TaxTMI 
TaxTMI 
2019 (10) TMI 1189
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....p-shot of the detailed Grounds of Appeal is as under: I. Transfer Pricing A. Contract Manufacturing Segment: 1. Cost Plus Method ("CPM") has been taken as the most appropriate method instead of Transactional Net Margin Method ("TNMM"), as applied by the Appellant; 2. functional comparability ought to take precedence over product comparability 3. the comparable companies selected by the TPO is not comparable even based on product comparability; B. Software services segment: 4. The learned AO/learned TPO/Hon'ble DRP erred in determining the ALP of provision of software services and proposing a transfer pricing adjustment of Rs. 71,470,061. 5. The learned AO/learned TPO/Hon'ble DRP erred in: 5.1. in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis 5.2. in adopting the arm's length mark-up to be 23.20 % [working capital adjusted margin] 5.3. in taking recourse to Section 133(6) of the Income-tax Act, 1961 ("the Act") 5.4. in considering 25% as the threshold limit for the Related Party Transactions ("RPT....
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....ted margin] pertaining to the rendering of engineering services and ITES 14.3. in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Act, which in many instances are inconsistent with the data disclosed in audited reports. 14.4. in considering 25% as the threshold limit for the RPT filter. 14.5. inconsistency in applying the filters 14.6. in accepting companies which are functionally not comparable 14.7. in accepting companies having RPT exceeding 10% 15. in disregarding the use of multiple year data. 16. in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 17. erred in not allowing the benefits of market risk adjustment to the Appellant. 18. erred in not allowing the benefit of range of +/- 5% Corporate Tax Re- computation of deduction under section 10A of the Income Tax Act, 1961 ('Act') Ignoring the concept of parity between Export Turnover and Total Turnover enunciated by the High Courts and not removi....
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....iate Method [MAM]. The determination of ALP by applying CPM was made by the TPO as follows:- "11.8 Determination of Arm's Length Price: Mean Arm's length Gross Margin 4 1.89% on Cost Less: Adjustment for selling & distribution expenses 7.26% on Cost Adjusted mean Gross Margin 34.63% on Cost In the case of taxpayer, the cost of production is arrived at as under (Based on the details given in Annexure C12 of the TP study) Description Amount (Rs) Sales 3329062967 Change in stock NA Raw material expenses 270,73,42,070 Packaging expenses / consumables 3,20,20,503 Purchase of finished goods 0 Power, fuel & water charges NA Compensation to employees 11,96,42,332 Indirect taxes NA Royalties, technical know-how fees, etc. 99,28,847 Lease rent & other rent NA Repairs & maintenance 4,03,94,544 Insurance premium paid 0 Outsourced mfg. jobs (incl. job works, etc.) 0 Depreciation 5,46,58,810 Cost of Production 296,39,87,106 Gross Margin 36,50,75,861 Gross Margin to Cost of Production 12.32% Gross Cost incurred for....
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....ble companies as per the chart given as Annexure-I to this order. 10. The TPO determined the ALP as follows:- "21.8 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI : 25.14% Less: Working capital adjustment (Annexure-C) : 1.94% Adj. Arithmetic mean PLI 23.20% Arm's Length Price: Operating Cost (Rs. 37,57,38,061/- + Recovery of expenses received of Rs. 1,33,00,576/-) Rs. 38,90,38,637/- Arm's Length Margin 23.20% of the Operating Cost Arm's Length Price (ALP) @123.20% of operating cost Rs. 47,92,95,600/- 21.9 Price Received vis-à-vis the Arm's Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 123.20% of operating cost Rs. 47,92,95,600/- Price charged in the internation....
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....or AY 2006-07 and after affording opportunity of being heard to the assessee. Engineering Services & ITeS 12. As far as the dispute in the Engineering Services & ITeS segment is concerned, the concise grounds of appeal are grounds 11 to 18. The assessee rendered ITeS as well as engineering services. It is the plea of assessee that engineering segment is different from ITeS and that the TPO was not justified in treating the engineering services segment also as ITeS. The computation of ALP in the engineering segment done by the TPO was as follows:- Net margin on cost earned by GEMS India for Engineering Particulars Amount (IN R) Operating Income 111,51,83,463 Operating Expenses 103,35,10,225 Operating Profit (Op. Income - Op. Expenses) 8,16,73,238 Operating margin to total cost (OP/TC) 7.90% Comparable companies selected by GEMS India in the engineering segment and their arithmetic mean S.No. Company name Operating Margin 1 Geometric Software Solutions Co. Ltd. 8.13% 2 Infotech Enterprises Ltd. 18.45% 3 Larsen & Toubro Infotech Ltd. 10.66% 4 Lurgi India Co. Ltd. -3.90% Mean 8.....
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....ble companies for AY 2007-08 as given in the table below. Particulars Source Unadjusted margin (OP/TC) FY 2006-07 Working capital adjusted margin (OP/TC) FY 2006-07 UB Engineering Ltd. CIT(A) order AY 04-05 -24.43% -25.71% Hi Quality Steels Ltd. 2.45% 2.36% RJ Shah & Co. Ltd. 21.65% 9.34% Raunaq International Ltd. 8.55% 7.59% TCE Consulting Engineers Ltd. DRP order AY 06-07 22.69% 21.18% Average 6.18% 2.95% 17. The learned counsel for the Assessee claimed that the adjusted operating profit to total cost of comparable companies was 6.28%. The Assessee's margin for the engineering segment was 7.90% which was higher than the aforementioned adjusted margins of the comparable companies. Based on the above submission, he pleaded that the engineering service segment is not comparable to ITES, BPO or KPO services and hence it will not be appropriate to aggregate the engineering service segment with the ITES segment. The learned DR relied on the order of the TPO/DRP. 18. We have heard the submissions and we find that the TPO/DRP did not accept the stand taken by the assessee and it considered engineering....
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.... (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India." 22. While computing the deduction u/s.10A of the Act, the AO noticed that during the relevant assessment year, the Assessee had incurred certain expenditure in foreign currency, which was not reduced from the export turnover while computing deduction under section 10A of the Income Tax Act, 1961. The AO therefore excluded the aforesaid sum from the export turnover without excluding them from the total turnover. As a result, the deduction claimed u/s.10A of the Act by the Assessee was allowed at a lesser sum than what was claimed by the Assessee. It was the plea of the Assessee in the appeal against the assessment order before the CIT(A) that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Communication expenses were incurred not for export of computer software outside India and therefore the exclusion from export turnover ....
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....parability; 1.4. the comparables selected by the TPO is not comparable even based on product comparability; 1.5. erred in withdrawing the average selling and marketing adjustment granted by the learned TPO in the transfer pricing order without issue of any notice; 1.6. if TNMM is applied, the margins will be within +/-5 percent range at ALP; and 1.7. Has not provided the working capital adjustment and selling and marketing adjustment under CPM and a contrary position has been adopted against the position approved in the preceding years by the Honourable DRP and CIT(A). 2. Engineering Services: 2.1. The learned DRP has taken a contrary stand compared to the position taken by the Honourable DRP and CIT(A) in the earlier years; 2.2. considering the engineering services segment as functionally similar to ITES segment and benchmarking the engineering services segment with ITES comparable companies, though ; 2.3. the Appellant has provided two separate benchmarking analysis; and 2.4. Our stand was accepted in the earlier years and a contrary stand has been taken in this year, without adducing any reason. 3. ....
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....d into a contract for contract manufacturing with its AE and therefore the said transaction was an international transaction and the price received by the Assessee in the said transaction has to pass the ALP test as laid down in Sec.92 of the Act. The Assessee adopted TNMM as the MAM for determining ALP. The net margin on cost earned by the Assessee in the contract manufacturing segment was as follows: Operating Income Rs. 2,832,793,348 Cost of Production Rs. 2,704,125,868 Gross Profit (Op. Income - Cost of Production) Rs. 128,667,480 Gross Margin on Cost of Production 4.76% Total Operating Expenses Rs. 2,729,518,203 Operating Profit Rs. 103,275,145 Operating /Net margin (OP/TC) 3.78% 29. The Assessee chose comparable companies and the average arithmetic mean profit of such comparable companies after permissible variation u/s.92C(2) was within Arm's Length Price. 30. The learned TPO rejected the analysis carried out by the Assessee and rejected all the comparable companies selected in the TP Study. The learned TPO adopted Cost Plus Method ("CPM") as the most appropriate method and granted selling and marketing adjustment f....
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.....10% 39.25% 10.620/0 Poly Medicure 16.94% 3.10% 5.06% 8.93% Shree Pacetronix 37.21% 9.31% 6.59% 22.06% South India Surgicals Co. Ltd 22.94% 7.37% 8.86% 6.96% Iscon Surgical 17.18% 6.62% 6.04% 4.30% Alpha X-Ray 2 8.44% 5.92% 10.09% 12.86% Average 27.48% 6.9% 12.4% 8.72% GEMS India 4.76% 33. It was submitted that if the Assessee's argument is accepted and the working capital adjusted arithmetic mean of the 7 comparable companies as shown in the tables above i.e. 8.72% is taken, then the same would be within the range of + / - 5% of the Assessee's Net Margin, no TP adjustment is required and therefore the TP adjustment made by the TPO is liable to be quashed. It was further submitted that the TPO adopted Transactional Net Margin Method ("TNMM") as the most appropriate method for AY 2009-10 and AY 2011-12. The ITAT also accepted TNMM as the MAM in Assessee's own case for AY 2006-07 and the matter was remitted back to the file of the TPO for further verification by the TPO. It was submitted that by adopting TNMM as the most appropriate method for the contract manufacturing segmen....
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....d the issue of determination of ALP in the contract manufacturing segment to the TPO/AO for fresh consideration holding that TNMM should be the MAM for determination of ALP. Facts and circumstances of the case being identical in AY 2008-09, following the decision of the Tribunal, we set aside the impugned order with similar directions as was given in AY 2006-07 and direct the TPO/AO to determine ALP in accordance with the directions contained in the earlier order of the Tribunal and keeping in view the other submissions on merits made by the Assessee before us. Gr.No.1 is thus treated as allowed for statistical purpose. 37. As far as Ground No.2 is concerned, the preliminary issue is as to whether engineering services should not be regarded as being ITES in nature and comparable companies ought not to have been selected treating the engineering services segment as akin to ITES segment. The arguments and submissions on this ground are identical to the arguments advanced in AY 2007-08. The factual details in this regard are as follows: The Net margin on cost earned by the Assessee for Engineering Segment was as follows: Particulars EDS Operating Income 1,310,3....
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....rvices and hence it will not be appropriate to aggregate the engineering service segment with the ITES segment. 43. The learned DR relied on the order of the DRP. 44. We have already decided similar issue in AY 2007-08 in the earlier part of this order. Facts and circumstances being identical in the present AY, we deem it fit and proper to remand the issue of determination of ALP to the TPO/AO for fresh consideration as per directions given in AY 2007- 08. Gr.No.2 is accordingly treated as allowed for statistical purpose. 45. As far as Gr.No.3 raised by the Assessee is concerned, the same deals with two segments ITES and SWD services segment. The first segment to be considered is ITES. As far as this segment is concerned, the facts are as follows: ITeS Segment Net margin on cost earned by the Assessee for the ITeS Segment Particulars Amount (INR) Operating Income 55,994,948 Operating Expenses* 47,873,928 Operating Profit (Op. Income - Op. Expenses) 8,121,021 Operating/Net margin (OP/TC) 16.96% Comparable companies selected by the Assessee and their arithmetic mean Sr.No. Company Name Operating Margin 1 ....
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....ompanies would be the Accepted / Rejected. Sr. No. Name of the Company Margin Unadj. % Margin WC adjusted Remarks Page Reference in the case law compendium 1 Accentia Technologies Ltd. 41.77% 37.58% Reject -dissimilar function Page No. 346 2 Acropetal Technologies Ltd. 35.30% 13.50% Reject - dissimilar function Page No. 347 3 Aditya Birla Minacs Worldwide Ltd. -4.00% -4.80% Accept 4 Asit C Mehta Financial Services Ltd. 9.42% 7.56% Accept 5 Caliber Point Business Solutions Ltd. 10.97% 7.07% Accept 6 Coral Hubs Ltd. 50.68% 37.59% Reject -dissimilar function Page No.349 7 Cosmic Global Ltd. 23.30% 21.94% Accept 8 Crossdomain Solutions Ltd. 27.03% 26.34% Reject -Dissimilar Function Page No.349 9 Datamatics Financial Services Ltd. 29.11% -6.37% Accept 10 e4e Healthcare Solutions Ltd. 18.54% 16.34% Accept 11 Eclerx Services Ltd. 58.80% 56.46% Reject -dissimilar function Page No. 350 12 Genesys International Corporation Ltd....
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....1. As far as the SWD services segment which is also part of Gr.No.3 is concerned, the factual details are as follows:- a. Software Segment Net Margin on cost earned by the Appellant Particulars OP/OC Operating Income Rs. 371,438,299 Operating Expenses Rs. 345,260,313 Operating Profit (Op. Income - Op. Expenses) Rs. 26,177,986 Operating/Net margin (OP/TC) 7.58% Comparable companies selected by the Assessee S.No. Company Name' Operating Margin 1 Aztecsoft Ltd. 7.10% 2 Larsen & Toubro Infotech Ltd. 15.43% 3 Mindtree Ltd. 14.87% 4 Mphasis Ltd.* 13.73% 5 P S I Data Systems Ltd.* 6.84% 6 Persistent Systems Pvt. Ltd. 19.75% 7 Prithvi Information Solutions Ltd. 13.49% 8 Quintegra Solutions Ltd. 9.85% 9 R S Software (India) Ltd. 13.96% 10 S I P Technologies & Exports Ltd. 13.10% 11 Sonata Software Ltd. 13.69% 12 T V S Infotech Ltd. -12.04% Arithmetic Mean 10.81% 52. The TPO rejected the analysis carried out by the Assessee and accepted only three comparable companies. Comparable co....
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....milar Page 314function 2 Bodhtree Ltd 18.72% 18.12% Reject - dissimilar Page 336function 3 Celestial Biolabs Ltd 87.94% 80.25% Reject - dissimilar Page 326function 4 E-Zest Solutions Ltd 29.81% 28.17%Reject - dissimilar Page 331function 5 Flextronics Software 7 .86% 4.17% Accept 6 Igate Global Solutions Ltd 13.99% 10.05% Accept 7 Infosys Technologies Ltd 40.37% 37.18% Reject - dissimilar Page 329function 8 Kals Info Systems (Seg) 31.29% 27.60% Reject - dissimilar Page 328function 9 LGS Global Ltd ( Lanco) 27.52% 24.06% Accept 10 Lucid Software 16.50% 14.93% Reject - dissimilar Function Page 333 11 Mindtree Consulting (Seg) 16.41% 12.35% Accept 12 Persistent Systems Ltd 20.31% 19.11% Reject - dissimilar function Page 334 13 Quintegra Solutions Ltd 21.74% 13.35% Reject - dissimilar function Page 335 14 R S Software (India) Ltd 7.41% 6.06% Accept 15 R Systems Inte....