TMI Blog2014 (11) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... before the DRP - there is no legal requirement that the segment-wise working submitted before the TPO should be audited by the assessee's CA - In absence of any error being pointed out in the working shown by the assessee wherein it has claimed that it has achieved a profit level of 34.17% of the cost in respect of transactions with AE, we have no option but to accept the same - the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions - the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO - only AE segment transactions should be considered while computing the PLI - bad debts incurred by the assessee were in respect of transactions with AE – the matter is remitted back to the TPO for verification – Decided in favour of assessee. Computation of margin – Held that:- In Capital IQ Information Systems India Pvt. Ltd. v. DCIT [2014 (3) TMI 626 - ITAT HYDERABAD] it has been held that the foreign exchange fluctuation gains is nothing but an integral part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing back of liability is not part of operating profit or would not be taken into consideration for computing the same - bad debts and provision for bad and doubtful debts are part of the operating expenses and the TPO is directed to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies. Risk adjustment due to difference in risk profile – Held that:- in M/s. Excellence Data Research Pvt. Ltd., Hyderabad Versus Income Tax Officer [2014 (9) TMI 126 - ITAT HYDERABAD] it has been held that allowing deduction of 1% towards risk profile uniformly cannot be adopted as a norm - this aspect requires to be re-examined by the TPO - Therefore, after excluding the above companies, if any adjustment is required to be made, Assessing Officer is directed to consider the risk profile and allow necessary deduction, based on the facts of each comparable case – the matter is remitted back to the TPO for consideration of risk profile – Decided in favour of assessee. - IT APPEAL NO. 243 (HYD.) OF 2014 - - - Dated:- 14-11-2014 - B. RAMAKOTAIAH AND SMT. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OC (%) 6.70 5. The TPO rejected the Transfer Pricing (TP) Study of the assessee on the following grounds: In the case of tax payer, the TPO is mainly concerned regarding whether the information or data used in the computation of the arm's length price is reliable or correct. It is clear from the provisions of Sec. 92C(3)(C) read with Sec. 92CA that on the basis of material or information or documents in the possession of TPO, if he is of the opinion that the information or data used in computation of the arms length price is not reliable or correct, the TPO may proceed to determine the arm's length price in relation to the international transactions in accordance with Sec. 92C(1) and 92C(2) on the basis of such material or information or document available with him. To sum up, the following defects have been found in the TP analysis carried on by the tax payer: 1. As per Rule 10B(4), it is mandatory to the use the current financial year data i.e., the financial year in which the international transactions took place (FY 2008-09) but the taxpayer did not use data for the FY 2008-09 (i.e. ending with March 31, 2009). 2. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded the same from operating expenses. The TPO also held that the foreign exchange loss which the assessee had claimed as non-operative to be related to operations and included it in the calculations of the assessee profit level indicator (PLI). 8. The TPO rejected the assessee's request to remove certain comparables and add new ones and also rejected the additional filters proposed by the assessee. The TPO arrived at a final list of comparables as under: S. No. Company Name OP/OC 1. Akshay Software Technologies Ltd. 12.41 2. Bodhtree Consulting Ltd. 68.43 3. Comp-U-Learn Tech India Ltd. 28.00 4. Igate Global Solutions Ltd. 21.97 5. Infosys Ltd. 41.34 6. KALS Inf. Systems (seg) 23.11 7. LGS Global 20.51 8. Mindtree Ltd. (seg) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed by the TPO and accepted by the Assessing Officer at ₹ 6,13,43,840 towards adjustment of ALP. 12. The assessee-company strongly objected to the draft assessment order and filed objections to the draft assessment order passed u/s. 153(3) r.w.s. 144C(1) of the Act before the DRP. The DRP considered each of the grounds of the assessee consisting of 23 grounds and concluded as follows: Based on the above discussion, the directions of the Panel as per the provisions of s. 144C(5) of the Act is as follow: All the objections of the assessee are rejected. 13. Aggrieved, the assessee filed the present appeal before this Tribunal by raising the following grounds of appeal: 1. That the order of the Deputy Commissioner of Income Tax, Circle 2( I), Hyderabad (hereinafter referred to as 'AO') in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP'), Hyderabad in so far as it is prejudicial to the Appellant, is contrary to law, facts and circumstances of the case. 2. Transfer Pricing Adjustments 2.1. General Grounds 2.1.1 The assessment order passed by the AO under section 143(3) read with section 144C a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejudice to Ground No. 2.3.1, based on the facts and the circumstances of the case and in law, the DRP/AO/TPO erred by treating the foreign exchange loss on re-instatement of the advances received from the AE as operating though the same is considered as an extraordinary event for granting the working capital adjustment. 2.4 Grant of Working Capital Adjustment 2.4.1 Based on the facts and the circumstances of the case and in law, the Learned AO/DRP/TPO erred in not granting the working capital adjustment to the net profit margins of the comparable companies as provided under Rule IOB(l)(e) read with Rule 10B(2)(b). 2.4.2 Based on the facts and the circumstances of the case and in law, the Learned DRP/AO/TPO erred in not allowing working capital adjustment to the margins of the comparable companies by ignoring the fact that the Appellant is a captive service provider and furnished the quantum of working capital adjustment. 2.5 Filters 2.5.1 The Learned AO/ DRP erred in confirming the TPO's stand in adopting the following filters for selection of comparable companies, which have been objected to by the Appellant: 2.5.1.1 Rejection of comparable companies which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable companies. 2.8 Risk Profile for captive service provider 2.8.1 The Learned AO/DRP/TPO ought to have appreciated that margins earned by the Appellant (being a captive service provider) were reflective of the functions performed and proportionate with the risks assumed while determining the ALP of the international transactions of the Software Development Services business of the Appellant. 2.8.2 The Learned AO/DRP/TPO erred in disregarding the differences in risk profile of the Appellant and the alleged comparable companies selected by him, by not allowing the risk adjustment claimed by the Appellant 2.8.3 Without prejudice to ground no. 2.8.2, the Learned AO/DRP erred in not granting an adjustment of I per cent which was granted by the Jurisdictional Tribunal in case of Hellosoft India Private Limited (ITA No. 645/HYD/2009), which is binding on the Learned AO/DRP/TPO. 3. The Learned DRP erred in law and on facts by summarily rejecting the Appellant's objections and disregarding the material placed on record thereby not following the procedure laid down u/s 144C(5), 144C(6) 144C(7) of the Act. 4. The Learned AO erred in granting credit in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have gone through the submissions and order of the TPO. The grounds raised before us were the same grounds raised before the TPO. We find that the TPO had given valid reasons for countering the argument of the assessee in the TP order. The TPO has rightly taken the revenues pertaining to AE segment and since the segmental results are not available in the audited financials, the TPO considered the expenditure on the pro-rata basis. This Panel and the earlier Panel have upheld the action of the TPO in similar other cases and accordingly, we decline to interfere on this ground. 18. In 3i Infotech Ltd. v. ITO in ITA No. 21/Mds/2013 dated 7.5.2013, the ITAT Chennai Bench held that segmental information provided must be taken and only the AE transactions ought to be considered, unless it was shown by the TPO/DRP that there were specific issues with the same. The ITAT Chennai Bench held as follows: 29. We, thus, find that the lower authorities were not justified in not excluding profit or loss in respect of domestic transactions for determining the profit declared by the assessee in respect of AE transactions. They were not justified in adopting the profit level achieved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws: 15. We have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controverted by the Revenue by bringing any material on record before us. It is the contention of the learned counsel for the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05 (Mum). 24. We are of the opinion that the assessee's case is distinguishable as the decision relied on by the learned counsel viz., Teva India (P) Ltd. (supra) dealt with foreign exchange gain on loan relating to acquisition of capital asset in India which was treated as addition by the Assessing Officer and capital receipt by the CIT(A) and the facts in the instant case are different. 25. The co-ordinate Bench of the Tribunal in Capital IQ Information Systems India Pvt. Ltd. v. DCIT, in ITA No. 1961/Hyd/2011 dated 23.11.2012 has held as follows: The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd. (supra), while considering a dispute of similar nature, observed as follows- The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company Following the aforesaid decision of the Bangalore Bench of the Tribunal, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of working capital adjustment, we rely on the decision of Demag Cranes Components (India) Pvt. Ltd. v. DCIT, ITA No. 120/PN/2011, dated 4.1.2012, wherein it has been held as follows: We have so far analysed Rule 10B(1)(e) on one side and other sub-rules in the context of TNMM and we have analysed the need for elimination of the difference, if any, in the comparable uncontrolled transactions which materially affect the profit margin in the open market. 28. Hence in the instant case, we are of the opinion that appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied. Hence we set aside this issue to the TPO with a direction to allow requisite adjustments on account of the impugned working capital while determining the margins of comparable. 29. With respect to ground No. 2.5, with regard to filters, the assessee has objected to the filters adopted by the TPO specifically the onsite revenues greater than 75% of the export revenues filter, 25% related party transactions filter and diminishing revenue persistent losses filter. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in A.Y. 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. 33. Following the decision in the case of CISCO Systems (India) Pvt. Ltd. (supra), we reject the Bodhtree Consulting Ltd., as a comparable in the instant case. Hence ground No. 2.6.1 of the assessee is allowed. 34. Ground No. 2.6.2.. In this ground the assessee objected to TPO selection of three comparable companies viz., CompU-Learn Tech India Ltd., (2) Infosys Technologies Ltd. and (3) Kals Information Systems Ltd., on the ground that these are functionally different from the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nity India Technologies Pvt. Ltd. in ITA No. 3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA; (iv) the company has substantial revenues from software products and the break up of such revenues is not available; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCIT, ITA No. ITA No 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied by the TPO. We are of the opinion that some more analysis has to be done and we direct the TPO to look into the financial statement of the company and also provide an opportunity to the assessee to submit relevant details to substantiate its claim that Comp-U-Learn Tech India Ltd. is not a comparable company. 40. With respect to ground No. 2.6.3 and 2.6.4, it was argued by the learned counsel that the TPO erred in computing the margins of comparable companies by considering the provision for bad and doubtful debts and bad debts as non-operative expenditure. 41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. v. DCIT, ITA No. 1189/Del/2005, 819/Del/2007 and 820/Del/2007. The relevant portion is extracted below: 106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period. Having regard to statutory provisions, it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same. We can therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 3,63,496 Contribution to PF ESI 15,47,906 Gratuity 13,04,894 Ex Gratia 0 HRD expenses 3,10,87 5,88,05,074 (iii) It was submitted by the ld. counsel for the assessee that the TPO ignored the contribution to PF ESI, Gratuity and Ex Gratia payments and arrived at the employee cost. According to the Id. counsel for the assessee, doing so was not proper. If all the employee costs are properly considered, then this company can pass the filter applied by the TPO for excluding it. (iv) We have considered the submission of the Id. counsel for the assessee and are of the view that prima facie the submissions of the Id. counsel are acceptable. We, however, feel that it would be just and appropriate to direct the TPO to consider including this company as a comparable afresh in the light of the facts brought to our notice by the ld. counsel for the assessee. We hold and direct accordingly.: 44. Following the decision cited above, we set aside the issue of comparabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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