AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 505
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....approval of Pr. CIT - 2, Hyderabad for determining Arm's Length Price u/s 92CA of the IT Act. 2.2 Assessee's Profile: The assessee company is engaged in providing/rendering R&D support services in respect of CAD and CAE tools in designing the automobile parts and is into modelling and iterative simulation. It receives the basic design from its group company. With respect of CAD modelling, it made a 3-D CAD modelling data of vehicle components using CAD software tools primarily CTIA. The CAE modelling services using Hypermesh comprises of finite modelling for the computer simulation which would involve breaking down the model in various structures. 2.3 International Transactions: As per 3CEB report, the international transactions reflected are as under: AE Nature of transaction Amount (Rs.) Hyundai Auto Ever Corporation Purchase equipment of 20,88,403 Purchase of computer 2,12,08,832 Purchase of computer software 27,41,790 Reimbursement expenses of 49,08,346 Payable 60,88,745 ....
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....d. 1.98 8. Microgenetic System Ltd. 7.01 9. TCS E-Serive Ltd. (Merged) 65.82 10 Cross Domain Solutions Pvt. Ltd. 29.88 Total 249.59 Average 24.96 2.7 After applying the average margins of the comparables to the financials of the assessee, the TPO determined the arm's length price as under: Description Amount (Rs.) Arm's length margin 24.96% Less: W CA 1.04% Adjusted Arm's length margin 23.92% Operating cost 75,77,31,854 Arm's length margin (%) 23.92% ALP @ 123.92% of OC 93,89,81,313 Price received 82,46,34,775 Adjustment u/s 92CA 11,43,46,538 The arm's length price of the assessee was Rs. 93,89,81,313/- and the shortfall of Rs. 11,43,46,538/- was treated as adjustment u/s 92CA of the IT Act. 3. Aggrieved, the assessee preferred an appeal before the DRP and DRP vide its order dated 31/10/2016, retained the comparables selected by TPO by observing as below and further directed the TPO/AO to readjust the W CA as under: "In our opinion, the differences, if any, in respect of the comparables, are taken care of by taking....
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....acts and circumstances of the case or in law, the AO/ORP erred in confirming the rejection of Crystal Voxx Limited as not comparable. Adjustment should be restricted to the international transactions 7. That on the facts and circumstances of the case or in law, the AO/ORP has erred in making the adjustment by considering total revenue of the Company without appreciating that the transfer pricing adjustment should be restricted only to the value of international transactions with the AE. Working capital adjustment 8. That on the facts and circumstances of the case or in law, ORP has erred in directing the AO/ TPO to consider the average Prime Lending Rate (PLR) of 13.85% for the FY 201112, instead of the PLR of 14.75% as adopted by the TPO vide his order. Use of Filters 9. That on facts and circumstances of the case and in law, the AO/ORP erred in upholding the use of different financial year end filter for rejection of comparable companies while undertaking the comparative analysis. Rejection of use of multiple year data 10. That on facts and circumstances of the case and in law, the AO/ORP erred in rejecting t....
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....cess to new customers and services and reduces our reliance on our existing large customers. The Agilyst business model is also very similar to ours and so we see many business synergies, including opportunities for cross-selling services across our combined customer base. The acquisition also adds delivery capability in Chandigarh - now our third location after Mumbai and Pune in India, and brings an additional 1,000 people into the eClerx family". By this acquisition, the financials are not reliable. He relied on the following cases: 1. Exevo India Pvt. Ltd., Vs. DCIT, ITA No. 20/Del/2017 - AY 2012-13 2. Fractal Analytics Pvt. Ltd., Vs. ACIT, ITA No. 1024/Mum/17 3. S&P Capital IQ Pvt. Ltd., ITA No. 200 & 435/hyd/2016 4. Hyundai Motor India Engg. Pvt. Ltd. 5. Hyundai Motor India Engg. Pvt. Ltd., ITA No. 128/Hyd/2016 & 216/Hyd/2016 6.2 Ld. DR, on the other hand, relied on the orders of revenue authorities. 6.3 Considered the rival submissions and perused the material on record. As per the submission of ld. AR, this company has acquired new entity. Agilyst Inc, USA and it is extraordinary event. By further relying on the case law Exevo....
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....nd, relied on the orders of revenue authorities. 6.6 Considered the rival submissions and perused the material on record. W e find that in AY 2008-09 and 2009-10 the coordinate bench of this Tribunal in assessee's own case has excluded this company as comparable from the list of comparables by observing as below: "11.1 We are in agreement with the contentions of the comparability on turnover ratio of assessee with this company on the ground that assessee's turnover is about Rs. 15.79 crores, as against turnover of Rs. 1016 crores of the Infosys. We are also of the view that other contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys BPO is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Considering these aspects, we are of the opinion that even though the profits of the Infosys BPO Ltd. is reasonable and no super profits are earned, because of its big brand value this company has to be excluded on the grounds of fun....
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....d also on the grounds of functional dissimilarity and huge turnover. Though, the company before us is TCS e-Service Ltd., and not Infosys BPO, we find that the turnover of the assessee company for this assessment year is around Rs. 50 crores as against the turnover of TCS e-Serve Limited of Rs. 1405.10 crores. Therefore, following the turnover filter as well as taking note of the fact that it owns and possesses brand value and intangibles as compared to the assessee which does not own such assets, we direct that this company be excluded from the list of final comparables. Accordingly, assessee's grounds of appeal No.6 is partly allowed." Following the said decision, we direct the AO/TPO to exclude the said company as comparable. 6.10 Crossdomain Solutions Pvt. Ltd. - Ld. AR submitted that this company cannot be a comparable to the assessee company as this company is functionally dissimilar as it has a diversified Knowledge Process Outsourcing Company providing services in insurance, health care, HR and accounting domains. Company also offers business excellence market research and data analytics and IT services. It was also submitted that the company is engaged in softwar....
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....lected by the TPO, the TPO observed that provision for doubtful debts are considered as operating expenses only when the same expenses are incurred every year for the last three years upto and including FY 2011-12. These expenses are incurred at almost consistent level in terms of its ratio with the turnover. Otherwise, the same is excluded from operating expenses treating the same as extra ordinary or restricted to the extent of reasonableness based on the three years' figures. He opined that the provision for doubtful debts are allowed provided a company follows a consistent approach to make provision every year, otherwise such expenses become extraordinary and thus are excluded from operating expenses. 7.1 Aggrieved, the assessee raised objections before the DRP and before the DRP it was submitted that the provision for bad and doubtful debts should be considered as operating in nature. On this count, the assessee sought for recomputation of margin in the case of Eclerx Services Ltd., Infosys BPO Ltd., TCS e-Serve Ltd and Datamatics Global Services Ltd. 7.2 The DRP after considering the submissions of the assessee, upheld the action of the TPO by observing as under: ....
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....ies Pvt. Ld., in ITA No. 243/Hyd/2014 vie order dated 14/11/2014 wherein the coordinate bench has held as under: 40. With respect to ground No. 2.6.3 and 2.6.4, it was argued by the learned counsel that the TPO erred in computing the margins of comparable companies by considering the provision for bad and doubtful debts and bad debts as non-operative expenditure. 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: "106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts we do not se....
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.... TPO rejected the inclusion of the additional comparable due to the reason that the company failed the service income filter and also has persistent losses at the segmental level. On a perusal of the Annual Report, it is noticed by us that the finding of the TPO are not in conformity with the Annual Report. However, It is noticed by us from the Annual Report, that the entire revenue of Rs. 3,05,34,534 has been shown as 'professional income'. Nowhere in the Annual Report is there any clarity with regard to functions performed by the above company except that, in the segmental reporting, it is mentioned that the company's operation predominantly relates to single segment, namely "BPO activity". The mention of the word 'predominantly' indicates that the company is also performing other functions, in regard to which no information is available. Further, the company cannot be retained as a comparable even if it is considered that the company is providing BPO services, considering the high end services (KPO) provided by the assessee. Accordingly, the above company cannot be considered as a comparable." 8.3 Aggrieved, the assessee is in appeal before us. 8.4 Cons....