TaxTMI 
TaxTMI 
2018 (2) TMI 1975
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....ion 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 income of Rs. 13,38,44,040. 2.2 Aggrieved by the....
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....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 the turnover filter only on lower limit of INR 1 crore and not applying an upper limit of turnover of INR 200 crores; 7. The learned AO/TPO err....
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....he 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-operating in nature as applied by the TPO. 4. The Hon'ble DRP erred in granting 1% risk adjustment arbitrarily without appreciating the facts of the case and its comparables. 5. The appellant craves leave to add, alter, amend and / or delete....
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....mmunication 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 adjustment of Rs. 24,09,24,619 in respect of the international transactions entered into by the assessee with its AEs in the software development services segment which was incorporated in the draft order of assessment for Assessment Year 2011-12 dt.26.3.2015. 4.6 Aggrieved by the draft order of assessment for Assessment Year 2011-12 dt.26.3.2015, the assessee filed its objections thereto before the DRP, which disposed off the same by issuing directions thereon under Section 144C(5) of the Act on 14.12.2015. ....
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.... 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, before allowing it as operational in nature in keeping with the orders of the co-ordinate bench in the assessee's own case for Assessment Year 2010-11 (supra). Consequently, Revenue's grounds at S.Nos.2 & 3 are partly allowed for statistical purposes. 7. Ground No.4 - Risk Adjustment. 7.1 In this ground, Revenue assails the order of the DRP for granting 1% risk adjustment arbitrarily without appreciating the facts of the case and the comparables. According to the learned Departmental Representative since, except f....
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....essee 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 nature, no adjudication is called for thereon. 10. Ground No.2 - Selection of Most Appropriate Method ('MAM') 10.1 In this ground, the assessee assails the order of the TPO in rejecting CUP Method adopted as the MAM by the assessee for its TP Study and adopting TNMM as the MAM for carrying out the comparability analysis. 10.2 Under the CUP Method, the assessee had compared the hourly rates charged by the assessee to the AE with the man hour rates adopted by other leading software companies whose information was available in the pu....
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....annot 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 case of any foreign exchange gain, this could increase the margin to that extent. In case of foreign exchange loss on the USD / foreign currency quoted by the assessee, then the margin would come down to that extent. However, as seen in this case, the margin without foreign exchange gain itself is less than 5%. Therefore, in the absence of correct cost structure and billing procedure, it is very difficult to accept the Cost Plus Method and analyse the issue. 5.7 The next contention of the assessee is with reference to CUP method. The assessee states in the Annexure I....
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....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 priority or preference to any of the methods. There are also no regulations which prescribe any circumstances under which method is to be adopted, except for PSM. The above 5 methods are categorised generally as 1.Traditional methods i.e., CUP, RPM and CPM, and 2. Transactional profit methods of PSM and TNMM. In the absence of reliable data to undertake the exercise under the traditional methods, the only option is go for the transactional profit methods, when standard methods are not reasonably applied. In view of absence of reliable data either to adopt Cost Plus Method or to an....
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....e 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 Limited and (x) Sasken Communication Technologies Limited. 11.3.3 AS per Addl. Ground No.16, the assessee seeks inclusion of the following companies :- (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. 12. Addl. Ground No. 15 - Companies the assessee seeks Exclusion from list of comparables. 12.1 In this additional ground (supra), the assessee seeks exclusion of the following seven companies from the TPO's set of comparables. (i) Acropetal Tech....
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.... 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 adequate opportunity of being heard in the matter. We hold and direct accordingly. 13. Acropetal Technologies Ltd. ('Acropetal') 13.1 Before us, the learned Authorised Representative for the assessee submitted that this company, 'Acropetal' needs to be excluded from the TPO list of comparables as it is carrying out business in four segments, and segmental details are available only for three segments. According to the learned Authorised Representative the functions of this company are akin to KPO Services and it has substantial R & D activities. It was also submitted that this company needs to be rejected as it is functionally not comparable and fails the employee cost filter. In support of the assessee's plea for exclusion of this company from the list of comparables, relianc....
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....arables, 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. In support of this proposition, the learned Departmental Representative relied on the latest decision of the co-ordinate bench in the case of AMD India (P.) Ltd. (supra) wherein at para 9 thereof this company has been retained in the list of comparables. 14.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the assessee has raised objections against the inclusion of this company 'E-Zest' as a comparable before the DRP, and notice that the DRP has observed that this company's activities predominantly revolve around software development services and that this company was selected as functionally comparable to the assessee in Assessment Year 2007-08; and therefore retained this company as a comparable. We fi....
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....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 dealt with or addressed the issues raised. 15.3 We have heard the rival contentions, perused and carefully considered the orders of the authorities below. It is seen that the TPO has rejected these comparables chosen by the assessee with a single line explanation in the table at para 6.1 of his order under Section 92CA of the Act. As was pointed out to us, many of the companies have been rejected on the ground that data was not available or that data was not available in the Prowess data base. The DRP too has not rendered a proper finding in respect of each of the 7 comparables listed above. In some cases, the DRP has given a cryptic one line - observation, without dealing with the issues raised by the assessee in objections before the DRP. Some of these companies have not been addressed / adjudicated at all as there is no mention of these companies in the DRP order. In this factual matrix of the ca....