TMI Blog2014 (5) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... it of IT Division are available separately and the AO has neither raised any objection on the profit computation nor made any adjustments to the working given by Assessee – each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling, etc.- The FAR analysis in each of the activity will have distinct and separate considerations - the TPO as well as DRP have ignored the fundamental fact and have erred in not considering this aspect of the economic substance of the transactions – Decided in favour of Assessee. Determination of ALP at entity level – Restriction to transaction with AEs – Held that:- Assessee has suffered losses in software services where the AE transactions are less - Assessee also had very meagre AE transactions in Engineering Services and there are separate profits which were already arrived at and accepted by AO in the order itself - When profit margins of different units are available separately, it could not be understood as to why TPO and DRP should adopt total profit at 10.74%, which included non-AE transactions on which according to Assessee, profit margin was less - Relying upon Dy. CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (8) TMI 845 - Karnataka High Court] followed - deduction u/s 10A of the Act has to be computed prior to setting of losses of other industrial units - The AO is directed to rework out the computation of income – Decided in favour of Assessee. - ITA No. 1989/Hyd/2011 - - - Dated:- 31-10-2013 - B. RAMAKOTAIAH AND SAKTIJIT DEY, JJ. For the Appellant : K. Pradeep and K. Neeraja. For the Respondent : P. Soma Sekhar Reddy. ORDER:- PER : B. RAMAKOTAIAH This appeal preferred by the Assessee is directed against the order of the DCIT, Circle - 1(1) passed u/s 143(3) read with section 92CA and section 144C of the IT Act, consequent to the directions issued by the Dispute Resolution Panel (DRP), Hyderabad. 2. Assessee has originally raised grounds of appeal running to 10 along with Appeal Memo and vide letter dated 02-11-2012 amended grounds and filed detailed amended grounds running to 8 in number. Vide petition under Rule 11 of IT Rules, Assessee prayed for admission of additional ground with reference to working capital adjustments. Ground No. 8 is a summary of other 7 grounds and states that such other grounds that may be advanced at the time of hearing. Assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the filters already adopted in its own study, but, the TPO rejected some of the filters adopted by Assessee and finally considered the data. Assessee accepted final analysis adopted by the TPO with a request that contemporaneous data along with earlier two years data should also be considered. However, the TPO did not agree and considered only the data for the relevant assessment year. Assessee, however, objected to the threshold limit adopted for the filters such as 'Related party transactions' and 'Employee cost.' These filters were also not considered by the TPO. One of the objection raised by Assessee before the TPO was that Assessee is following Business Process Outsourcing (BPO) and some of the comparable companies are in the Knowledge Process Outsourcing (KPO), therefore, those comparables should be excluded. Finally, the TPO selected 27 companies as comparables. Out of 22 companies selected by Assessee at the time of TP study and two companies additionally suggested by Assessee, the TPO accepted 9 comparable companies and rejected balance companies. 5. Before us, Assessee has not raised grounds with reference to comparables rejected by the TPO, therefore, to that extent t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent wise data provided by Assessee (C) Wrongly applying ALP at entity level instead of restricting to transactions with AEs. (D) Selection of wrong comparables by the TPO (E) Using a higher threshold for related party transactions (F) Employee Cost filter, and (G) Improper calculation of working capital adjustment 8. Under these heads, AR submitted detailed submissions as under: (A) Rejecting the contemporaneous data and undertaking fresh comparable.( Ground 3(i) ). 1. The learned counsel submitted that the TPO used the comparable data which was not available to Assessee at the time of preparing the TP documentation which is against the principle of natural justice and further the information obtained by the TPO is not freely available in the public domain. It was submitted that the TPO should have given an opportunity to Assessee to re-prepare the TP documentation considering the data available at the time of assessment proceedings. 2. After considering rival contentions, proceedings before the TPO as well as DRP and paper book filed before us, we are not convinced with the objection raised by Assessee. Even though relevant data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating margin of 20.36%. The TPO as well as DRP have ignored this fundamental fact and have erred in not considering this aspect of the economic substance of the company. The reason for rejection of segment as stated by the TPO is that these were not audited. It may be noted that the requirement under Companies Act for disclosure of separate segment arises only in terms of AS-17. If the segments are functionally same and do not meet threshold limit the same are considered as one segment which in fact is the case with Assessee. The books were audited and there is only one segment in accordance with AS-17. The TPO has rejected the segment results shown above merely on this ground, without looking at the details and reconciliation with trial balance that was submitted. (d) The learned counsel relied on the decision of Delhi Bench of ITAT in the case of Delhi Bench of ITAT in the case of Benetton India Pvt. Ltd. Vs. ITO [2012-TII-05-ITATDEL- TP) to submit that when Assessee is in different segments only the segmental profits should be arrived at and that can only be benchmarked independent of each other. He also relied on the decision of coordinate bench of Mumbai ITAT in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... separate activities and should have benchmarked separately. One objection, which can be raised in this regard is that Assessee itself has benchmarked transactions combining all the three transactions in TP report. However, when this was brought to the notice of TPO and particularly when segmental reports are available on the basis of claims made u/s 10A, the TPO should have taken them into consideration. The TPO as well as DRP have ignored this fundamental fact and have erred in not considering this aspect of the economic substance of the transactions. The requirement under Companies Act for disclosure of separate segment arises only in terms of AS-17, but, under the TP provisions, the segments are functionally different and they do not meet threshold limits. Accordingly, this objection of Assessee is to be upheld. (C) TPO wrongly applied ALP at entity level instead of restricting to transactions with AEs GroundNo.3(iii): (a) It was submitted that its operational margin indicated that transactions with AE resulted in operating profit to cost ratio of 17.89% and with non-AE at 2.35% and total operating profit to cost is at 10.74%. It is further submitted that the TPO made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e) However, as seen from the details placed in the written submissions, Assessee has arrived at marginal cost at 20.36% in segment wise data whereas in the separate computation for AE and non-AE transactions, profit was arrived at 17.9%. These amounts are to be reconciled with reference to turnovers and expenses claimed for the purpose of deduction u/s 10A from GIS Services and Engineering Services. Since separate segmented data is available by way of CA's certificate under the provisions of section 10A, the AO can reconcile these amounts and arrive at correct profit margins and make the adjustments thereon. Therefore, we uphold the objections raised by Assessee and direct the AO to re-workout the addition, if any, only with reference to AE transactions and not on non-AE transactions. (f) In the case of Dy. CIT v. Firestone International , 712-ITAT-2012 (Mum), the coordinate bench held as follows: "...Since the arm's length price has to be determined only with reference to the international transactions, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be considered on the value international transactions alone and not on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd High turnover companies and giants in industry Patni Telecom Solutions Pvt. Ltd. Vs. ACIT, Hyderabad (TS-102-ITAT- 2013 (Hyd) Zavata India Pvt. Ltd., (TS-156-ITAT- 2013 (Hyd) 6 Infosys BPO Ltd. 7 Wipro Limited 8 Asit C Mehta Financial Services Ltd. Functionally different company and RPT 10% Functionally different company not comparable with the business of Assessee Zavata India (P.) Ltd. (supra) 9 Triton Corporation Comparable indicted for money laundering offences. Directions of DRP (c) The learned DR, however, relied on the orders of TPO and the DRP and explained that these comparables are selected after due analysis and nothing should be excluded. (d) We have considered and examined various comparables selected as well as perused various orders of the coordinate benches on the issue. It is true that in the transfer pricing analysis comparability is at the heart of transfer pricing analysis. The foundation for comparability analysis is the need for a comparison between conditions made or imposed between AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the above, we direct the AO/TPO to exclude the said company as comparable from the list of comparables. (2) Eclerx Services Ltd. We find that the PLI for Eclrex Services Ltd for the AY 2007-08 is 89.33% and is in the business of high end KPO. As ruled by the coordinate bench in the case of Capital IQ Systems (India) (P.) Ltd. (supra), supernormal profit companies must be excluded for determination of ALP. In the case of Market Tools Research (P.) Ltd. (supra), on which reliance was placed by Assessee, the coordinate bench held as follows: "We find that comparability of this company has been dealt with in detail in the case of Capital IQ Information Systems (India) (P.) Ltd. v. DCIT ITA No. 1961/H/2011 dt. 23-11-12for the AY 2007-08 at para 14 15 they have held that Eclerx Services Ltd. cannot be taken into account in view of their extra ordinary profits and that company was engaged with knowledge process outsourcing business which is distinct and different from the line of nature of activities of the assessee. Hence this company should be excluded while determining ALP" Even in the case of Zavata India (P.) Ltd. (supra), on which Assessee relied, similar view was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables while determining ALP. (4) Vishal Information Technologies Ltd. We find that employee cost of the said company for The AY 2007-08 is mere 2% as against 49% in the case of Assessee and the industry average of 30 to 40%, as the employee's cost forms major cost base in ITES companies. Therefore, the said adopts different methods of rendering services and is not akin to the business relating to Assessee and hence, we direct the AO/TPO to exclude the said company from the list of comparables while determining ALP. Cordinate benches in the case of Brigade Global Services (P.) Ltd. (supra) and Zavata India (P.) Ltd. (supra) held a similar view to exclude. 5. HCL Comnet Systems Services Ltd. 6. Infosys BPO Ltd. 7. Wipro Ltd. Assesse relying on the following decisions of the coordinate bench, submitted to exclude the said companies from the list of comparables on the ground that the said companies turnover is many times more as compared to that of Assessee. 1. Patni Telecom Solutions (P.) Ltd. (supra) 2. Zavata India (P.) Ltd. (supra) We find that in the case of Patni Telecom Solutions (P.) Ltd.(supra) the coordinate bench excluded the high turnover c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Maple was directed to be excluded. Therefore, we direct the AO/TPO to exclude the said company Triton also from the list of comparables while determining ALP. 9. In view of the above discussion, the TPO is directed to work out the average arithmetic mean of PLI, subject to verification on turnover filter of comparables at Para 8 (d) - 5,6,7 above. 10. Assessee contested as a general principle about higher threshold for related party transactions, employee cost filter as stated above in Items (E) (F). while we are not objecting to the contentions per se, there is no need to separately adjudicate on these filters as Assessee's objection with reference to other comparables selected by the TPO have already been addressed in the above grounds. Therefore, giving any finding on these objections will only be academic in nature, as the specific objections to the comparables were already dealt with. Hence, these two objections raised by Assessee in Ground No. 3(vi) and 3(vii) are considered academic in nature and accordingly rejected. ADDITIONAL GROUND 11. The additional ground raised by Assessee is with reference to improper calculation of working capital adjustment by the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the TPO, in the interest of justice, we restore the issue to the file of TPO with a direction to examine the veracity of Assessee's claim and take proper decision in correctly computing the working capital adjustment. With these directions this additional ground is considered allowed for statistical purposes. 15. The AO/TPO is directed to exclude comparables and determine the ALP by restricting to the international transactions with AEs only and while doing so, consider segmental profits, based on the reports submitted for claiming u/s 10A of the Act. After arriving the arithmetic mean of PLI, if any further adjustment towards working capital is required, the same may be considered after verification as directed above. If required, the TPO or AO can seek information from the Assessee and decide accordingly. 16. The other ground raised is with reference to setting off of brought forward losses and unabsorbed depreciation before giving effect to deduction u/s 10A 17. As briefly stated above, the AO has set off of losses of Rs. 47,97,187/- of non 10A unit before providing deduction u/s 10A. It was the contention that deduction u/s 10A is undertaking specific and should be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed. 30. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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