TaxTMI 
TaxTMI 
2018 (12) TMI 1133
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....unds raised by the assessee are as follows: (1) Ground No.1 raised by the assessee relates to disallowance under section 14A, other than what the assessee had suo-moto disallowed. (2) Ground No.3 raised by the assessee relates to additions made with respect to unbilled revenue to the tune of Rs. 17,44,27,000/-, which is already included in the revenue/income of the company. 4. We shall first take-up additions challenged on account of Transfer Pricing Adjustment as has been raised vide ground No. 2, which is reproduced below for ready reference: Ground No.2 raised by the assessee relates to upward adjustment on arm's length price to the tune of Rs. 1,45,89,355/- wherein the assessee objected that method adopted by ld. Commissioner are not in sync with reality. 5. The brief facts qua the issue of transfer pricing adjustments of Rs. 1,45,89,355/- are that M/s. R.S. Software (India) Ltd. was incorporated on 02.12.1987, as a private limited company and subsequently converted into a public limited company in 1992. The company is in the software industry and engaged in developing customized commercial application software as per specific needs and requirements o....
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....tment to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; 4.Arriving at the arm's length price in relation to the supply of the property or provision of services by the enterprise which is the sum arrived at by adding the adjusted mark up to the costs as in 1 above. 13.1 Identification of costs: The cost identification is done internally, and it includes all costs directly associated with the work, which is in terms of the manpower cost and other identified direct costs for the manpower involved in the project. No part of indirect costs are considered neither appropriations nor allocations. This step is not very critical as the mark up is applied on such costs and it is thus important to state whether the mark up adopted meets the arm's length pricing. 13.2 Identifying the mark up: 13.2.1 For identifying the mark up, the CPM guidelines state that the same has to be computed as the GP mark- up arising from the tra....
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....bove table reflects the average profit of the company at 11.43% which is less than the mark up of 12% considered in the inter-company transactions." 13.2.8 For the purpose of further evaluation of the mark-up factor used, we will also consider the mark up for transactions taken by other enterprises in the same line of business with comparable features. Having gone through the main provisions of Transfer Pricing Study Report ( TP Study Report) of the assessee, as noted above, the ld TPO came on conclusion that assessee, in fact, has selected Transactional Net Margin (TNMM) method for benchmarking exercise instead of Comparable Uncontrolled Price Method (CUP Method). The ld TPO observed that the assessee under consideration had considered profit before interest and tax (PBIT) instead of gross profit (GP) and taken PBIT/Sales as the profit ratio. The assessee arrived at average three years PBIT/Sales ratio of 11.43% in respect of its own business. It was stated by the assessee that average net profit of the company at 11.43%, which was less than the mark up of 12% considered in intercompany transaction. In this connection, it may be mentioned that mark-up term was us....
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.... 56.38% 5. ASM Technologies Ltd. 71.14 61.11 10.03 14.1% 16.41% 6. e-Infochips Ltd. 103.41 59.10 44.31 42.85% 74.97% 7. Onward Technologies Ltd. 61.59 54.21 7.38 19.45% 13.61% 8. Thirdware Solutions P ltd. 105.68 84.38 21.30 20.15% 25.24% 9. Persistent Systems (India) Ltd. 810.36 652.64 157.72 19.46% 24.17% 10. Indium Software (India) Ltd. 13.66 11.10 2.56 18.74% 23.06% 11. e-Zest Solutions Pvt. Ltd. 18.64 16.06 2.58 13.84% 16.06% 12 Subex Ltd. 329.01 245.67 83.34 25.33% 33.92% Simple A.M 20.59% 27.21% PLI of the assessee: Operating revenue 247,13,96,000 Total expenses Rs.214,77,00,000/- Less: Finance Cost Rs.44,00,000/- Operating expenses (total cost) 214,33,00,000/- Operating profit Rs.32,80,00,000/- OP/OR (Rs.32,80,00,000/- / 247,13,96,000) 13.28% OP/TC (Rs.32,80,00,000/- / 214,33,00,000/-) 15.30% Thus, PLI of assessee OP/OR was 13.28% and OP/TC was at 1....
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.... company-wise, which is given on Page No.5 to 10 of the DRP order. Having analysed the comparable companies, the ld. DRP confirmed the order passed by the ld. TPO/Assessing Officer. 7. Aggrieved by the order of the ld. DRP/ Assessing Officer, the assessee is in appeal before us. 8. Learned counsel for the assessee begins by pointing out that the assessee has adopted the Cost Plus Method for calculating the arm's length margin (ALM) in respect of its international transactions. The counsel explained the steps involved in application of the Cost Plus Method(CPM) as follows: (1). Identification of Direct and Indirect Costs for providing the Service. 2. Calculating the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined. (3). Calculating any adjustment to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrol....
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....oss margin), the average margin %age is 12.10% instead of 11.43%. A small change of 0.6% only. Again, this compares to the 12% that the company has used, as the GP Benchmark, used for the CPM Method. It has also been mentioned in Para 13.2.8 of the TP-Study Report of the assessee,(mentioned in para 6 of this order), that the mark-ups used by other enterprises in the same line of business with comparable features is taken only as a "further evaluation" of the mark-up factor used. This is no way can be taken as the assessee resorting to Transactional Net Margin Method (TNMM) for arriving at arm's length price, (ALP). 9. On the other hand, the ld. DR for the Revenue submitted before us that assessee has himself selected Transactional Net Margin (TNMM) method for benchmarking exercise instead of Comparable Uncontrolled Price Method ( CUP Method). The ld TPO observed that the assessee under consideration had considered profit before interest and tax (PBIT) instead of gross profit (GP) and taken PBIT/Sales as the profit ratio. The assessee arrived at average three years PBIT/Sales ratio of 11.43% in respect of its own business. It was stated by the assessee that average net profit ....
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.... (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. We note that any other method may be prescribed by the CBDT, but no other method has been prescribed by the CBDT, so far the assessee is concerned. The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed. First of all, in the assessee's case under consideration, we would like to examine the applicability of the transfer pricing method, to determine the arm's length price (ALP) of the sale of services and purchase of services, by using a most appropriate method (MAM). We note that the arm's length price of an international transaction has to be determined by any of the following methods, being the most appropriate method as mentioned above in section 92C (1) of the Act. Further, section 92C(2) mentions that the most appropriate method shall be applied in the manner as may be prescribed. The prescription, accordingly, has b....
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....upply of the property or provision of services by the enterprise;" We note that assessee in his TP-Study Report determined the direct and indirect costs of production incurred by the company for purchase and sale of services and computed the PBIT as gross profit. Thus, assessee has fulfilled all the conditions of the Cost Plus Method (CPM) except using a terminology by mistake as 'profit before interest and tax'(PBIT) instead of gross profit (GP). 11. We note that so far the assessee is concerned, he is selling of services and purchasing of services, therefore, Cost plus method (CPM) would be the appropriate method considering the functions, assets, risks, other factors and circumstances of the assessee's business. We note that by mistake, the assessee has mentioned in his TPStudy report, the wrong nomenclature/terminology as PBIT/Sales as the profit ratio instead of using Gross Profit terminology. This does not mean that the assessee is not eligible to use Cost Plus Method (CPM). The ld TPO held that assessee by its own admission, instead of using Gross Profit used the PBIT/Sales. That is, the ld. TPO observed that the profit ratio of comparable taken was PBIT/Sales, that is....
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....h price adjustment. Hence, after applying tolerance limit of +/-5%, we do not suggest any transfer pricing adjustment in the assessee's case under consideration. 12. The object of the transfer pricing is to ascertain the correct arm's length price by applying most appropriate method. We note that in the assessee's case under consideration, the information was on record of the TPO in respect of sales of services and purchase of services and hence, the TPO cannot say by any stretch of logic that the CPM is not a suitable method considering the business circumstances of the assessee. As we stated earlier that normally for manufacturing and sale of services/purchase of services CPM is suitable to compute arm's length price of the services. We note that the stand of the Ld DR that the assessee has selected TNMM as a most appropriate method (MAM) by using terminology, in his TP-Study Report, as PBIT/Sales to compute the ALP and the assessee cannot resort to change his method at the appellate stage, is not acceptable for the reasons given above. We are of the view that such a contention cannot be upheld because it is found on the facts of the case that if a particular method will no....
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.... out by ld AO with the detail documentary evidence furnished by the assessee and disallowance u/s 14A was recalculated by excluding investments having taxable yields as following: The assessee has already added Rs. 1.2 lakh to the total income on account of expenditure disallowed u/s 14A. In view of the above, further disallowance of expenditure u/s 14A r.w.r. 8D was made by ld AO at [ Rs. 15.134 lakh - Rs. 1.2 lakh] = Rs. 13.934 lakh. 16. The ld. Counsel for the assessee submitted before us that the disallowance of section 14A read with rule 8D, which can be done as per the books of accounts of the assessee company. The ld Counsel submitted before us the computation of disallowance under section 14 A read with Rule 8D as follows: Particulars Amounts(Rs.in lacs) Amount Rule 8D (ii) Interest cost (in Rs.) 2547973 A Average investment -Opening investment Nil -Closing Investment (Rs. In lakhs) 1021.9 (considering only investments that Have the potential to earn tax free Income) Average investment (Rs. in lakhs) 510.95 B Average Assets  ....
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....sing Officer the assessee is in appeal before us. The ld. Counsel for the assessee submitted before us that assessee has included the billed revenue as per accrual concept of accounting in the books of accounts. The ld. DRP had given the direction to the Assessing Officer to examine whether the assessee has included the unbilled revenue as per accrual basis of accounting in his books of accounts or not. Accrual basis of accounting says that when right to receive payment has established, the Revenue should be recognised. The ld. Counsel submitted before us that neither ld AO nor ld DRP understood the facts in right perspective. In fact, as per audited books of accounts, the assessee has included unbilled revenue to the tune of Rs. 17,44,27,000/- and offered for taxation, therefore, there is no any ground for making disallowance. On the other hand, the ld. DR of the Revenue has primarily reiterated the stand taken by the Assessing Officer which we have discussed in our earlier para and is not being repeated for the sake of brevity. We note that the ld. DRP had already given instruction to the Assessing Officer to examine whether the assessee had included unbilled revenue in ....