TMI Blog2016 (9) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... the tested party as well as the comparable companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) Considering finance charges for computation of operating profits - Held that:- We find that ld. CIT(A) has observed that finance charges were in the nature of bank charges which pertained to the business operations of a company. He further referred to this observation in regard to working capital adjustment wherein he had held that the interest on loans taken by both the comparables as well as the assessee should be treated as part of operating expense. These findings have not at all been controverted. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A). - ITA no. 393/Del/2010, C.O. No. 85/Del/2010 - - - Dated:- 30-9-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI KULDIP SINGH : JUDICIAL MEMBER For The Department : Shri Neeraj Kumar Sr. DR For The Assessee : Shri Salil Kapoor, Adv., Shri Sanat Kapoor Adv., Ms. Ananya Kapoor Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transactions. In the TP report the assessee had selected following seven comparable companies: S. No. Name of the comparable 1 Ace Software Exp 2 Alphageo (India ) Ltd. 3 Brels Infotech 4 C S S Technergy Ltd. 5 KLG Systel 6 Online Media Sol 7 Vaman Technology 7. The assessee had adopted upper filter of ₹ 50 crores turnover for selection, which resulted into the above seven comparables. The average operating margin of these comparables was 7.22% whereas that of the assessee was 6.50% and, accordingly, assessee concluded that the international transaction entered into with AE was at arm s length. 8. Ld. TPO increased the upper sales filter to ₹ 150 crores and also directed for using current year data on the basis of which the assessee found 21 comparables. Since 12 comparables were having RPT more than 15%, therefore, they were rejected by assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005 March 19.8% 9 ICRA Techno Analytics Ltd 2005 March 27.65% Average 15.83% 11. Before ld. TPO the assessee had, inter alia, submitted that the margin of these two additional comparables had to be recomputed. Ld. TPO accepted the assessee s contention as per his finding on pages 47 48 of his order in regard to Tech Mahindra (R D Services Ltd.) and also in regard to ICRA Techno Analytics Ltd., the findings of which are contained at pages 49 50 of his order. He further pointed out that the margins of the remaining seven comparables, on the lines of the computation of these two comparables, is to be done again. He, accordingly, recomputed the margins of all the other seven comparables, the details of which are contained from pages 51 to 55 of his order and, accordingly, final selection of comparables was done as under: S. No. Financial Head Year End OP/TC % 1 Ace Software Exports 2005 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Book value of revenue = ₹ 30,86,86,545 Difference = ₹ 3,21,95,020/- 14. Ld. CIT(A) upheld the ld. TPO s finding regarding applying upper limit of sales filter of ₹ 150 crores. However, he rejected following four comparables out of nine selected by ld. TPO: - Ace Software Exp - C S S Technergy Ltd. - KLG Systel - Tech Mahindra (R D Services Ltd.) 15. Further, he allowed the working capital adjustment only in regard to interest on loans taken by both the comparables as well as the assessee. 16. Ld. CIT(A) further examined the TPO s computation of operating profit and held that stock adjustment and misc. income is to be treated as operating income and finance charges and misc. expenses were to be treated as operating expenses for both the tested party as well as the comparables. 17. Ld. CIT(A) computed the ALP on the basis of recomputed margins as under: S.No. Name of Company OP/TC 1 Alphageo (India) Ltd. 14.22% 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, admit this additional ground. 23. Ld. DR submitted that ld. CIT(A) has not taken into consideration the objections raised by ld. TPO in not allowing the working capital adjustment. He pointed out that ld. TPO clearly observed that the working capital adjustment could only be provided if the assessee could demonstrate that the working capital was inadequate for the normal business activities relating to international transactions. However, ld. CIT(A) completely disregarded this aspect and held that the interest on loans, taken by both the comparables as well as the assessee, should be treated as part of operating expense. 24. Ld. counsel referred to para 15.4 of CIT(A) s order wherein he has observed that for the purpose of computing reasonable accurate adjustment on account of working capital the need for the adjustment arises only if the elements of working capital i.e. debtors and creditors are affected by the international transactions, which the tested party undertakes with its AEs. He further observed that as a first step if the international transactions with AE do not impact any of the elements of the working capital there should be no need for a working capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the comparables which have been identified are in a disadvantageous position in comparison to the assessee. 8.3. It may be mentioned that the associated enterprises with which the assessee had undertaken the international transaction are located in low-tax jurisdictions or tax heaven country namely Bermuda. There exists a marked difference in tax structure in India and Bermuda. This leads to an opportunity for the tax arbitrage for any assessee who is carrying out business in the circumstances identical of the assessee is operating . 29. He submitted that assessee was the first KPO established in the country and was high-end service provider. Ld. DR further submitted that ld. CIT(A) has taken into consideration all comparables which were BPO. He further pointed out that margins were recomputed for all comparables without affording any opportunity to assessee. He submitted that no reason has been given by ld. CIT(A) for rejecting three comparables on the ground that foreign exchange earnings was less than 50%. Further, he rejected Tech Mahindra n(R D), on the ground that the same was functionally not comparable to assessee. He referred to page 57 of CIT(A) s order where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A), he submitted that the main issue was whether certain expenses were operating or non-operating in nature. He referred to page 268 of PB, wherein computation of operating profit margins wss filed before AO on 7.7.2008. Ld. counsel submitted that Rule 46A is not applicable because no fresh evidence was filed before ld. CIT(A). He further submitted that ld. DR has not pointed out any fresh evidence being filed before ld. CIT(A). As there was no additional evidence filed before ld. CIT(A) there is no question of applicability of rule 46A. 35. Ld. counsel referred to PB II, filed on 22.8.2016, wherein show cause notice received from TPO dated 25.7.2008 is contained from pages 1 to 26. Ld. counsel referred to page 285 of PB, wherein assessee s reply dated 11.8.2008 is contained wherein at page 289, chart was filed for determining the operating profit margins. Ld. counsel referred to page 55 of TPO s order and pointed out that after considering these mistakes, ld. TPO determined the PLI at 17.53% as against 15.83% in show cause notice. Ld. counsel referred to PB II, filed on 22.8.2016 and referred to page 72 of the same wherein in regard to ground no. 4.6 raised before ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o were found to be materially dis-similar in aspects and features that have a bearing on the profitability of those entities. 39. It was further held that where the controlled transactions were clearly in the nature of low-end ITES such as call centres etc., for rendering data processing not involving domain knowledge, inclusion of any KPO service provider as a comparable would not be warranted. 40. We have considered the submissions of both the parties and have perused the record of the case. We may point out that department has not specifically objected to rejection/ inclusion of comparables by ld. CIT(A). However, since the selection of comparables has a bearing on the determination of ALP, therefore, we proceed to consider the inclusion/ exclusions of comparables done by ld. CIT(A). 41. Now coming to the issue of comparables, we find that as far as rejection of three comparables viz. Ace Software Exp., C S S Technergy Ltd. and KLG Systel is concerned, ld. CIT(A) has rejected these comparables for the reason that it had no foreign exchange earnings. This has been done because BT TechNet Ltd. was rejected by ld. TPO on the ground that it had no foreign exchange earnings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock Adjustment- The appellant in its above submissions has stated that stock adjustment has been treated as operating income while calculating the PLI. The appellant further states since it pertains to raw material, in~entory therefore it should be considered as part of operating expense. As stock adjustments pertain to purchases made, therefore it should be treated as a cost item. I have considered the above submission of the appellant, and it is observed that Schedule VI of the Companies Act, 1956 does not specify any format for the Profit and Loss account. Accordingly, companies, in general practice, either follow the 'T' format or the Vertical format for preparation of Profit and Loss account. Further, in both the formats, the 'Change in Stock' is disclosed either in 'Income' side or adjusted in 'Expenditure' side. Different companies adopt varying presentations for disclosing 'Change in Stock'. Difference in disclosure/ presentation should not lead to different PLI calculations of companies. Accordingly, it is necessary to adopt a consistent way of treating change in stocks for PLI computation purposes. Based on the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) on this count. In the result ground no. 6 is dismissed. 48. Ground no. 7: The department has assailed the finding of ld. CIT(A) in considering the finance charges for computation of operating profits and in not quantifying the finance charges brought in as operating expense and providing a line by line calculation of the operating margin. We find that ld. CIT(A) has observed that finance charges were in the nature of bank charges which pertained to the business operations of a company. He further referred to this observation in regard to working capital adjustment wherein he had held that the interest on loans taken by both the comparables as well as the assessee should be treated as part of operating expense. These findings have not at all been controverted. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A). Ground no. 7 is dismissed. 49. In the result department s appeal is dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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