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2016 (3) TMI 1184 - AT - Income TaxTPA - TP adjustment in respect of transactions with non-AEs? - Held that:- As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm’s length price, there is no scope for computing income from noninternational transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee under this segment with reference to the base of ‘total costs’, also inclusive of costs relevant for transactions with non- AEs, we vacate the impugned order to this extent and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only under this segment, to the exclusion of transactions with non-AEs. Computation of Operating costs - Personnel expenses - Held that:- Since the revenue from this international transaction representing 150% is ₹ 7,30,47,418, we hold that the employee cost for rendering ITES be taken at ₹ 4,86,98,278 (Rs.7,30,47,418 *100/150). The remaining employee cost is relatable to software development services. We have also gone through an Agreement with M/s Wells Fargo India Solutions Pvt. Ltd., which is a non-AE and the assessee has rendered software development services to this Indian company also. It is common submission that agreements with other non-AEs are on the same terms as with M/s Wells Fargo. No mechanism has been set out under this Agreement for determining the Personnel costs incurred by the assessee in rendering services to non- AE. In the absence of any mechanism for apportionment of employee cost between AE and non-AE transactions of software development services, we direct that the remaining personnel costs (after exclusion of ₹ 4,86,98,278) be apportioned between AE and non-AE transactions in the ratio of revenue. Operational and other expenses - TPO, in the first step, has bifurcated such expenses along with others in the ratio of revenue from software development and ITES segments. Then he reduced nonoperational expenses of Financial expenses, Forex loss, Provision of doubtful debts, Loss on sale/discarded of fixed assets and Provision for doubtful advances, to find out the amount of total operating expenses other than Personnel expenses. The ld. AR could not point out any rational basis for apportionment of such expenses, other than the revenue from the relevant segments. We, therefore, uphold in principle, the apportionment of such other expenses, except depreciation, in the ratio of revenue from both the segments. As regards the five items treated by the TPO as non-operating nature, the ld. AR did not raise any objection to such treatment. We, therefore, hold that that the other proportionate expenses relating to software development segment as deduced from the bifurcation on the basis of revenue, should be further apportioned between AE and non-AE transactions in the ratio of the revenue from the two streams. The five items of non-operating expenses are also directed to be reduced in the same way. The proportionate part relatable to the AE transactions be considered in the calculation of OP/OC of the international transaction of rendering software development services. As regards Depreciation, we find that the assessee, inter alia, earned Rent of ₹ 88,90,195 and credited it to Profit and Loss account. This amount of rent has been taken as nonoperating income and rightly so. Once rent is non-operating, then the amount of depreciation on the assets yielding rent cannot also be treated as operating expenses. Accordingly, we direct that the above discussed exercise of bifurcating `Other Operating expenses’ be carried out in respect of Depreciation also, but after reducing such amount of depreciation as relates to the assets fetching rental income. Selection of comparabale - Held that:- The mere fact that company ‘A’ has been held to be not comparable in a judicial order passed in the case of company ‘B’, does not per se make it incomparable in all the subsequent cases to follow. Not only company ‘A’ held to be incomparable to company ‘B’ can be comparable to company ‘C’, but company ‘X’ held to be comparable to company ‘Y’ can also be incomparable to company ‘Z’, depending upon the functional profile and the applicability or otherwise of the related factors. There can be no hard and fast rule that if a particular company has been found to be not comparable in the case of another company, then such former company would cease to be comparable to the assessee company also. Comparability of each company needs to be ascertained only after matching the functional profile and the relevant factors of the other company. International transaction of `Software development’ of the assesseee need to be considered while selection comparable. Addition on account of re-allocation of indirect costs amongst eligible units (section 10A) and non eligible unit on the basis of gross revenue receipts - Held that:- It prima facie appears from the language of the assessment order that the assessee maintained consolidated accounts and apportionment of expenses was done at the instance of the AO alone. Be that as it may, we have to decide the basis of allocation of indirect expenses, for which the assessee also conceded to some extent before the DRP for apportionment on certain basis given in the paper book. We agree with the Ld. AR that all the expenses cannot be apportioned on the basis of gross receipts from each unit. There are certain expenses which have separate keys for allocations. In such circumstances, each expenditure needs to be viewed from the apportionment angle separately and there cannot be a strait jacket formula for apportioning them on the basis of gross revenue. Under the given circumstances, we set aside the impugned order and remit the matter to the file of AO for making apportionment of all the indirect costs separately on some reasonable basis.
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