TMI Blog2015 (1) TMI 554X X X X Extracts X X X X X X X X Extracts X X X X ..... ent company. For CEPHA Imaging P. Ltd there is nothing in the annual report to suggest that it is into software development. Further from the annual report as well as working submitted by assessee it appears that the RPT as a percentage of sale is 16.59%. Thus direct AO/TPO to verify this aspect and if it is found that RPT of this company is less than 25%, then, this company cannot be rejected as a comparable. For Celestial Biolabs Ltd. is concerned, we are of the view that this company cannot be treated as comparable to assessee as it is engaged in various activities. As far as TCG Life Science Ltd. is concerned can be seen from facts on record, substantial revenue earned by the company is from R D activities. Therefore, only because revenue from manufacturing activities exceed the cut off mark by 0.16%, the company cannot be treated as un-comparable to assessee. Thus direct the AO/TPO to compute the ALP of the international transactions under both the segments keeping in view our directions herein above. - Decided partly in favour of assessee for statistical purpose. Allowance of risk/working capital adjustment - Held that:- in the TP study assessee has not worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te support services 4,09,76,856 ii) Provision of R D services to AE 6,91,62,304 iii) Payment of Management fee to AE 41,92,324 iv) Purchase of business undertaking from AE 13,18,91,892 v) Purchase of business finished goods from AE 1,42,234 vi) Reimbursement of expenses by AE 2,95,67,179 3. As the revenue earned by assessee from the international transactions with the AEs was more than ₹ 15 crores, AO made a reference u/s 92CA(1) to the Transfer Pricing Officer (TPO) for determining the Arm s Length Price (ALP). In course of proceeding before TPO, assessee submitted a TP study report carried out through an external agency. In the TP analysis, both for corporate support services segment as well as R D segment, assessee was chosen as the tested party and Transaction Net Margin Method (TNMM) was adopted as the most appropriate method with operating profit to operating cost (OP/OC) as profit level indicator (PLI). In corporate support services segment seven comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the decision of the TPO in rejecting two of the companies selected as comparable in the corporate support services segment also sought exclusion of three companies out of five companies retained by TPO which were also selected by assessee itself in the TP study. In respect of one company i.e. R Systems International Ltd., assessee raised objections with regard to margin computation. In so far as Research Development Support Services is concerned, assessee challenged the selection of two additional comparables by TPO. The DRP after considering the submissions of assessee and the remand report submitted by TPO did not find merit in any of the contentions raised by assessee and accordingly directed AO to finalise the draft assessment order. In pursuance to the directions of DRP, AO passed the impugned assessment order incorporating the additions proposed in the draft assessment order towards TP adjustment. 6. Being aggrieved, assessee is before us raising in total ten grounds. However, at the time of hearing, learned AR confined his argument to selection/rejection of comparables in both the segments as raised in ground Nos. 2, 3 4, not allowing economic adjustment as raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trongly contesting the claim of assessee submitted before us that all these companies having been selected by assessee itself in the TP study, TPO has merely gone in to the functional profiles of these companies and did not apply any filter to accept/reject the comparables proposed by assessee. Therefore, TPO s decision in retaining these companies as comparable should be upheld. Further, ld. DR submitted that the issue whether Caliberpoint Business Solutions Ltd. has failed more than 25% RPT filter was never raised by assessee before TPO. As far as Cosmic Global Ltd. is concerned, ld. DR argued that the fact whether this company does not satisfy the employees cost filter was never brought to the notice of TPO, hence, there was no occasion for the TPO to apply employee cost filter while selecting this company. With regard to Infosys BPO Ltd., ld DR submitted that brand value in a service industry may drive its revenues but may not affect the profitability of a company. It was submitted, the brand value of an ITES company does not determine its profit margin. He further submitted that there is no relevance between the size of the company and economies of scales in the ITES sector. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thstanding the fact that it included such cases in the list of comparables. 8.7 Moreover, when the TPO has rejected two companies selected by assessee by going into their functionality by applying certain filters, in all fairness he should have done similar exercise in respect of other comparables also. 8.8 Having held that assessee is entitled to object to certain comparables selected by TPO which were also initially selected as comparables by assessee itself, we will now consider the merits of the arguments of the parties with regard to selection of the three companies as comparables by TPO. 9. Caliberpoint Business Solutions Ltd. 9.1. Assessee has sought exclusion of the aforesaid company on the ground that it fails more than 25% RPT filter applied by TPO. On a perusal of the financials of this company as shown in the annual report, a copy of which is placed at page 133 of assessee s paper book and working furnished by assessee, it is to be seen that the RPT as a percentage of sales is 34.20%. Further, it is seen from the order of TPO that he himself considers companies having more than 25% RPT not to be treated as comparables. That being the case, if actually the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng P. Ltd. 13. As far as CG Vak Software and Exports Ltd. is concerned, the ld. AR submitted before us that TPO and DRP were not correct in rejecting the aforesaid company as comparables on ground of functional dissimilarity. The ld. AR submitted that segmental details of both software development segment and BPO Services segment are available in the annual report of the company. Hence, the TPO was not justified in rejecting the said company on the ground of low turnover from BPO sector. 13.1 As far as CEPHA Imaging P. Ltd. is concerned, ld AR referring to the annual report of the company, submitted that it is engaged in rendering BPO services and related party transaction is only 16.59%, hence, this company should not have been rejected by TPO and DRP. 14. Ld. DR on the other hand, submitted that segmental details of CG Vak is not available in the annual report. Further, the BPO services constitutes only 12% of the total turnover. Therefore, as revenue from BPO services is less than 1 crore, it cannot be considered as a comparable. As far as CEPHA Imaging P. Ltd. is concerned, ld. DR supporting the order of DRP and TPO submitted that the company being into software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hes of the Tribunal have also rejected this company from being treated as a comparable to a BPO service Provider. As far as TCG Life Science ltd. is concerned, ld. AR submitted before us that this company cannot be treated as comparable to assessee as it has substantial sales from manufacturing activity. Ld. AR referring to the annual report of the said company, submitted that a company which is selected as comparable should be engaged in substantial similar activity as the tested party. It was submitted by ld. AR that as the manufacturing activity amounts to 25.16% of the total sales of the company it fails the filter of 75% revenue from R D activity, therefore, it cannot be treated as a comparable. 17.2 The ld. DR on the other hand, justified selection of the aforesaid two companies as comparables to the assessee. 17.3 We have considered the submissions of the parties and perused the materials on record. As far as Celestial Biolabs Ltd. is concerned, we are of the view that this company cannot be treated as comparable to assessee as it is engaged in various activities. The coordinate bench of this Tribunal in case of M/s Millipore (India) P. Ltd. Vs. DCIT (supra) approved t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions. 21. The ld. DR on the other hand submitted that under TNMM the standards of comparability are relatively relaxed and only broad similarity of functions is required. TNMM can be used with data for companies that are broadly comparable to the tax payer as functional differences are likely to be reflected in the level of operating expenses incurred by each company. These expenses are deducted in the calculation of operating profit and are accordingly taken account of in the comparability analysis. He submitted, considering these aspects assessee having adopted net margin or operating profit as the most reliable or viable indicator of profit level, selective argument against unutilized capacity is uncalled for. He submitted, assessee is being remunerated on cost plus mark-up which includes the cost of unutilized capacity also. The comparables selected by the TPO broadly undertake expenses similar to that of the assessee and are part of the R D service providers and hence such comparables cannot be rejected simply on the ground of differences in functions and profits. 22. We have considered the submissions of the parties and perused the materials on record. It is a fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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