between (-) 61.5% to 46.4%. The arithmetic mean of the above mentioned companies was 9.6%. This margin was taken as the benchmark for comparison of the operating margin over operating cost earned by the Assessee from its software development services rendered to its AE. During the year the Assessee had earned an operating margin of 12% on transactions with the AE. Hence, it was concluded by the assessee that the provision of software development and software services to its overseas AEs were at an arm's length. 5. The AO on consideration of the above transfer pricing study conducted by the Assessee was of the ....
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.... 1 M/s. Mphasis BFL Ltd. 53.78 17.39 23.27 94.44 31.48 2 M/s. Visual Soft Technologies Ltd. 26.92 14.37 10.06 51.35 17.11 3 M/s. Blue Star Infotech Ltd. 21.31 13.1 5.16 39.57 13.19 4 M/s. Infotech Ltd. Loss 4.02 7.83 11.85 5.92 5 M/s Ftech Infosys Ltd. 51.08. 43.25 NA 94.33 47.16 6 M/s Aztec Software & Technology Services Ltd Loss 19.4 22.79 42.19 21.09 7 M/s K P I T Cummins Infosystems Limited 13.29 12.87 12.15 38.31 12.77 8 M/s Prithvi Information Solutions Ltd. 8.3 10.53 NA 18.83 9.41 9 M/s R.S.Software Ltd. Loss 7.57 NA 7.57 7.57 Average 18.41 The arithmetic mean of the operating profit on operating cost comes to 18.41% as compared to the operating margin on operating cost of the software division of the assessee company. which is 12%. Hence. by taking the operating profit on operating cost percentage as 18.41 % as the benchmark, the arm's length price of international transactions representing provision o....
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.... was as per the TPO's order. Based oh the above, the average operating margin came to be 17.77%. This margin is beyond 5% of the price as provided for in Section 92C(2) of the IT Act, and so can be used for the arm's length price adjustments. 15. The assessee in its submission dated 02.06.2010 to the Panel also stated it had submitted before the TPO requesting to make adjustments to the comparable companies' margins on account of the various' differences. These adjustments are on account of the following: * Risk. Adjustment: This adjustment, according to the assessee, was sought on account of the difference in the risk profile of a captive service provider (assuming less than the normal risks) and full-fledged entrepreneurs (bearing business and operational risks). The assessee stated that where a risk-insulated captive service provider would earn low returns, a full-fledged 'entrepreneur would earn higher returns, on the basis of higher the risk higher the returns. The assessee sought the above adjustment to be calculated on the basis of the difference between prime 'lending rate (PLR) and the bank rate, and determined the same at 4.75% (P....
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....gued against as it is required, and the IT Act does provide for that, but in the absence of limited guidance on the methodology to be adopted, and no such methodology being provided by the assessee which could be considered reasonable and accurate, the adjustments cannot be allowed. It would be beyond this Panel to come up with a specific number for adjustments. Hence in view of the same, the adjustments as requested by the assessee are denied. In fact, there. was no force in the submission of the assessee and the demand by them was neither specific nor accurate." 8. After the order of DRP the TPO passed the order of assessment u/s 143(3) r.w.s. 144C of the Act dated 30.07.2010. Against the aforesaid fair order of the assessment the assessee preferred appeal before the Tribunal in ITA No.1887/Kol/2010. The Tribunal vide its order dated 07.03.2010 had not allowed any relief to the assessee. The assessee filed an appeal before the Hon'ble Calcutta High Court and the Hon'ble Calcutta High Court vide its order dated 13.10.2012 in its G.A.No.2012 held that the entire matter should be remanded for fresh hearing by the Tribunal. Accordingly the appeal was restored to the file of the tr....
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....our issues arising for consideration pursuant to the order of the Tribunal dated 19.06.2013 in ITA No.1787/Kol/2010 I. Claim of Risk Adjustment II. Claim of Working Capital adjustment III. Removal of Comparable (Aftek Infosys Ltd.) sought by assessee IV. Inclusion of Comparable (Sasken Technologies Ltd.) sought by the assessee. 11. As far as the claim of the assessee for risk adjustment and workiing capital adjustments is concerned the DRP held as follows :- " 10.0 Finding: 10.1 DRP has carefully considered the facts of the case and the submissions of the taxpayer. The panel is not inclined to accept the assessee's claim of risk adjustment. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. Unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. ln the present case, except pointing out various risks, the....
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....P&L ale. But, it is always not necessary that these risks reflected in the marketing, sales promotion expenses will automatically be compensated by increase in sales or higher margins. For example, increased marketing efforts in some segments of export market may not yield results for a software development company and thereby there may be a loss on this marketing effort which may bring down the overall profitability rather than increase the profitability. Thus if undertaking the market risk etc. helps in earning any extra margin, the benefit is more than set off by the corresponding expenditure. The same applies to credit risk undertaken. * It is incorrect to say that higher the risk, the higher is the margin though it is true that higher risk expects a higher margin. Thus realization of risk is different from expected return based on risk undertaken. Finally selected cornparables had almost similar risks but margins varied. * The taxpayer's single customer risk more than offsets any other risk differential between the taxpayer and the comparable companies. * Different comparables can have different risk profiles and different profit margins. The pro....
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....es. While these daily and monthly figures may be available in the taxpayer's case, the same are not available in the case of comparable companies. Hence, calculation of reasonably accurate adjustments is not possible. Further, the issue of working capital would be relevant only when there is a situation of inventory remaining tied up or receivables being held up. These situations may not be so relevant to the service industry. 7.2 Further, this adjustment is not generic to be allowed as a routine. The assessee has to demonstrate unambiguously for the relevant period that variations in Working Capital profile would indeed have impact on the margins of the comparables. The factum of working capital adjustment having been allowed in other years would have no binding proposition unless it is demonstrated that the capital profiles were identical to such periods. In view of above discussion, the panel is of the considered view that this objection deserves to be rejected." 12. On excluding Aftek Infosys Ltd. As comparable the DRP took the following view:- "DRP has duly considered submissions of the assessee. There is no evidence furnished to DRP about functional d....
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....ctionality of the assessee is identical for all these periods, this contention is accepted by this DRP. The TPO/AO is directed to take this comparable in final list and re-compute the profit margin and consequent adjustment, if any thereafter. The objection is according allowed." 14. Pursuant to the aforesaid directions of the DRP the AO proposed an adjustment of Rs. 32.81 crores by his order dated 21.05.2015 giving effect to the directions of the DRP dated 16.03.2015as follows :- " 4. The Hon'ble DRP, Delhi in its order dated 16.03.2015 has rejected the all the claims of the assessee except for claim 4 i.e. inclusion of Sasken Technologies Ltd as among the comparable. 5. The assessee in its original transfer pricing study has rejected the company as functionally not comparable. However, this office has consistently taken a view that the M/s Sasken Communication Technologies Ltd as a comparable in subsequent years for the same assessee and as no difference in functionality of the above comparable is observed the decision of the DRP, Delhi accepted and no further appeal is suggested. It is also seen that after giving effect to the directions of DRP the....
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....5 are determined as under Operating margin declared by the assessee at 12% operating margin percentage- Rs. 40.80 Crores Operating margin taking the operating margin percentage at 21.96%- Rs. 73.61 Crores Arm's Length Price adjustment Rs. 32.81 Crores Hence an adjustment of Rs. 32.81 Crores has to be made following the Hon'ble DRP, Delhi order. 15. It can be seen from the aforesaid proposal of the AO that the original adjustment by the TPO at the first instance was Rs. 19,61,43,994/- which was increased to Rs. 32,81,00,000/-. The proposal as above was incorporated by the AO in his fair order dated 22.05.2015. Aggrieved by the aforesaid order of the AO dated 22.05.2015giving effect to the directions of the DRP u/s 144C of the Act dated 16.03.2015, the assessee has preferred the present appeal before the Tribunal. 16. The following are the grounds of appeal raised by the assessee:- "1. Order enhancing the income is bad in law 1.1. That on the facts and circumstances of the case and in law, the Ld. AO erred in enhancing the figure of transfer pricing adjustment in respect of Software services to Rs. 32,81,00,000 ....
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....ears. 3.2 The Ld. AO, and the TPO erred in not appreciating that the TPO in its own orders for preceding years i.e. AY 2005-06 as well as in subsequent years i.e. AY 2007-08 to AY 2011-12 has considered the margin of Sasken at overall entity level. Thus, following the principle of consistency, entity level margin of Sasken should be considered. 3.3 Without prejudice, the Ld. AO, and the TPO erred in not considering the unallocated expenses provided in the segment reporting of the Annual Report of Sasken while doing the segmental margin computation, as a result of which the margin so computed by TPO is significantly skewed and distorted. 4. Non- Rejection of Aftek as a comparable 4.1 The Learned AO, DRP and the TPO erred in not considering the claim of the Appellant for rejecting Aftek as a comparable company. 4.2 The Learned AO, DRP and the TPO erred in not considering that Aftek is functionally dissimilar to the Appellant. 4.3 The learned AO, DRP and the TPO erred in not considering that Aftek should be rejected as it enjoys significant benefits on account of intellectual property rights ('IPR'), which constitutes nearl....
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....234B 9.1. That on the facts and circumstances of the case and in law, the Ld. AO erred in levying interest of Rs. 3,25,49,736 under section 234B of the Act." 17. We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The first and foremost submissions of the ld. Counsel for the assessee was on exclusion of companies listed in ground no.2.2 from the list of comparables. In this regard we have already seen that the DRP when it passed order dated 17.06.2010 excluded these three companies from the list of nine comparable companies chosen by the TPO. In the order giving effect to the directions of the DRP dated 16.03.2015 these companies were never sought to be included. In other words, the DRP's directions dated 17.06.2010 was accepted by the revenue and the assessee and had become final. Therefore, the AO was not justified in adding these three companies as comparable companies while giving direction to the DRP in its order dated 16.03.2005. Therefore, these three companies have to be excluded from the list of comparable companies. We are of the view that the stand taken by the assessee in this regard deserves to be accepted. We have already seen....
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....al is projected in ground no.3 of its appeal. We have also seen that DRP in its direction dated 16.03.2015 has held that Sasken Communication Technologies Ltd has to be included as a comparable. The TPO has excluded this company chosen by the assessee from the list of comparables. The only limited prayer of the ld. Counsel for the assessee is that the DRP had given direction to take a profit margin at the segmental level whereas it should be taken at the entity level. In this regard it was pointed out by the ld. Counsel for the assessee that the TPO himself has taken the entity level margins in A.Y.2007-08 to 2009-10 as follows : Assessment year Margin as per TPO Order Paper Book Page Reference 2007-08 13.37% 171 2008-09 16.88% 201 2009-10 17.51% 204 2010-11 19.95% 207 2011-12 20.91% 210 Thus going by the above, it was submitted that the corrected computation of profit margins of Sasken at an entity level should be taken as given below: - Sasken Technologies Ltd. Amt in Lakhs Annual Report (AR) Mar 2004 12 months Pg No.60 of AR Annual Report Mar 2005 12 mmonths Pg No.60 of AR Annual Report....
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.... 13.13 14.42 13.90 20. After considering the submission of the learned counsel of the Assessee, we are of the view that the profit margin at the entity level of this comparable company Sasken ought to be taken and not at the segmental level. We are of the view that the claim of the Assessee that without allocating 'Corporate expenses' the margins have been computed needs verification by the TPO/AO and the TPO/AO is directed to verify this claim as given in the chart above and allow the same, if the figures are found to be correct. 21. The last and final submission of the ld. Counsel for the assessee is with regard to the adjustment towards working capital and risk adjustment. In this regard it was pointed out by the ld. Counsel for the assessee that the TPO again in A.Y.2004-05 in its order dated 15.05.2006 has himself allowed working capital and risk adjustment at 2% and similar allowance of such adjustments in the present assessment year should be done. The following are the relevant observations of the TPO in A.Y.2004-05 :- "Taking all these into account, the computation provided by the tax payer cannot be accepted as reliable. However it is no....