TaxTMI 
TaxTMI 
2018 (2) TMI 1975
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....it provides the aforesaid services at a compensation at cost plus mark up. For the year under consideration, the assessee filed its return of income on 28.11.2011 declaring total income of Rs. 13,38,44,040. The return was processed under Section 143(1) of the Act and the case was taken up for scrutiny by issue of requisite notice. A reference under Section 92CA of the Act was made by the Assessing Officer to the Transfer Pricing Officer ('TPO') for determination of the Arm's Length Price ('ALP') of the international transactions entered into by the assessee with its Associated Enterprise ('AE') in the year under consideration. The TPO passed an order under Section 92CA of the Act dt.27.11.2014 proposing an adjustment of Rs. 24,09,24,619 to the software development services segment of the assessee's international transactions. After receipt of the TPO's order, the Assessing Officer passed a draft order of assessment under Section 143(3) r.w.s. 144C of the Act vide order dt.26.3.2015, wherein the assessee's income was determined at Rs. 37,47,68,660, in view of the addition of the Transfer Pricing Adjustment of Rs. 24,09,24,619 to the returned i....
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....nd qualitative filters: (a) The learned AO/TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months); (b) The learned AO/TPO erred in applying 'employee cost greater than 25% of the total revenues' as a comparability criterion in the search strategy to identify comparable companies; (c) The learned AO/ TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. The Appellant had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues. (d) The learned AO/ TPO erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using export earnings greater than 75% of the sales as a comparability criterion; and (e) The learned AO/ TPO erred, in law and in facts, by applying t....
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....mmunication Technologies Limited were chosen as comparables in transfer pricing study, however upon availability of more details in public domain, these companies are found to be not comparable and should be excluded from the final set of comparables." 3.1.3 After hearing both parties, we are of the view that the additional grounds raised are fundamental and necessary for adjudication of this appeal. Therefore, in the interest of substantial justice we admit the additional grounds raised by the assessee for consideration and adjudication respectfully following the ratio of the decision of the Hon'ble Apex Court laid down in the case of NTPC Ltd. v. CIT[1998] 229 ITR 383. 3.2 The grounds raised in Revenue's appeal are as under :- "1. The directions of the DRP are opposed to law and facts of the case. 2. The Hon'ble DRP erred in holding that foreign exchange loss or gain is a part of operating expense or operating income, as the case may be, when the TPO has excluded this data form that of the comparables. 3. Whether the DRP is correct in foreign exchange fluctuation as operating in nature, while treating foreign exchange fluctuation non-o....
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.... 253850000000 177,030,000,000 43.39% 7 Larsen & Toubro Infotech Ltd. 23318122096 19,764,861,289 19.83% 8 Mindtree Ltd.(seg) 8,783,000,000 7,937,143,242 10.66% 9 Persistent Systems & Solutions Ltd. 189,490,457 155,172,089 22.12% 10 Persistent Systems Ltd. 6,101,270,000 4,971,860,000 22.84% 11 R S Software (India) Ltd. 1,882,638,471 1,617,804,170 16.37% 12 Sasken Communication Technologies Ltd 3,941,962,000 3,175,616,000 24.13% 13 Tata Elxsi Ltd (seg) 3,581,985,000 2,962,533,352 20.91% AVERAGE MARGIN 24.82% 4.5 The TPO computed the ALP of the international transactions of the software development services segment of the assessee as under :- Arm's Length Mean Margin on cost 24.82% Less: Working Capital Adjustment 1.49% (As per Annex. C) Adjusted margin 23.33% Operating Cost 1,49,68,18,050 Arms Length Price (ALP) 1,84,60,25,701 123.33% of Operating Cost) Price Received 1,60,51,01,082 Shortfall being adjustment u/s 92CA: 24,09,24,619 Based on the above computation, the TPO proposed an....
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....n exchange loss / gain is operational in nature, by following the decision of the co-ordinate bench of this Tribunal in the case of SAP Labs Ltd. v. Asstt. CIT[2012] 134 ITD 253/17 taxmann.com 16 (Bang.) and of another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08. We find that another co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2010-11 in its order in IT(TP)A Nos.291 & 427/Bang/2015 dt.24.6.2016 has held that if foreign exchange gain / loss is operational in nature if it is linked to the exports / imports related to the particular year. To this extent, we find no infirmity in the order of the DRP. However, the facts related to the foreign exchange gain in this year, i.e. as to whether it is related to the business operations and whether they are in the capital or revenue field is not clear from the orders of the authorities below. The TPO has also not rendered any finding in this regard. In this factual matrix of the case, the finding of the DRP is being set aside and the matter is remanded to the file of the TPO for the limited extent of factual verification in this regard as observed above,....
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....itted before the DRP, at Annexure/Objection 13 thereof, mentioned risk adjustment at 4.92%, no scientific basis or working in respect of the assessee's claim vis-à-vis the comparable companies had been provided. Even on pages 890 & 891 of paper book (Annexure 9-B), no working has been given in respect of risk adjustment claimed at 6.26% vis-à-vis the comparable companies. Since the assessee has not given the computation of risk adjustment of the assessee vis-à-vis the comparable companies, we hold that the assessee shall not be entitled to any risk adjustment and accordingly reverse the DRP's decision granting the assessee risk adjustment. In coming to this view, we place reliance on the decision of the co-ordinate bench of this Tribunal in the case of Syniverse Teledata Systems (P.) Ltd. (supra) which covers the issue squarely in favour of the revenue in the light of the factual matrix of the case. Consequently, Ground No.4 of Revenue's appeal for Assessment Year 2011-12 is allowed. 8. In the result, Revenue's appeal for A Y 2011-12 is partly allowed. Assessee's appeal in IT(TP)A No.269/Bang/2016 9. Ground No.1 - being general in n....
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....hen we enquired, the ld. counsel fairly admitted that assessee would prefer CUP method over Cost Plus Method. In view of this, in the absence of any data, we are not in a position to appreciate the Cost Plus Method. More over, most of captive service provides work on Cost Plus Method ranging from 5% mark-up to 25% mark-up. All the transactions are related party transactions. Therefore, uncontrolled comparable prices are generally not available in the Cost Plus Method. Even the assessee's analysis of 32% Gross Profit and 5% Net Profit cannot be accepted as there cannot be any Gross Profit in the case of assessee, who is operating on Cost Plus Method. More over, even though the assessee is stated to have been operating on Cost Plus 5% Method, OP/Cost as computed by the assessee itself is at 3.2% and if foreign exchange gain was added to the operating margin, then only it comes to 5%. Generally in a Cost Plus situation, the entire cost spent by the assessee with a mark-up of 5% would be billed to the AE on a periodical basis. The conversion generally done at the prevailing rate of USD or foreign currency involved. Therefore, the basic concept is the margin would be about 5%. In ca....
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.... is not available for strict comparison. It was also submitted that the assessee has not taken NASCOM rates as the basis in comparing the rate per hour. This indicates that assessee's comparability under the CUP method is based on various assumptions of (a) estimating the offshore profits, (b) estimating number of employees, (c) estimating the working hours per employee per day per month, and then dividing the profit by so many assumptions/ numbers. This analysis of the assessee cannot be relied on as an external CUP. As can be seen from the above, there is no internal CUP which can be relied on in order to accept the CUP method. Therefore, in our view, the analysis undertaken by the assessee is not only faulty, but devoid of any data or proper analysis. In view of this, we have no option than to accept the TPO's contention of TNMM as the most appropriate method. 5.8 Under section 92C of the Act, ALP has to be examined adopting the most appropriate method. Section 92C prescribes five methods - CUP, RPM, CPM, PSM and TNMM. Rule 10C provides the relevant guidelines for analyzing the most appropriate method to be selected. Under the Indian TP regulations, there is no ....
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....pecified the companies which it seeks exclusion / inclusion. In this view of the matter, except for the grounds at S.No.7 (supra) and additional grounds 15 to 17 (supra), all other grounds (i.e. Grounds 3 to 6, 8 to 12) raised on TP issues were not urged or pressed before us and are accordingly dismissed as infructuous. 11.3 In proceedings before us, the learned Authorised Representative for the assessee submitted a chart indicating the companies which the assessee is seeking exclusion / inclusion with details regarding each of the companies. 11.3.1 As per Addl. Ground No.15 (supra); out of the 13 companies selected by the TPO, the assessee seeks exclusion of the following 7 companies from the list of comparables :- (i) Acropetal Technologies Limited (ii) E-infochips Limited (iii) E-Zest Solutions Ltd. (iv) ICRA Techno Analytics Limited (v) Infosys Technologies Limited (vi) Tata Elxsi Limited (Seg.) and (vii) Persistent Systems & Solutions Ltd. 11.3.2 As per Addl. Ground No.17, the assessee seeks exclusion of the following companies :- (viii) L & T Infotech Limited (ix) Persistent Systems Limi....
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....espect of exclusion of the aforesaid comparables before the DRP at Ground of objection 9 at pages 74 to 98 thereof, the DRP in its order has only addressed the issue of inclusion / exclusion of two of the above comparables; (i) Acropetal Technologies Ltd. and (ii) E-Zest Solutions Ltd. at paras 10.6 to 10.7 of its order respectively while disposing off the assessee's grounds of objection No.9. The objections raised by the assessee in respect of the other five companies listed in para 12.1 above i.e. (i) E-Infochips Limited (ii) ICRA Techno Analytics Ltd. (iii) Infosys Technologies Ltd. (iv) Tata Elxsi Limited (Seg.) and (v) Persistent Systems & Solutions Ltd. have not been addressed by the DRP and we find that there is not even a mention of these companies in the DRP's order. In this factual matrix of the case, we deem it absolutely necessary and appropriate to remand the issue of comparability of the aforesaid five companies (supra) to the file of the DRP for examination and adjudication on the objections raised by the assessee praying for their exclusion in the light of certain judicial pronouncements and the facts of the case on hand, after affording the assessee adequat....
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....the file of the DRP for examining and adjudication of the issues raised by the assessee, after affording the assessee adequate opportunity of being heard in the matter and to file details /submissions in this regard, which shall be duly considered. We hold and direct accordingly. 14. E-Zest Solutions Limited ('E-Zest') 14.1 Before us, the assessee submitted that this company 'E-Zest' ought to be excluded from the list of comparables as it is engaged in the business of software development services and product engineering, but however segment details in this regard are not available. It was also submitted that this company has inventories, indicating that it is into software products and also R & D activities. In support of the assessee's plea for exclusion of this company form the list of comparables, the learned Authorised Representative placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of Applied Materials India (P.) Ltd. (supra). 14.2 Per contra, the learned Authorised Representative supported the orders of the authorities below in including this company 'E-Zest', in the list of comparables to the assessee.....
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.... decision of the co-ordinate bench of this Tribunal in the case of AMD India (P.) Ltd. (supra), we uphold the inclusion of this company, E-Zest Solutions Ltd. in the list of comparables. Consequently, the assessee's ground on this company fails. Addl. Ground No.16 -Inclusion of companies sought for by the assessee. 15.1 The assessee seeks exclusion of the following seven comparables :- (i) Akshay Software Technologies Ltd. (ii) Cat Technologies Ltd. (iii) LGS Global Limited (iv) Silverline Technologies Ltd. (v) Caliber Point Business Solutions Ltd. (vi) Helios & Matheson Information Technology Ltd. (vii) R Systems International Ltd. 15.2 In the course of proceedings before us, the learned Authorised Representative of the assessee submitted that these 7 companies (supra) are all comparable to the assessee in all respects and that the TPO has rejected these companies on incorrect reasons / factors. On being specifically asked at the Bar, the learned Authorised Representative also accepted that the objections were raised by the assessee before the DRP against exclusion of these companies, but the DRP has not d....
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....ore details being now available in the public domain which render these two companies as not comparable to the assessee and therefore prays that they be excluded from the list of comparable companies. 16.4 Per contra, the learned Departmental Representative for revenue objected to the admission of this additional ground stating that when the assessee itself has selected these two companies, the authorities below had no occasion to consider the objections now raised by the assessee before the Tribunal. 16.5 After having heard both parties and perused and considered the material on record, we find that the functional comparability of these two companies i.e. (i) L & T Infotech Limited and (ii) Sasken Communication Technologies Limited have been considered by benches of this Tribunal in various cases, including those cited by the ld.AR. By way of this additional ground, the assessee is raising objections to the inclusion of these companies on the issue of functional dissimilarity and other grounds. In our considered view, the assessee cannot be precluded from raising an objection against inclusion of a company even if the said company was selected by the assessee in its TP Study....