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2019 (6) TMI 1444 - AT - Income TaxTP Adjustment - aggregated approach of considering the three business divisions together for determining the ALP. - comparable selection - primary argument of the ld. AR was that in the case of the assessee the segmental data of each of the divisions i.e. EIC EEEC and FCEC were available whereas the very same data is not available with the comparable companies. - HELD THAT - Assessee is in the business of providing engineering support services including configuration engineering framework design and graphical design largely in connection with industrial automation projects undertaken by other Emerson group members. Emerson also provides IT services including database administration and help desk support to various members of the Emerson group. Emerson also maintains manufacturing and distributions operations. From the reading of provisions of Section 92C(1) of the Act we find that the expression class of transaction is mentioned thereon. We hold that the assessee in the instant case had aggregated class of transactions falling in engineering and design services. From the reading of provisions of Section 92C(1) of the Act we find that the Section uses the expression class of associated persons . From the background of the assessee and the AEs reflected in the TP study report various documents available on record which are not disputed we find that all the AEs are engaged in manufacturing of industrial automated products. We find that all the three divisions under the engineering services segment are engaged in rendering design and engineering services falling under the common administration and management control of the company and funds for the three divisions are interlaced as they are drawn from a common pool of funds maintained by the company. In these circumstances adoption of aggregated approach for benchmarking the international transaction should be accepted. International transactions can be aggregated when the transactions pertain to the same class. Further Section 92C and Rule 10C state that for selecting the most appropriate method to determine arm s length price (ALP) among other factors the nature and class of transaction and functions performed in respect of the transactions are critical. Where (i) the nature and class of the international transactions; (ii) the class or classes of AEs entering into the international transactions; as well as (iii) the FAR analysis in relation to the transactions are similar it would be prudent to aggregate the international transactions while determining the most appropriate method as per the Indian TP regulations. Hence we hold that the provisions of the Act and the rules permit aggregation of similar class of transactions if the FAR is the same when the services are rendered to a class or classes of AEs while determining MAM. Therefore we hold that it would be rational to apply this aggregated approach of considering the three business divisions together for determining the ALP. Certification Engineers International Ltd. to be excluded as comparable on the ground that the said comparable is a Government company as it is only wholly owned subsidiary of Engineers India Ltd. which is a Government of India Undertaking. Comparable for Provision of IT Support and Related Services - Comparable chosen by the ld. TPO M/s. MPS Ltd. is functionally not comparable with that of the assessee and accordingly we direct the ld. TPO to exclude the same from the list of comparables. MPS Limited and Excel Infoways Ltd. companies admittedly does not fall within the turnover filter range fixed by the ld. TPO itself which is Rs. 6.45 Crores to 604.50 Crores. Hence we hold that the said comparable fails on the turnover filter applied by the ld. TPO and accordingly deserves to be excluded from the list of comparables and we direct accordingly. Comparable chosen by the ld. TPO which is Jindal Intellicom Ltd. having a margin of 11.92%. It is now well settled that working capital is to be given to the assessee and there is no dispute in this regard. We find that the assessee had infact given the workings for working capital assessment of all the comparables before the ld. TPO which are enclosed in page 570 of the paper book. The ld. TPO is directed to give working capital adjustment in respect of Jindal Intellicom Ltd. and recompute the margin thereon and then decide as to whether any adjustment to ALP is to be made when compared with assessee s margin. Comparable for Provision for Software Development Servies (IT Segment) - companies functionally dissimilar with that of assessee need to be deselected from final list and there is no segmental data available for the revenue stream in respect of revenue from software development and revenue from sale of products. Hence in the absence of segmental data for the software development segment alone the same cannot be held to be comparable with the assessee in IT segment. Also RPT transaction are not more than 25% the said company is a good comparable. Software Development Services - companies functionally dissimilar with that of assessee and having diversified activities need to be deselected from final list
Issues Involved:
1. Transfer Pricing Adjustments for Engineering and Related Services Segment. 2. Transfer Pricing Adjustments for IT Support and Related Services Segment (ITeS). 3. Transfer Pricing Adjustments for Software Development Services Segment (IT Segment). 4. Transfer Pricing Adjustments for Facilitation/Marketing Support Services Segment (MSS Segment). 5. Application of Filters and Selection/Exclusion of Comparables. 6. Consideration of Suo Moto Adjustments Made by Assessee. Detailed Analysis: 1. Transfer Pricing Adjustments for Engineering and Related Services Segment: The assessee, engaged in providing engineering support services, used the Transactional Net Margin Method (TNMM) as the most appropriate method. The assessee's Operating Profit margin was 32.40%. The TPO, however, segregated the profitability of three divisions (FCEC, EEEC, and EIC) and made adjustments based on the profitability of the EIC division, which had a lower margin of 7.36%. The TPO selected two comparables and arrived at a mean margin of 16.31%, resulting in an adjustment of Rs. 12,36,14,584. The DRP upheld the TPO's segregation approach. The Tribunal found that the aggregation approach was justified due to the interlinked nature of transactions and common pool of funds among divisions. The Tribunal directed the exclusion of Certification Engineers International Ltd. from comparables and allowed working capital adjustments. 2. Transfer Pricing Adjustments for IT Support and Related Services Segment (ITeS): The assessee provided ITeS services with a margin of 13.35%. The TPO made an adjustment of Rs. 6,03,56,767, using a mean margin of 24.19%. The Tribunal excluded MPS Ltd. and Excel Infoways Ltd. from the comparables due to functional dissimilarities and failure to meet turnover filters. The Tribunal directed the TPO to provide working capital adjustments for the remaining comparables. 3. Transfer Pricing Adjustments for Software Development Services Segment (IT Segment): The assessee provided software development services with a margin of 5.18%. The TPO made an adjustment of Rs. 1,82,43,364, using a mean margin of 25.57%. The Tribunal excluded Cyber Infrastructure Pvt. Ltd., Infobeans Systems India Pvt. Ltd., Ingenuity Gaming Pvt. Ltd., Nihilent Analytics Ltd., and Cybercom Datamatics Information Solutions Ltd. due to lack of segmental data and functional dissimilarities. The Tribunal directed the inclusion of Evoke Technologies Ltd., Kals Information Systems Ltd., and CITL Ltd. as comparables, and granted working capital adjustments. 4. Transfer Pricing Adjustments for Facilitation/Marketing Support Services Segment (MSS Segment): The assessee provided marketing support services with a margin of 16.25%. The TPO made an adjustment of Rs. 36,77,080, using a mean margin of 19.52%. The Tribunal excluded Axis Integrated Systems Ltd. from the comparables due to failure to meet the export filter. The Tribunal directed the TPO to re-compute the margin of ALP under MSS segment. 5. Application of Filters and Selection/Exclusion of Comparables: The Tribunal addressed the application of various filters such as turnover filters and export earnings filters. The Tribunal emphasized the importance of segmental data and functional comparability in selecting/excluding comparables. The Tribunal directed the exclusion of comparables that did not meet the specified filters or had functional dissimilarities. 6. Consideration of Suo Moto Adjustments Made by Assessee: The Tribunal noted that the TPO failed to consider the suo moto adjustments made by the assessee in the benchmarking process. The Tribunal directed the TPO to consider these adjustments while re-computing the ALP for the respective segments. Conclusion: The Tribunal's detailed analysis and directions ensure a more accurate benchmarking process by considering functional similarities, segmental data, and appropriate filters. The Tribunal's directions for exclusions and inclusions of comparables, along with working capital adjustments, aim to achieve a fair determination of the arm's length price for the assessee's international transactions. The appeals for both assessment years were partly allowed for statistical purposes.
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