TMI Blog2014 (10) TMI 493X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction of the assessee was at arm’s length price - The remaining set of 17 comparable companies were having an arithmetic mean of 32.33% - After considering overall PLI of assessee at 17.38% an upward adjustment of ₹ 16,83,86,191/- was made by TPO to the transfer price. The company is a knowledge process outsourcing (KPO) engaged in providing data analysis and data process solutions, online operation support, customer relationship management support, data de-duplication services etc. - Since functionally, it is different from assessee company, DRP was not justified in not excluding the same from the list of comparables - the AO has called for information with respect to this company u/s.133(6), wherein it was found that company is engaged in providing services under IT segment and it is functionally comparable to the assessee. The assessee has placed segment-wise revenue in case of engineering division at ₹ 218,000,505/, and in case of Information Technology Services division, at ₹ 385,147,981 - If we will take correct segmental revenue of information technology service as per audited accounts at ₹ 385,147,981/- in place of ₹ 208,000,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions in connection with IT and ITES activity undertaken by the assessee with its associated enterprise ( AE‟). 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a wholly owned subsidiary of Lionbridge Mauritius Limited as on March 31, 2008. The assessee provides localization, software services, including e-learning, content development, user support services. Localization services involve taking a product and making it linguistically and culturally appropriate to the target locale. Content development includes updating and management of the clients‟ localized software and web content. 3.1 The assessee has benchmarked information technology/software development (IT) services and localization [low end IT enabled services (ITES)] rendered by it to its A.E. Lionbridge Maurities, on an aggregated basis. These services include e-learning content development, user support, and localization application support services. The assessee adopted the following methodology for determining the ALP of these transactions: i. The assessee has adopted TNMM. ii. Profit level indicator (PLI) is the operating profit to operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provision of services rendered to the AEs. 3.4 The details of PLI of these 22 comparables companies are as under :- 3.5 After considering assessee‟s objection in respect of five companies, same were excluded from the 22 comparable selected by TPO in respect of remaining 17 comparable having an arithmetic mean of 32.33% an up word adjustment of ₹ 16,83,86,191/- was made by the TPO to the transfer price. Assessee approached to DRP and the DRP deleted further two companies from the set of comparables identified by TPO. As a consequence the revised margin was computed at 30.10%. Accordingly DRP recomputed adjustment in respect of International Transactions by taking 15 companies at ₹ 10,39,54,664/- in place of adjustment proposed by TPO at ₹ 16,83,86,191/- 3.6 The TPO/AO has also declined claim of deduction u/s.10A on the disallowance made u/s.10(10C). The AO/TPO also disallowed deduction in respect of foreign exchange loss amounting to ₹ 2.98 crores. The AO/TPO has also excluded expenditure incurred in foreign currency amounting to ₹ 30.38 crores while determining the export turn over for the purpose of Section 10A of the Act. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt proceedings, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements; (f) using data and information which was not available in public domain and relying on the same for comparability purposes; (g) rejecting the objections raised by the Appellant in relation to selection/rejection of comparable companies in passing the order under section 92CA of the Act; (h) not eliminating companies with large turnover from the list of comparable companies; (i) arriving at an arm's length margin of 30.10 percent for the IT and ITES segment of the Appellant; (j) ignoring the provisions of rule 10B(4) of the Income-tax Rules, 1962 (Rules'), which authorizes usage of multiple year data of comparable companies for the purpose of determination of the arm's length price as defined under section 92F of the Act; (k) not making a further downward margin adjustment to consider working capital risk differentials between the Appellant and the comparable companies; (l) applying the provision of Chapter X of the Act, although the Appellant is availing the relief under section 10A of the Act; in doing so the TPO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing into account the disallowances made in respect of foreign exchange losses. e. DRP and AO have erred in not considering the decision of Bombay High court in case of CIT vs Gem Plus Jewellery India Pvt Ltd (330 ITR 175), wherein Honorable Jurisdictional High Court has held that plain consequence of disallowance and the add back is an increase in the business profits of the assessee and exemption under section 10A is allowable with reference to such enhanced income. Exclusion of expenditure incurred in foreign currency from export turnover f. DRP and the AO erred in excluding expenditure incurred on foreign currency amounting to ₹ 30,38,41,097, while determining the export turnover for the purpose of Section 10A of the Act. Re-computation of deduction for the purposes of Section 10A and levy of Interest g. AO erred in re-computation of deduction under Section 10A of the Act, by not taking into account the 'profit of the undertaking' as laid down under the provisions of the Act. h. On the facts and in the circumstances of the case and in law, the AO erred in levying interest under section 234B and 234D of the Act. 5. Shri Ajit Kumar Jain, CA appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that while computing exemption u/s.10A, the lower authorities were not justified in reducing the profit on account of disallowance made in respect of taxes paid on perquisite to employees u/s.10(10cc). For this purpose, reliance was placed on the decision of Hon‟ble Bombay High Court in the case of Gem Plus, reported in 330 ITR 175, in support of the proposition that consequence of disallowance and add back is an increase in the business profit of the assessee and exemption u/s.10A is allowable with reference to such enhanced income. 5.3 With respect to disallowance of foreign exchange loss, learned AR place reliance on the decision of Hon‟ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd., 312 ITR 254 in support of the proposition that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balancesheet was an item of expenditure u/s.37(1) notwithstanding that the liability has not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred. 5.4. On the other hand Ld. CIT DR Mrs. S. Padmaja contended that assessee‟s objection that some of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 16,83,86,191/- was made by TPO to the transfer price. Assessee approached to the DRP. The DRP deleted two companies from the set up comparables identified by the TPO. As a consequence the revised margin was computed at 30.10% as under :- 7. By applying the arithmetic mean of 30.10% an adjustment of ₹ 10,39,54,664/- was sustained by DRP. Out of the comparables taken by the DRP, learned AR has contended against three companies namely, Mold-Tek Technologies Limited, Eclerx Services Ltd Acropetal Technologies Ltd. which were alleged to be functionally different from the assessee company being a low end back office support service provider. We found that Mold-Tek Technologies Limited (Mold-Tek) provides KPO services in the field of engineering. We also found that Mold-Tek has demerged its subsidiary Mold-Tek Plastics Limited w.e.f. April, 2007 which is an extra-ordinary event. Furthermore, since the Mold-Tek is into providing KPO engineering services, hence, cannot be functionally compared with the assessee company which is engaged in the provision of back office operations. For this purpose, reliance may be placed on the decision of Special Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 385,147,981/- in place of ₹ 208,000,505/-, PLI will be much more than 35.30%. There appears to be some contradiction/ error which requires examination on the part of the lower authorities. We accordingly, direct the AO/TPO to verify and compare the revenue of IT segment of Acropetal Technologies Ltd. with that of assessee company in place of revenue of its engineering design and services. Accordingly, the matter is restored back to the file of the AO only with respect to comparable M/s Acropetal Technologies Ltd, and for deciding afresh after giving due opportunity to the assessee. 10. Now, coming to the ground raised by the assessee regarding corporate tax, we found that in the course of assessment the AO/TPO has proposed disallowance u/s.40a(v) in respect of tax borne by employer which was claimed as exempt by the employee u/s.10(10CC) of the Act. However, deduction u/s 10A was not allowed on the revised business profit so enhanced because of disallowance u/s 40a(v). The issue under consideration is squarely covered by the decision of Hon‟ble Bombay High Court in the case of Gem Plus (supra). Accordingly, we direct the AO to allow deduction u/s.10A on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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