TaxTMI 
TaxTMI 
2025 (10) TMI 1409
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....Officer failed to appreciate the business model which did not result in shifting of profit by the assessee to outside India. The TO adjustment resulted in determination of Total Income of Rs 17,34,22,310/- as against the returned Loss of Rs 7,19,87,239/-, 2. The Ld TPO/Ld DRP erred in holding the assessee as a Knowledge Process Outsourcing Entity (KPO) (TeS) instead of holding the assessee as an ITeS (Low end) provider and wrongly interpreted the Rule 10TA(g) of the Income Tax Rules, 1962. 3. The Ld TPO/LA DRP failed to appreciate that the assessee did not provide the Engineering and Design Services, despite providing the evidence about the qualifications, experience and analytical skill sets of the personnel employed by it. 4. The Ld TPO/Ld DRP erred in the calculation of profit-level indicator (PLI). 4.1. The Ld AO/Ld DRP failed to accept the correct operating revenue of Rs. 51,16,93,970/- in computation of PLI. Ld TPO adopted Operating Revenue at as sum of Rs. 50,92,96,752/- wrongly. Forex Loss of Rs. 24,37,218/- was set off against other income and forex loss or income does not form a part of operating revenue/ expenditure. 4.2 Ld TP....
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....0th January 2014 with the A.E. and interest was wrongly charged 12. Without prejudice, the Ld TPO/Ld AO/Ld DRP erred in benchmarking the interest charged by SBI on receivables on deposits with it. 13. Without prejudice, the Ld TPO/Ld AO/Ld DRP ought to have appreciated that the Interest on outstanding receivables ought to have been charged at LIBOR plus 200 basis points. 14. The assessee craves leave to add, amend, omit, substitute the above grounds of appeal at any time before or at the time of hearing. 3. The brief facts of the case are that the assessee company, DGS Technical Services Put. Ltd., is engaged in the business of structural steel engineering and detailing services to its A.E., DGS INC. It is primarily engaged in providing structural steel detailing services, i.e., detailed plans, drawings, and other documents for the manufacture and erection of steel members, columns, beams, braces, trusses, stairs, handrails, etc., used in the construction of steel buildings, airports, warehouses, industrial plants, power plants, industrial sheds, cement plants, and commercial building structures, etc. The assessee had filed its return of income for the....
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....of OP/OC. The Ld. TPO, after considering the relevant objections filed by the assessee, has selected a final set of three comparable with a weighted average OP/OC of 17.90%. The Ld. TPO has also recomputed the PLI of assessee by recomputing Operating Revenue and Operating Cost by rejecting the explanation of the assessee for exclusion of extraordinary costs being salary paid to employees during the COVID period, finance cost, and forex loss, and had arrived at a PLI (OP/OC) at (-)19.95%. The Ld. TPO, after recomputing the PLI, has worked out a TP adjustment of Rs. 24,08,05,786/- in respect of provision of structural steel engineering and detailing services rendered by the taxpayer to its A.E. 5. Further, the Ld. TPO has also computed interest on receivables from the A.E on delayed realization of receivables from the A.E., after allowing a credit period of 60 days and applying the SBI short-term deposit rate, and worked out total interest receivable on delayed receivables at Rs. 46,03,763/-. The A.O., in pursuant to the order passed by the Ld. TPO under Section 92CA(3) of the Income-tax Act, 1961, dated 29.11.2023, has passed a draft assessment order under Section 144C(1) of the ....
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....assessment order passed by the A.O., the assessee is now in appeal before the Tribunal. 9. Ground No. 1 of the assessee's appeal is general in nature and does not require specific adjudication and thus, Ground No. 1 of the assessee's appeal is dismissed as infructuous. 10. The next issue that came up for our consideration from Ground Nos. 2 to 6 of the assessee's appeal is re-characterization of services rendered by the assessee to its A.E. from ITeS to KPO, rejection of TP documentation submitted by the assessee, and selection of fresh comparable. 11. The Learned Counsel for the assessee Shri H. Srinivasulu, Advocate, referring to the business profile of the assessee, submitted that, the assessee renders back-end support services to the construction industry. Further, the assessee is engaged in the business of providing ITeS services mainly in the field of structural detailing services, as per the drawings/designs supplied by its A.E. The assessee employs software known as 'Tekla Software' and provides detailing services. The services rendered by the assessee to its A.E. are low-end services, for which the assessee mainly engages diploma holders for rendering ....
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....ed for selection of comparable. Further, few comparable selected by the assessee company are not available in a database for comparison. The Ld. TPO, after considering the relevant facts, has rightly rejected the TP documentation of the assessee and thus, the reasons given by the Ld. DRP to uphold the search process adopted by the Ld. TPO should be upheld. 13. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. There is no dispute with regard to the services rendered by the assessee to its AE. The assessee provides structural detailing services to its AE on the basis of drawings/designs supplied by the A.E. or its customers. The assessee employs a software known as 'Tekla software' and provides detailing services. In fact, the main drawings/designs are supplied by the A.E. or the customers. The assessee only uses the software for detailing the structural designs of the drawings/designs by employing low-key employees like diploma holders and from the nature of the services provided by the assessee to its AE, in our considered view, the services rendered by the assessee to it's A.E. cannot be c....
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....able. 15. The next issue that came up for our consideration from ground Nos. 4 to 6 of the assessee's appeal relates to the computation of Profit Level Indicator (PLI), i.e., OP/OC, by re- computing operating revenue and operating cost. 16. The assessee has reported its operating revenue at Rs. 51,16,93,970/- and operating cost at Rs. 63,61,85,360/-. Further, the assessee has reduced a sum of Rs. 9,95,38,765/- towards ideal cost or exceptional cost being salary paid to employees during the COVID period from operating expenses. The assessee had also reduced Rs. 1,64,01,114/- towards interest or finance cost from operating expenditure. Thus, the assessee has computed net operating expenses of Rs. 52,02,45,481/-, against operating revenue of Rs.51,16,93,970/- to arrive at PLI of (- 0.02%). The Ld. TPO recomputed PLI (OP/OC) at -19.95% by taking into account operating revenue of Rs. 50,9256,753/- and operating cost of Rs.63,61,85,360/-. In the process, the Ld. TPO considered forex less of Rs.24,37,218/- as operating in nature and further, not excluded extraordinary cost being salary paid to employees during COVID period for Rs. 9,95,38,765/- and also interest or finance cost ....
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....4/-, and the same has been treated as non- operating in nature. The finance cost incurred by the assessee is not related to the working capital requirement of the assessee company, but the same has been incurred for the purpose of acquiring capital assets. He further submitted that Rule 10TA of the Income Tax Rules, 1962 defines the operating expenses which excludes interest expenses from the operating cost. Although this evidence has been furnished by the assessee before the lower authorities, but both the authorities have considered the same as operating in nature only on the ground that, the assessee is having short term borrowings, however as per the financials of the assessee, there is no interest on short-term borrowings. Therefore, he submitted that, the finance cost needs to be excluded from the operating cost. 19. The Learned Counsel for the assessee further referring to the operating revenue computed by the Ld. TPO submitted that, the assessee has computed operating revenue of Rs. 51,16,93,970/-, whereas the Ld. TPO has computed operating revenue at Rs. 50,92,96,752/- by reducing forex loss of Rs.24,37,218/-. It was contended that, forex loss is not an operating expens....
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....rating revenue, therefore, such costs are non- recurring and abnormal in nature and are directly attributable to the extraordinary event of the COVID-19 pandemic and the same needs to be considered as non-operating in nature. The OECD Guidelines on Transfer Pricing implications of the COVID-19 pandemic recognizes that, exceptional and non-recurring costs arising from COVID-19 may warrant separate treatment. Such costs may be excluded from the computation of tested parties PLI, provided they are clearly identified and not reflective of normal business conditions. Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962, allows adjustments to account for differences materially affecting comparability. Therefore, going by the facts of the present case and also the explanation offered by the assessee that, during the COVID period, it has continued to pay salaries to its employees despite non-utilization of the services of employees because of absence of relevant equipment to be provided to the employees at home, the Ld. TPO has considered the said extraordinary cost as operating in nature. Therefore, in our considered view, the expenditure incurred by the assessee being ideal cost should be t....
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....perating revenue. As per Rule 10TA of I.T. Rules, 1962, which is applicable from the assessment year 2015-16, for the purpose of operating expenses, loss arising on account of foreign currency fluctuations has been excluded. Since the forex loss incurred by the assessee is not on account of business operations of the assessee and further, Rule 10TAJ excludes loss arisen on account of foreign currency fluctuations from the definition of operating expenses, in our considered view, the Ld. TPO / Ld. DRP have erred in including forex loss while computing the operating revenue. Therefore, we direct the Ld. TPO to exclude the forex loss for the purpose of computation of operating revenue. To sum up, we direct the Ld. TPO to recompute the PLI by adopting the operating revenue as computed by the assessee by excluding forex loss and also recompute the operating cost by excluding extraordinary / ideal cost being salaries paid to employees during the COVID period and also the finance cost. In other words, we direct the ld. TPO to accept PLI (OP/OC) of -0.02% computed by the assessee. 24. The next issue that came for our consideration from Ground No.7 of the assessee's appeal is exclusi....
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....ting results of the above company. The Ld. TPO and Ld. DRP after considering relevant facts, have rightly included the above companies in the list of comparable. Therefore, she submitted that, the above two companies should be included in the final set of comparable. 27. We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. Insofar as L&T Technology Services Ltd. is concerned, we find that, the above company operates in five verticals, namely transportation, telecom and hi-tech, industrial products, medical devices, etc. The above company fails the turnover filter because, the turnover of L&T Technology Services Ltd. was at Rs. 4,964 crores, whereas the turnover of the assessee company was at Rs. 51.16 crores. Although the Ld. TPO applied the turnover filter, but he has applied only the lower turnover limit of Rs. 1 crore but failed to apply the upper turnover filter for selection of any company. It is a well-settled principle of law from the decision of the ITAT Hyderabad Bench in the case of Trinity Infraventures Limited Vs. ACIT (163 taxman.com 771) that, the turnover filter should be applied from lower....
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....gy Infratech Pvt. Ltd., and AXIS CADESS Technology Ltd., in the final set of comparable upon verification of the relevant FAR analysis and filters applied for selection of comparable. Since the FAR analysis of the above three companies are similar to that of the assessee company, the above three companies should be included in the final set of comparable for the assessment year under consideration. Therefore, he submitted that, the additional evidence filed by the assessee should be admitted and appropriate directions may be given to the Ld. TPO to include the above three companies in the final list of comparable. 30. The Ld. CIT-DR, on the other hand, opposed the admission of additional evidence filed by the assessee and submitted that, the benchmarking analysis for determination of the arm's length price should be decided on the basis of the relevant evidence filed by the taxpayer for each assessment years. Therefore, there is no question of rule of consistency and selection of same comparable for each assessment years. Since the assessee could not furnish relevant evidence to prove the inclusion of the above three companies for the assessment year 2021-22, on the basis of....
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....d. TPO computed interest on outstanding receivables from the A.E. after allowing a credit period of 60 days and by applying the SBI short-term deposit rate applicable for the relevant assessment year. 33. It was the arguments of the learned counsel for the assessee that, as per the agreement with the A.E. dated 10-01-2024, the assessee has allowed a credit period of 90 days and receivables from the A.E. realized within the credit period allowed to the A.E. Therefore, the question of imputation of interest on outstanding receivables does not arise. The learned counsel for the assessee further submitted that, if at all interest needs to be computed, then the LIBOR+ appropriate basis points should be adopted instead of the SBI short-term deposit rate. 34. The Ld. CIT-DR, on the other hand, supporting the order of the Ld. TPO submitted that, the assessee could not substantiate the claim of 90 days credit period to the A.E. when compared to non AEs. The agreement with the A.E. is not relevant and what is required to be seen is whether the assessee has provided similar credit period to non-AEs or not. Since the assessee has not furnished any details to compare the credit period all....