TaxTMI 
TaxTMI 
2019 (10) TMI 1189
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....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") filter. 5.5. in rejecting the upper limit for sales turnover filter proposed by the Appellant without providin....
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....n 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 removing the expenses from Total Turnover also, when they are removed from Export Turnover. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the abo....
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.... 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 contract manufacturing activity (as arrived at above) A Rs. 296,39,87,106/- Arithmetical mean gross markup on cost B 34.63% Arms length Price @ 134.63% of the Cost C Rs. 399,04,15,841/- Price shown in the international transactions D Rs. 332,90,62,967/- Shortfall being adjustment u/s.92CA D - C Rs. 66,13,52,874/- The above difference of Rs. 66,13,52,874/- is treated as an adjustment under manufacturing....
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....rithmetic 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 international transactions (Rs. 39,45,24,963/- Recovery of expenses received of Rs. 1,33,00,576/-) Rs. 40,78,25,539/- Shortfall being adjustment u/s 92CA Rs. 7,14,70,061/- The above shortfall of Rs. 7,14,70,061/- is treated as transfer pricing adjustment u/s 92CA. If any filter or criteria applied by the taxpayer for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new comparable set including those companies which are not take....
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....s:- 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 8.33% [Page 125 of Volume I of Paper Book] 13. The Assessee claimed that its profit margins are within the +/- 5% variation to the profit margins of comparable companies permitted under the provisions of Sec.92C(2) of the Act. 14. The TPO however held that Engineering services provided by the Assessee was akin to ITES and therefore he combined the financials of both ITES and Engineering services segment and by doing so arrived at a OP/OC of 8.05%. The Assessee had benchmarked the ITES and Engineering services segment separately in its TP Analysis. But this was disregarded by the TPO. 15. Th....
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....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 segment also as part of ITeS, despite a separate TP analysis having been carried out by the assessee in engineering services and ITeS. It is also the plea of assessee that engineering services and ITeS have been considered as separate segments in the safe harbour guidelines framed under the Income-tax Rules, 1968 and this also supports the plea of assessee. We also find that in the preceding years 2004-05, 2005-06 & 2006-07, the engineering segment has been considered separately from the ITeS. The ld. DR, however, pointed out that the services rendered by the assessee were akin to ITeS and the conclusion of the revenue authorities have to be uphel....
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....he 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 as done by the AO was not correct. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) wherein it was held that while computing deduction u/s.10A of the Act expenses that are reduced from the export turnover should also be reduced from the total turnover. The D....
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....ourable 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. ITES and Software services segments: The Honourable DRP and the learned AO have erred in: 3.1. changing the functional characterisation of engineering services segment, thereby taking a contrary stand this year, without any reason; 3.2. in not granting adjustment for market; 3.3. in taking a RPT limit of 25%, which is against the guidance set in several case laws, including those of the Hon'ble Bangalore Tribunal; 3.4. inconsistency in applying filters like export earnings etc. and not applying necessary filters like employee cost filters, which are again not consistent with the guidance of several case laws; 3.5. upholding the actions of the learned TPO in applying the export filter, accepting companies with significant advertise....
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....er 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 for the below mentioned comparable companies. The following Comparable companies were selected by TPO and their arithmetic mean of profit margin was as follows: SI. No. Name of the Company Unadjusted 1 Alpha X-Ray Technologies (India) 26.96% 2 Artficial Limbs manufacturing 28.09% 3 Centenial Surgical Surture Ltd 56.27% 4 Iscon Surgicals Ltd 18.56% 5 Poly Medicure Ltd 19.56% 6 Shree Pacetronix Ltd 47.99% 7 South India Surgicals Company Limited 33.28% ARITHMETIC MEAN 32.96% 31. The TPO has granted average marketing adjustment of 7.18% on the above. However no working capital adjustment was granted. The learned TPO imposed an adjustment as shown in the table below. "Computation of arm's length price by TPO and the adjustment made Arm's Length Mean Margin 32.96% Less: Marketing Adjustment 7.18....
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....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 segment, the net level margin of the Assessee would be at ALP even considering the TPO's set of comparable companies. The Margin of the comparable companies adopting TNMM as the most appropriate method, was also given and the same is as follows: Company OP/TC Artificial Limbs 1.45% Centennial Surgical 55.39% Poly Medicure 4.20% Shree Pacetronix 11.31% South India Surgicals Co. Ltd. 22.94% Iscon Surgical 8.68% Alpha X-Ray 4.48% Average 6.33% Range Computation Particulars Assessee's Segment 5% -5% Revenue 2,83,27,93,348 2,97,44,33,015 2,69,11,53,680 Cost 2,72,95,18,203 2,72,95,18,203 2,72,95,18,203 Operating Profit 10,32,75,145 244914812 -38364522 OP/OC 3.78% 8.97% -1.41% Therefore, even if TNMM is considered as the most appropriate method then the operating margin of the company 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 ....
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.... earned by the Assessee for Engineering Segment was as follows: Particulars EDS Operating Income 1,310,310,457 Operating Expenses* 1,176,105,198 Operating Profit (Op. Income - Op. Expenses) 134,205,259 Operating/Net margin (OP/TC) 11.41% 38. The Comparable companies selected by the Assessee in the engineering segment and their arithmetic mean was as follows: S.No. Comparable Companies ROTC 1 Aztecsoft Ltd. 11.70% 2 Geometric Ltd. 16.99% 3 Infotech Enterprises Ltd. 25.04% 4 Larsen & Toubro Infotech Ltd. 15.64% 5 Neilsoft Ltd. 9.17% 6 Quintegra Solutions Ltd. 9.85% 7 Prithvi Information Solutions Ltd. 14.17% 8 T V S Infotech Ltd. - Arithmetic Mean 11.32 39. The Assessee claimed that the price charged in the international transaction should be regarded as at Arm's Length after permissible variation to the ALP profit margin of +/- 5% permitted under the provisions of Sec.92C(2) of the Act. 40. The TPO however combined the ITES and Engineering services segment together and determined ALP and consequent addition to be made to the total income on account of adjustment to ALP. 41. The submissions made by the Assessee ....
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..... 1.02% 3 Triton Corp Ltd. 28.43% 4 Transworks Information Services Ltd. 4.35% 5 H T M T Global Solutions Ltd. 15.01% 6 Allsec Technologies Ltd. 28.47% 7 Sparsh B P 0 Services Ltd. 4.91% Mean 13.38% Since the profit margin of the Assessee was higher than the comparable companies, the Assessee claimed that the price received should be regarded as at Arm's length. 46. The learned TPO rejected the analysis carried out by the Assessee and imposed an adjustment of Rs. 161,312,284 in the ITeS segment by combining Engineering and ITeS segment, which action was confirmed by the DRP. Sr. No. Name of the Company Unadjusted Working Capital Adjusted (incorporated from SCN) 1 Accentia Technologies Ltd 41.77% 37.58% 2 Acropetal Technologies Ltd (Seg) 35.30% 13.50% 3 Aditya Birla Minacs Worldwide Ltd -4.00% -4.82% 4 Asit C Mehta Financial Services Ltd (Seg) 9.42% 7.550/0 5 Caliber Point Business Solutions Ltd 10.97% 7.06% 6 Coral Hubs Ltd 50.68% 37.60% 7 Cosmic Global Ltd 23.30% 21.94% 8 Crossdomain Solutions Ltd 27.03% 26.34% 9 Datamatics Financials Services Ltd (Seg) 29.11% -6.39% 10 e....
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....dissimilar function No. 352 17 R Systems International Ltd. 4.30% 3.33% Accept 18 panco Ltd. 8.81% 3.09% Accept 19 Wipro Ltd. 30.05% 30.05% Reject -dissimilar function Page No.352, 353 20 Allsec Technologies Ltd. -13.29% -15.54% Accept 48. The Computation of arithmetic mean of 11 comparable companies that remain after accept/reject matrix as given in the table is adopted would be as follows: SI.No. Name of the Company Unadjusted OP/TC Adjusted OP/TC 1 Aditya Birla Minacs Worldwide Ltd. -4.00% -4.80% 2 Asit C Mehta Financial Services Ltd. 9.42% 7.56% 3 Caliber Point Business Solutions Ltd. 10.97% 10.97% 4 Cosmic Global Ltd. 23.30% 21.94% 5 Datamatics Financial Services Ltd. -5.35% -6.37% 6 e4e Healthcare Solutions Ltd. 18.54% 16.34% 7 'services India Pvt. Ltd. 10.77% 9.41% 8 Jindal Intellicom Pvt. Ltd. -10.29% -11.36% 9 R Systems International Ltd. 4.30% 3.33% 10 Spanco Ltd. (Seg) 8.81% 3.09% 11 Allsec Technologies Ltd. -13.46% -15.54% Arithmetic mean 4.82% 3.14% 49. The working capital adjusted arithmetic mean of the 11 c....
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....s Ltd 21.74% 13.35% 13 R Systems Intenational (Seg) 15.30% 12.05% 14 RS Software (India) Ltd 7.41% 6.06% 15 Sasken Communication Technologies Ltd (Seg) 7.58% 5.61% 16 Tata Elxsi Ltd (Seg) 18.97% 17,38% 17 Thirdware Solutions Ltd 1 9.35% 15.53% 18 Wipro Ltd (Seg) 28.45% 28.45% 19 Softsol India Ltd 17.89% 14.11% 20 Lucid Software Ltd 16.50% 14.93% ARITHMETIC MEAN 23.65% 20.71% Computation of arm's length price by TPO and the adjustment made Arm's Length Mean Margin 23.65 Less: Working Capital Adjustment 2.47 Adjusted mean margin of the comparable companies 21.18 Operating Cost 35,63,12,516/- Arm's Length Margin (21.18% of Operating Cost) 7,54,66,991/- Arm's Length Price (ALP) 121.18% of Operating Cost 43,17,79,506/- Price charged in international transactions* 38,24,90,503/- Short fall being adjustment u/s. 92CA 4,92,89,004 53. The DRP confirmed the order of the TPO. The learned counsel for the Assessee submitted that without prejudice to the other grounds of appeal if the decision of this Hon'ble Tribunal rendered in the cases of Infineon Technologies India Pvt. Ltd. ....
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.... Mindtree Consulting (Seg) 12.35% 5 R Systems International (Seg) 12.05% 6 R S Software India Ltd. 6.06% 7 Igate Global Solutions Ltd. (Seg) 5.61% Arithmetic Mean 10.62% Range Computation Particulars GEMS (IT Segment) 5% -5% Revenue 371,438,299 390,010,214 352,866,384 Cost 345,260,313 345,260,313 345,260,313 Operating Profit 26,177,986 44,749,901 7,606,071 OP/OC 7.58% 12.96% 2.20% 55. The working capital adjusted arithmetic mean of the seven comparable companies which works out to be 10.62% would be within the range of + / - 5% of the Assessee's net margin. Therefore, no TP adjustment would be required and therefore, the TP adjustment made by the TPO is liable to be quashed. 56. We have considered the submission of the Assessee. While deciding identical ground in AY 2007-08, We have already set aside this issue to the TPO/AO for fresh consideration with certain directions. 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 keeping in mind the submissions made as above, for fresh consideration. This part of Gr.No.3 is accordingly ....