AI Drafter 
TaxTMI 
TaxTMI 
2016 (9) TMI 1447
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....panies should be excluded from the lists of comparables. 2. The learned TPO has erred in treating foreign exchange gain or loss as non - operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. On facts and in the circumstances of the case and law applicable, foreign exchange gain or loss should be considered as operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. Ground on working capital adjustment 3. The learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, working capital adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on risk adjustment 4. The learned TPO and CIT(A) has erred in not allowing risk adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, risk adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on inappropriate computation of oper....
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....earned TPO has erred in not properly computing the operating margin of the comparables and the assessee. On facts and in circumstances of the case and law applicable, the operating margin of the comparables and the assessee is to be properly computed. Prayer 12. In view of the above and other grounds to be adduced at the time of hearing, the respondent prays that the order of the learned CIT(A) to the extent prejudicial to respondent be quashed or in the alternative the aforesaid grounds of cross objections be accepted and relief be allowed accordingly. 3. M/s Aroba Ltd is a subsidiary of Aroba Wireless Network Incorporated USA. It is engaged in providing software development and support services to its AE. 4. The following are the details from the international transactions of the Assessee. 1) Income from software development services amounting to Rs. 15,74,03,549/-. 2) Income from providing marketing services amounting to Rs. 2,06,39,290/- 3) Purchase of capital asset amounting to Rs. 2,40,16,114/- 5. The assessee adopted TNMM at entity level, whereas the TPO adopted TNMM segment level. The operating costs of the assesse....
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....8% Adjusted mean margin after working capital adjustment 20.73% Operating Cost (A) 13,75,90,785 Arm's length price - 120.73% of operating cost (B) 16,61,13,355 Total operating Revenue (c) 15,74,03,549 Short fall being Adjustment u/s92CA (BC) 87,09,806 8. The TPO has computed the working capital adjustment at 2.39%. The TPO has contended that there must be a upper cap for the adjustment to be given. Hence the working capital adjustment is restricted to 1.98% and the adjusted mean margin is computed at 20.73%. 9. The CIT(A) observations with respect to software development segments is as follow. CIT(A) Observation (Software Development Segment) SL. No .Name of the Company Sales (Rs. In crores Operating Margin on Cost Adjusted Operating Margin on Cost CIT(A) Order 1 ICRA Techno Analytics Ltd. (seg) 11.89 24.94% 23.79% Accept 2 Infosys Ltd. 21,140.00 44.98% 43.79% Reject 3 Kals Information Systems Ltd(seg) 2.16 34.41% 29.54% Accept 4 Larsen & Toubro Infotech Ltd. 1,776. 76 19.33% 18.53% Reject 5 Mindtree Ltd (seg) 698.....
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....perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 3. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 4. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functio....
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....T(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from the list of comparables selected by TPO/AO. 17. Hence based on final list of comparable companies 3 in Nos. viz. Persistent Systems, RS Software, Think Soft, the working capital adjustment comes to 1.92% which is lesser than 1.98 adopted by the TPO. 18. The appellant's margin for software division is as under:- Particulars Amount(INR) Operating Revenue as per TPO 15,74,03,549 Operating Cost as per TPO 13,75,90,785 Operating Profit 1,98,12,764 OP/OC 14,40% 19. Ground No.2 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature. 20. With respect to ground No. 3 working capital adjustment, the CIT(A) has held that the action of the TPO in restricting working capital adjustment to 1.98% is correct. We find that 1.92% which comes out based on final list of comparables is lesser than 1.98% adopted by the TPO. The ld counsel for the assessee requested that working capital adjustment should be given at actual based on final comparables. R....
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....ch Ltd.* 13.68% Accept 2 3 HCC A Business Services 19.09% Reject 4 Hindustan Housing Co Ltd 38.12% Reject b) Fails RPT filter 5 ICC International Agencies Ltd., 13.72% Accept 6 Killick Agencies & Mktg. Ltd. 17.36% Reject c)Fails RPT filter 3 7 Priya International Ltd 11.47% Accept 24.80% 29. The learned counsel for the assessee submitted as follows:- 30. Asian Business Exhibition & Conferences Ltd., should be rejected as it is functionally different from the Appellant for the following reasons: a. As per director report, the company is engaged in the business of organizing exhibitions and conference. b. As per profit and loss account, the company has revenues from exhibitions & events, delegate fees, sponsorships and entry charges. c. As per significant accounting policies, the company has revenues recognition policy for income from exh....
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.... The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- "11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. ....
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.... 32. The learned counsel submitted that HCCA Business Services is engaged in Payroll processing. Therefore this company is functionally different from the Appellant and should be rejected. Reliance is placed on ITAT decision in the case of DC IT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under: (1) HCCA Business Services Pvt. Ltd. 13. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 14. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO....
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.... in the nature of commission income and service charges. Therefore, this company was functionally dissimilar to that of assessee. 18. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. 19. The ld. DR has submitted that the TPO has considered the relevant information as reported in the annual report of the company and it was found that this company is acting as an agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company was found to be in the business of marketing support services which is similar to the assessee. 36. Also we find that RTP filter is substantial at 16.4% and hence the following decision of 24/7 Customer.Com Pvt. Ltd., (Supra), we direct the TPO to exclude this comparable. 37. Following the co-ordinate bench decisions stated (Supra) we direct that TPO to exclude Asian Business Exhibition & Conferences Ltd., Cyber Media Research Ltd.,, HCCA Business Services Pvt. Ltd., Hindustan Housing Co. Ltd., and Killick Agencies & Marketing Ltd. 38. Hence the final comparables in sales and support services segment which are to be reta....
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....ibuted 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..................". 5.5.2 In conformity with the findings of the earlier Bench (supra), we direct the AO/TPO to work out suitable risk adjustment and compute the ALP accordingly. 40. The particulars for grant of risk differential is as follows: Particulars Amount (INR) Total Operating Revenue 2,06,39,290 Operating Cost as per TPO 1,87,62,380 Operating Margins 18,76,910 OP/OC 10.00% 41. Hence, we direct the TPO to grant risk adjustment in light of the decision of Bearing Point (Supra). 42. Ground No.9 the TPO is directed to provide appropriate working capital adjustment for the sales and marketing segment. 43. Ground No.8 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature for marketing support services. 44. The Appellant's margin is within 5% range of the average margin of....