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SSP India Pvt. Ltd Versus DCIT, Circle-2, Gurgaon

2015 (7) TMI 214 - ITAT DELHI

Transfer pricing adjustment - whether OP/OC margin is 15.01% and not 13.05%.? - Held that:- We admit the above ground of appeal raised by the appellant. Further on consideration of the facts, we direct the Assessing Officer to recompute the OP/OC by adopting the operating profit at ₹ 2,46,79,428/- and operating cost at ₹ 16,43,66,021/-. The additional ground is therefore, allowed for statistical purposes.

Computing the net margin by considering foreign exchange gain/loss a .....

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change gain/loss as an operating item. As such, the ground raised by the appellant is allowed.

Exclusion of M/s. Info Drive Software Limited as comparable taken by the TPO/TRP - Held that:- employee cost as per the financial statements of M/s. Info Drive Software Ltd. is ₹ 164.05 lacs whereas the total cost is 927.61 lacs (Page 617 of Paper Book). On the said basis, according to the appellant since the employee cost is 17.69% which is less than the filter of 25% applied by the T .....

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n’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT ] - Decided in favour of assessee for statistical purposes.

Assessing Officer passed order under section 154 of the Act determining the adjustment at ₹ 2,13,67,552/- in terms of the directions of the DRP - Held that:- The contention of the appellant is that upper band margin based on the PLI of the appellant at 15.01% is 20.76% and since margin of .....

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n as directed above. - Decided in favour of assessee. - ITA No. 1309/Del/2014 - Dated:- 29-5-2015 - SHRI S.V.MEHROTRA AND SHRI A. T. VARKEY, JJ. For the Appellant : Shri Gautam Jain CA For the Respondent : Shri Ajit Kumar Singh CIT DR, & Shri Judy James, Standing Counsel ORDER PER A. T. VARKEY, JUDICIAL MEMBER This appeal arises from an order made by DCIT, Circle 2, Gurgaon u/s 144C(13) of the Act in pursuance to directions of the DRP dated 23.12.2013 u/s 144C(5) of the Act and relates to as .....

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ances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in considering certain non-comparable companies as comparable companies. 2 That on the facts of the assessee company s case the learned assessing officer erred in not passing speaking order. 3 That on the facts of the assessee company s case the learned assessing officer erred in using financial information of the comparable companies relating to the fin .....

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arned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in selecting following companies as comparable companies even when these companies did not meet the comparability criteria with respect to: a) Related Party Transaction Filter - the following companies i) Tech Mahindra Ltd. that has a RPT of 58.15% of its total revenue. ii) Infodrive Software Limited has a RPT of 59.23% of its total revenue. b) Employee Cost filter - Infodrive Software Limited s .....

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ailable for said companies was not ample to ascertain the comparability of the said companies and such companies are as under: (i) CAT Technologies Limited - RPT data is not available. (ii) Thirdware Solutions Limited - Segment reporting data is not available. f) The audited financials of some of the companies were not complied as per the mandatory accounting standards applicable in India specified by Central Government, therefore such companies cannot be taken as comparable company. i) CAT Tech .....

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her rates for similar business and they are as under: (i) Aricent Technologies (Holding) Limited (ii) Tech Mahindra Limited i) Assets employed and the risks assumed in comparison with the assessee company (i) Aricent Technologies (Holding) Limited (Consolidated) (ii) Infodrive Software Limited (iii) CAT Technologies Limited (Standalone) (iv) Persistent Systems Limited (v) KPIT Cummins Infosystems Limited (vi) Tech Mahindra Limited (vii) Thirdware Solutions Limited (viii) Larsen & Toubro Info .....

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earned Transfer Pricing officer in not making adjustments to the Arm s Length Price as computed by him so as to take into account the low risks assumed by the assessee company for its international transaction. 8. That on the facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing officer in using entirely different set of companies as comparable companies as mentioned in the transfer pricing .....

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the facts and in the circumstances of the assessee company s case the Learned Dispute Resolution Panel erred in sustaining the order of the learned Transfer Pricing Officer in rejecting following companies as comparable companies even when these companies meet the comparability criteria in comparison with the assessee company. (i) CG VAK Software and Exports Limited (ii) Axis-IT&T Limited (iii) MPS Technologies Limited 11. That the Learned Dispute Resolution Panel erred in sustaining the ord .....

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omparing pygmy company with giants. (iv) Accounting year should strictly end on 31st March 2009. 12. That on the facts and in the circumstances of the assessee company s case the Dispute Resolution Panel erred in sustaining the order of the learned assessing officer / transfer pricing officer in rejecting the transfer pricing study report of the assessee company. 13. That on the facts and in the circumstances of the assessee company s case the learned Dispute Resolution Panel erred in partially .....

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e learned assessing officer in treating the net profit as per respective profit and loss accounts as operating profit of the various companies as selected by him without making adjustment for non-operating incomes & expenses of such companies. 15. That on the facts and in the circumstances of the assessee company s case the learned Dispute Resolution Panel erred by relying upon the action taken by the Transfer Pricing officer without exercising their own judgment and skill. 16. That on the f .....

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in providing support services for development and maintenance of software to SSP (UK). In the instant assessment year, the appellant furnished a return of income on 22.9.2009 declaring Nil income after claiming exemption under section 10A of the Act. As per the Transfer Pricing document furnished by the appellant, the tax payer had entered into an international transaction for provision of software services of the value of ₹ 18,90,20,954/-. The arms length price of the international transa .....

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and business is assured, thereby it should have 6.75% lower profit then industry average at least. As a result, it claimed that overall return of comparables was determined at 9.24% (15.99%-6.15%) and since the tax payer was charging at the rate of 13.05% which is more than the price charged as compared to comparables, it was stated that the transaction is at arm s length price. The appellant had computed the PLI of the comparables by selecting a set of 10 comparables as under (Page 94 of Paper .....

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y the tax payer and adopted a set of fresh 11 comparables and thus, computed the margin of the comparables with PLI as operating profit to operating cost (OP/OC) at 31.48% in the manner hereunder: S. No. Name of comparable As Per TPO 1 Info Drive Software Ltd. 40.51 2 Aricent Technologies Limited (Consolidated) 25.76 3 Bodhtree Consulting Limited (Standalone) 69.80 4 Cat Technologies Limited (Standalone) 34.43 5 KPIT Cummins Infosystem Limited (Consolidated) 21.56 6 Larsen & Turbo Infotech 2 .....

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rsuant to the directions of DRP out of the set of 12 comparables adopted by the TPO, one of the comparables namely Bodhtree Consulting Ltd. was directed to be excluded and margin was redetermined at 28% on a set of 11 comparables in the manner as under: S.No. Name of comparable As per assessee 1 Info Drive Software Ltd. 40.51 2 Aricent Technologies Limited (Consolidated) 25.76 3 Cat Technologies Limited (Standalone) 34.43 4 KPIT Cummins Infosystem Limited (Consolidated) 21.56 5 Larsen & Turb .....

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he Act determining the adjustment at ₹ 2,13,67,552/- in terms of the directions of the DRP and as such, income of the appellant finally stands assessed at ₹ 2,13,67,552/-. The said adjustment has been computed in the manner hereunder:- S.No. Particulars Amount 1. Price received 18,90,20,954 2. Total cost 16,43,66,021 3. ALP at a margin of 28% 21,03,88,507 4. Price received 18,90,20,954 5. Difference 2,13,67,552 8 Before us, learned counsel for the appellant shri Gautham Jain submitte .....

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round in support of the above arithmetic error was also filed by the counsel on the date of hearing. He contended that this additional ground is on account of an arithmetical error at the end of the TPO and therefore, all facts in support of the additional ground are already on record and since it is merely an arithmetic error, additional ground be considered and it be held that margin of the tax payer with the PLI OP/OC is 15.01% and not 13.05%. The learned DR Adv Judy James at this juncture op .....

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determined the OP/OC margin at 13.05%. According to him, the OP/OC margin is 15.01%. It was clarified that 13.05% is the OP/OR margin, which was the PLI adopted by the appellant in his TP study. We find the TPO has stated in the order as under: 3.1 The operating profit margin (OP/OC) computed by the assessee is as below. Particulars Amount (Rs.) Income from services rendered 18,90,20,954 Other Revenue (foreign exchange) 24,495 Total Operating Income 18,90,45,449 Expenditure: Personnel Expenses 9 .....

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figures is done then the OP/OC margin would be 15.01%. Thus, from the aforesaid, it is evident that all the facts to determine additional ground of appeal are on record. The Hon ble Supreme Court in the case of NTPC India Ltd. 229 ITR 383 has held as under: But where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to c .....

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ounds preferred by the appellant relates to the claim of the appellant that DRP and TPO have erred in computing the net margin by considering foreign exchange gain/loss as non operating item. 14 Having considered the rival submissions, we find that the issue is no longer res-integra and stands concluded by the decision of the Coordinate Bench in the case of Westfalia Separator India Pvt. Ltd. vs. ACIT ITA No. 4446/D/02 for Assessment year 2003-04 wherein it has been held as under: We have heard .....

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aracter as that of the transaction to which it relates. The Special Bench of the Tribunal in the case of ACIT vs. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that foreign exchange fluctuation gain is a part of export turnover. Though such decision was rendered in the context of section 80HHC, but the same logic applies generally as well. The essence of the matter is that any gain or loss arising out of change in foreign currency rate in respect of transaction for import or export of g .....

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revenue account or as a trading asset or as part of circulating capital embarked in the business'. When we read the ratio of the case of Sutlej Cotton (SC)(supra) in juxtaposition to that of the Special Bench in case of Prakash I Shah (supra), there remains no doubt that forex gain or loss from a trading transaction is not only an item of revenue nature, but is, in fact, a part of the price of import or value of export transaction, as the case may be. Operating expense is ordinarily an expen .....

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observing as under: The operating income/expenditure was never defined in any of the legislation so far. It was the conventional wisdom which went into the components of operating income/expenditure while calculating the operating profit. However, the position has changed since the notification of CBDT issued on 18.9.2013. This is the notification on Safe Harbour Rules . Rule 10TA(j)(k) and (l) define the concept of operating expense , operating revenue and operating profit respectively. Accordi .....

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ever, such a contention has been rejected in the aforesaid order of the coordinate bench wherein it was held as under: 4.8. The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbor rules notified on 18.09.2013 which are not applicable to the assessment year under consideratio .....

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ange gain/loss as an operating item. As such, the ground raised by the appellant is allowed. 18 Ground No. 5(b) preferred by the appellant relates to exclusion of M/s. Info Drive Software Limited as comparable taken by the TPO/TRP. According to the appellant, employee cost of M/s. Info Drive Software Limited is 18% which is much below the 25% filter adopted by the TPO. It was therefore, submitted that such comparable be excluded. The learned special counsel opposed the contention of the appellan .....

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he rival submissions and perused the material on record. We find that TPO at pages 44 to 45 of the order has held that filter for selection of comparables should include a filter of employees cost less than 25% of total cost. The TPO has observed as under: 7.3 The assessee has objected to the use of filter of employee cost less than 25% of total cost:- 7.3.1 The assessee has objected to applying a filter of employees cost less than 25% of total cost. The assessee has objected to the use of the e .....

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l not be achieved by applying this filter in the ITES segment. Therefore, this filter shall be used in this segment. The asessee must understand that filters like this one may be described as diagnostic tools . The objective of such tools is to arrive at a set of comparables that is closest to the assessee in functions. The entire process of selection of comparables cannot be left to the stage of qualitative analysis. This will only increase the element of subjectivity in the process, which is n .....

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e 617 of Paper Book). On the said basis, according to the appellant since the employee cost is 17.69% which is less than the filter of 25% applied by the TPO, therefore the same should be excluded. We therefore, direct the AO/TPO to verify the claim of the appellant as to the computation of percentage at 17.69% and if the said computation is correct then the said comparable of M/s. Info Drive Software Ltd. be excluded from the list of comparables. So far as objection raised by the learned DR as .....

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upreme Court's decision in CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661, where the Court noted: "Whether the respondent is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason .....

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at the assessee itself had included that dividend income in its return for the year in question but there is no estoppel in the Income tax Act and the assessee having itself challenged the validity of taxing the dividend during the year of assessment in question, it must be taken that it had resiled from the position which it had wrongly taken while filing the return. Quite apart from it, it is incumbent on the income-tax department to find out whether a particular income was assessable in the p .....

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V.MR.P. Firm, Muar [1965] 56 ITR 67 , the following observations of Their Lordships of Supreme Court are as under : "The decision in Amarendra Narayan Roy v. CIT AIR 1954 Cal. 271 has no bearing on the question raised before us. There the concessional scheme tempted the assessee to disclose voluntarily all his concealed income and he agreed to pay the proper tax upon it. The agreement there related to the quantification of taxable income but in the present case what is sought to be taxed i .....

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cial care and to use restraint in relying on the burden of proof in the course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm s length principle .....

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y the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by th .....

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