TMI Blog2013 (11) TMI 1413X X X X Extracts X X X X X X X X Extracts X X X X ..... ty in the accounts of comparable Education Consultant (P) Ltd. overstating the profit to the tune of ₹ 2.72 crores – This abnormal profit needs to be adjusted while working out the OP/TC in this account of comparables – The issue was restored for fresh decision. Foreign exchange difference – Held that:- The issue was no more res integra – Following ITAT, Bangalore Bench in the case of SAP Labs India (P) Ltd. vs. ACIT [2010 (8) TMI 676 - ITAT, BANGALORE] - The foreign exchange gain is an integral part of the sale proceeds of an assessee carrying on an export business - This income should not be excluded from the computation of the operating margin of the assessee company – Decided in favour of assessee. Risk profile and working capital adjustment – Held that:- No risk adjustment can be allowed when the same has not been quantified - The assessee has failed to bring any evidence on record to show that there was any difference in risk profile of comparable companies – If difference in the risk results into deflation and inflation of the financial results of comparables adjustment can be made on this fact - The assessee has also failed to establish any working capital diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -- 14,937,677 3. Charge back of expenses borne by AEs on behalf of PESPL --------- 74,023,785 In the case of provision of administrative and technical support services, by adopting the method of Transaction Net Marin Method (TNMM), the value of transaction was shown as Rs.24,01,27,068/-. The borrowing cost incurred by the assessee was shown as Rs.22,17,06,942/-. Thus, the borrowing margin was shown at Rs.1,84,20,126/-. The operating profit to total cost (OP/TC) ratio was 8.30%. The assessee has chosen the TNMM with OP/TC ratio as the Profit Level Indicator (PLI) to benchmark its international transaction with the AEs. The assessee chose 14 comparables and used three years data. The PLI ratio of the comparable selected by the assessee was computed at 11.25% and the assessee justified that the transactions with the AEs were at arms length. The Transfer Pricing Officer (TPO) has adopted the current year data and rejected the search process undertaken by the assessee to identify the comparables. The TPO selected seven comparables with the mean PLI of 31.9% and accordingly, proposed an adjustment of Rs.5,23,70,900/- after re-computing the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noring the contention of the appellant that segment accounts should not be considered when direct comparables are available. 9. On the facts and circumstances of the case, the learned Assessing Officer has erred both on facts and in law in applying arm's length price for determination of income of the appellant based on the data of comparables which are not comparable with the level of operation of the appellant. 10. On the facts and circumstances of the case, the learned DRP has erred, both on facts and in law in rejecting the contention of the assessee that the exceptional comparable having 'abnormal profit/losses' should be excluded while determining the arms' length price. 11. On the facts and circumstances of the case, the learned AO has erred both on facts and in law in excluding a sum of Rs.29,86,257/- in the revenue income ( the assessee while working out the TNMM despite the fact that the same being difference in foreign exchange fluctuation will go to enhance the revenue receipt and as such is to be taken into account while computing TNMM. 12. In the alternative and without prejudice to the above the AO has erred in not excluding gain on account of foreign exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leave to add, amend or alter any of the grounds of appeal. 3. The assessee objected the use of current year data by the TPO for transfer pricing analysis on the basis that such data was not available in public domain at the time of finalization of transfer pricing study and the use of multiple year data would result in better capturing of market/business cycles reflected in the industry in comparison to single year data. This plea of the assessee was not accepted in view of the provisions of Rule 10B(4) of the Income-tax Act, 1961 wherein it is provided that data of the comparable transactions shall be for the same financial year in which the assessee has entered into international transactions unless data related to earlier years (not more than 2 years) reveals certain facts which could have an influence on the determination of transfer pricing in relation to the transactions being compared. Since assessee has failed to make out any case relating to the use of earlier years data, this plea of the assessee was dismissed. This issue has been taken by the assessee under grounds no.16.1 to 16.4. 4. After hearing both the sides on this issue, we find that assessee has failed to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... administrative and technical support services to its AEs. The value of this international transactions undertaken by the PESPL with the AEs is as follows : Associated enterprise Amount (INR) Premier Oil Cachar BV India Project Office 135,931,806 Premier Oil (North East India) BV India Project Office 9,265,511 Premier Oil Gas Services Limited 94,929,751 Total 240,127,068 3.02.2. Charge back of expenses borne by PESPL on behalf of AEs During the FY 2007-08, PESPL has charged back expenses borne on behalf of its AEs. These expenses were charged for legal fee and travel related expenditure, incurred by PESPL on behalf its AEs. The value of the charge back of these expenses is as follows : Associated enterprise Amount (INR) Premier Oil Cachar BV India Project Office 11,209,214 Premier Oil (North East India) BV India Project Office 1,499,295 Premier Oil Gas Services Limited 2,229,168 Total 14,937,677 3.02.3. Charge back of expenses borne by AEs on behalf of PESPL During the FY 2007-08, the AEs have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exploration consultancy then functions cannot be compared to assessee company. Financial results of Saket Projects Ltd. were also not reliable. The ld. AR also drew our attention to the objections filed before the DRP in the written submissions placed at pages 714 728 of the paper book. He has also drawn our attention of remand report at pages 746 -747 of the paper book and rejoinder at pages 756 to 760. 8. On the other hand, the ld. DR submitted that initially assessee took it comparable and the assessee has objected to inclusion of the company as having abnormal margins in the set of comparables taken by the TPO after using current year data. The Saket Projects Limited has shown higher margins of profit for the year. The assessee has himself chosen as its comparable for the earlier year and also in the year under consideration on the basis of earlier years data. When the assessee has taken functional comparable company then low or high margins of profit will not affect the exclusion and inclusion of the comparable. There should be functional comparability and the difference in the margins is taken out by taking the arithmetic means of various comparable companies. Variati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We agree with the view of revenue that no comparable can be rejected merely on the basis of high margins if the comparable is functionally comparable to the assessee and also that there is miner variation in functional similarity. However, in the case of Saket Projects Ltd. there is functional dissimilarity. The company is organizing events with various kinds of sponsorships. The facts also suggest that segmental allocation of expenses were not reliable. We also hold that when direct comparables are available then segmental results of companies engaged in other business should not be taken as comparable. On the basis of these facts, we hold that Saket Projects Ltd. was not comparable to the extent wherein the various variations could be ruled out or iron out by provisions of law and rules. 10. In ground no.5, the issue is regarding ICRA Management Consultant Services Limited wherein the assessee claims that in the TNMM (OP/TC) should be 2.15% instead of 4.18% as taken by the TPO by not excluding non-operating income of Rs.0.34 million. 11. While pleading on behalf of the assessee, ld. AR submitted that the TPO has computed TNMM of comparable M/s. ICRA Management Consultant Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uditor s report of Educational Consultants (P) Ltd. placed at pages 689 to 692 of the paper book. 15. While pleading on behalf of the assessee, the ld. AR submitted that auditors in their report which is placed at pages 689 to 692 of the paper book in its para 4.vii has clearly mentioned that the profit has been overstated by Rs.2.72 crores and this profit should be deducted while working out the OP/TC. The revenue s reliance that the observation of the auditors has been rebutted by the company in its annual report should not be made a basis for rejecting the contention of the assessee. 16. We have heard both the sides on the issue. We find that the auditors have in their report at para 4.vii has reported as under :- Subject to our comments in paragraph 4(vi)(a), non confirmation and non reconciliation of Sundry Debtors, Sundry Creditors, Loan Advances and other Liabilities, the impact of which is indeterminable, paragraph 4(vi)(b), Ad-hoc Provision of Rs.10.30 lakhs in respect of 50% merger of Dearness Allowance with basic pay financial impact not determinable presently, paragraph 4(vi)(c), the non provision of amount due from KREIS to the tune of Rs.1.10 crores and parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. Ld. AR also submitted that this has been followed in the case of Tilogy E Business Software India (P.) Ltd. vs. DCIT 12 Taxmann.com 464 (Bang.). It was also prayed that if assessee s contention is not accepted then the foreign exchange fluctuation income of the comparables needs to be excluded from the operating income of the comparables. 20. We have heard both the sides on this issue and we agree with the ld. AR that this issue is no more res integra. Various Benches of the ITAT have decided the issue in favour of the assessee by taking the foreign exchange fluctuation income in case of exporters as a part of the operating income and we direct the TPO to include the foreign exchange income as operating income while working out the PLI. 21. In the ground no.13, it is prayed that the DRP ahs erred both on facts and in law in rejecting the calculation of the assessee for making appropriate adjustment to account for varying risk profiles and difference in working capital of the assessee vis- -vis comparables. 22. We have heard both the side son this issue and after hearing, we find that there is no merit in the plea of the assessee. No risk adjustment can be allowed when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on 31.08.2010) wherein it was held that the depreciation @ 60% on such items shall be allowed. Respectfully following the aforesaid judgments of Hon'ble jurisdictional High Court, we allow this ground of assessee s appeal. 28. In the ground no18, the issue is against the disallowance of Rs.1,04,780/- on account of professional consultancy fee invoking the provisions of section 40(a)(ia) of the Act. 29. While pleading on behalf of the assessee ld. AR submitted that the DRP has not allowed the assessee s plea in toto. In fact, the TDS has been deducted which is evident from pages 343A, 343B, 343C and 343D of the paper book. The DRP being satisfied with the explanation of the assessee asked the Assessing Officer to verify the same and allow deduction. This disallowance was factually incorrect. 31. We have heard both the sides on this issue. Since the DRP has directed the Assessing Officer to verify the claim of the assessee and allow deduction if the TDS has been deducted, we uphold the direction of the DRP and dismiss this ground of assessee s appeal. 32. Ground No.19 was not pressed, hence dismissed as not pressed. 33. Ground No.20 is general in nature and does not r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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