TaxTMI 
TaxTMI 
2025 (9) TMI 432
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....te method. For the purpose of applying this method, operating profit to total operating costs ("OP/OC") was considered to be the most appropriate Profit Level Indicator ("PLI"). The Assessee had performed a detailed search for independent comparable companies engaged in provision of similar services in public databases and identified 87 comparable companies. The arithmetic mean OP/OC margins of the 87 comparable companies was 13.1% while the margins of the Assessee was 15.50%. Given the same, since the margin of the Assessee was more than the arithmetic mean margins of the comparable companies, the international transactions were concluded to satisfy the arm's length criteria from an Indian transfer pricing standpoint for the financial year ('FY') 2004-05. 3. The TPO vide order dated 30.7.2008 held that since the Assessee has entered into an agreement with its AE for Cost plus 17% but it has earned only a net margin of 15.5%, the difference of 1.5% was made as an addition to the tune of Rs. 55,88,944/- in respect of international transactions. In this TP order, the TPO has considered severance pay as non-operating in nature. The ld.CIT(A) vide order dated 24.01.2011 allowed the ....
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....s Limited - The Company is into development of proprietary products and earns a margin of 163.70%. b) Datamatics Global Services Ltd - The Company offers software products and provides Business Process Outsourcing services and earns a margin of 71.70%. c) Panoramic Universal Ltd - The Company offers both software products and services and earns a margin of 57.95%. d) Persistent Systems Limited - The Company is involved in the business of software product development." 6. Ground No. 1 to 3: Erroneous treatment of severance pay as operating in nature: - The Ld.AR submitted before us that the Assessee has paid severance pay amounting to Rs. 64,30,195/- which is an extra ordinary and one-time expense incurred by the Assessee. Hence, the Assessee has treated the same as extraordinary expense / non-operating item while computing the PLI of the Assessee. Further, Severance pay is a form of compensation that employers may choose to provide to employees upon the termination of their employment. It provides financial assistance during the transition period from an individual's previous job to their next opportunity. Given that this is an extraordinary cir....
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.... account of income-tax; and viii. other expenses not relating to normal operations of the Assessee: 7. The Ld. DR on the other hand, submitted that both the TPO and ld.CIT(A) having accepted the severance pay as operating in nature, there is no reason to exclude it. 8. We have heard the submissions of both the parties and find merit in the submission of the Ld. AR. Since the service agreement specifies that extraordinary items should be excluded from operating expenses/cost, we are of the considered view that severance pay is non-operating expense in nature. Our view is also supported by the guidelines issued by OECD and the Safe Harbour as well as the jurisdictional Tribunal decision in the case of M/s. Igarashi Motors Ltd. as under: "In Assessee's own case for the assessment year 2007-08, through their order dated 31^st October 2012 passed in ITA No.12 (Mds)/2012, the Income-tax Appellate Tribunal, Chennai Bench B, Chennai has considered the very same issue. For that assessment year also, the TPO vis a vis, the Assessing Officer declined to exclude extra-ordinary items while computing the operating profits of the Assessee. In this regard the Tribunal has h....
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....t severance pay which is an extra- ordinary item of expense should be excluded from the operating cost while computing the margins of the Assessee for the purpose of benchmarking analysis with final set of comparable companies. Thus, this ground of appeal is allowed in favour of the Assessee. 10. Ground No. 4 (a): Tanla Solutions Limited as the comparable company: - The Ld. AR submitted before the TPO that the company is functionally not comparable and having super normal profits. The TPO held that the company was selected as comparable company by the Assessee itself and the Assessee has not submitted any evidences in respect to functional dissimilarity and the objection in respect to super normal profit was also not accepted. The Ld AR submitted that merely because the Assessee selected the company as comparable in transfer pricing report that does not restrict the Assessee from seeking exclusion of such comparable at a later stage when there are compelling data suggesting such incomparability. The Ld. AR further contended that the company had extra-ordinary event during the subject year i.e. it has acquired two new companies during the year viz. Techserv Teleservices Ltd. o....
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....xpayer or its counsel had taken Datamatics as comparable in its T P Audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable." The Ld. AR has demonstrated that Tanla Solutions Limited cannot be accepted as comparable company because it had extra-ordinary events and Super Normal Profits. The jurisdictional Tribunal decision in the case of Cameron Manufacturing (India) (P.) Ltd Vs. DCIT ITA No. 336/CHNY/2018 Para 4 & 7 as under: "4. We find merit in the submission of the Ld.AR. In the Financial Year 2012-13 relevant to the Assessment year 2013-14, M/s. Acropetal Technologies has disclosed 57.66% as its margin which seems to be quite abnormal when compared with the margins in the preceding and succeeding financial years. Therefore, as contented by the Ld.AR, we are of the considered view that M/s. Acropetal Technologies Ltd., cannot be accepted as a comparable company." "7. After considering the issue, we are of the view that when the company is functionally dissimilar and when in a particular year there is an extraordinary profit, then the company cannot be taken as a comparable company. In the case o....
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....f software (i.e. AI and Cloud computing) and as such it is not similar to the business model of the Assessee which is into simple software development service such as prototype design, development and related support activities to its AE. Apart from this, this company has also earned extraordinary profits during the relevant assessment year and as held in para 9 of this order and by once again referring to jurisdictional Tribunal decision in the case of Cameron Manufacturing (India) (P.) Ltd (Supra), we hold that this company cannot be considered as comparable to the Assessee and we hereby direct the TPO to exclude this company from the final list of comparables and then determine the arm's length price for the purpose of benchmarking. Thus, this ground of appeal is decided in favour of the Assessee. 17. Ground No. 4(c): Panoramic Universal Ltd as comparable company: - 18. The Ld.AR submitted before the TPO that the company is having super normal profits. The TPO held that the objection in respect to super normal profit is not accepted. The Ld AR further submitted before us that the company is engaged in the business of providing information technology services as well as hos....
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....jection of Persistent Systems Limited: - 22. The Ld.AR before the TPO that the company is engaged in software product development and functionally not comparable. The TPO held that the objection of the Assessee cannot be accepted as the same is taken from website of the company. The information related to software testing is taken from website of the company and not from Director report and audited financial statement. The TPO also noted that a company may mention various services in its website for various purposes including advertisement and it cannot be considered as evidence. The Ld AR further submitted before us that the company is engaged in the business of digital strategy and design, software product engineering, CX transformation, Cloud and infrastructure, intelligent automation, enterprise IT Security, data & analytics, application development and management, enterprise integration etc. whereas the Assessee is engaged in software development services and is not a software product company. Further, the AR contended that the observation of the TPO that information in the website is not reliable cannot be accepted unless and until the TPO points any other information cont....