TMI Blog2016 (5) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... r The Respondent : Shri R.D. Onkar ORDER PER SUSHMA CHOWLA, JM: This appeal filed by the Revenue is against the order of CIT(A)-IT/TP, Pune, dated 26.12.2012 relating to assessment year 2008-09 against order passed under section 143(3) r.w.s. 144C of the Income-tax Act, 1961 (in short the Act ). 2. The Revenue has raised the following grounds of appeal:- 1. The order of the learned Commissioner of Income-tax(Appeals) is contrary to law and to the facts and circumstances of the case. 2. The learned Commissioner of Income-tax(Appeals) grossly erred in holding that foreign currency fluctuations are exceptional/nonoperational items to be kept out of the calculation of the PLI, and in failing to appreciate and apply the decisions in the cases of SAP Labs India Pvt. Ltd., 44 SOT 156 (Bang); M/s. Four Soft Ltd., ITA No.1495/Hyd/2010 - ITAT, Hyderabad; Deutsche Bank A.G. V /s DCIT reported in 86 ITD 431; Kodiak Network (India) P. Ltd. Vs. ACIT, ITA No.970/Bang/2011; and M/s. Capital IQ Information Systems (I) P. Ltd. (Hyd.) (order pronounced in the Court on 23.11.2012) 3. The learned Commissioner of Income-tax(Appeals) grossly erred in allowing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price in relation to the international transactions entered upon by the assessee. The TPO noted that the assessee was an undertaking registered as 100% Export Oriented Unit under the Software Technology Parks Scheme and was engaged in the provision of engineering design services to Dana group. The assessee had undertaken international transactions of providing engineering design services to the extent of ₹ 13,27,02,913/- to its associate enterprises and further, international transaction was on account of reimbursement of expenses to the tune of ₹ 53,36,594/-. The assessee had selected TNMM method as most appropriate method to benchmark the international transactions relating to rendering of design engineering services and in respect of reimbursement of expenses, the method adopted was at actual. The Profit Level Indicator (PLI) of the said transactions was computed at 42.82% as against the arithmetic mean of margins of comparables selected by the assessee which was 28.32%. The assessee had selected seven concerns as functionally comparable. The TPO at the first instance was of the view that the PLI was to be computed with average margins of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of expenses was of non-operational nature and therefore should be added back to the profit of the year. Further, pleas were also raised in respect of other entries, one such plea was with regard to depreciation and it was claimed that the depreciation was charged by the assessee at the rates higher than rates of depreciation prescribed in Schedule XIV of the Companies Act, 1956. It was pointed out that since the companies including Rolta India Ltd. and KLG Systel Ltd. had adopted lower rate of depreciation on fixed assets, then adjustment was required to be made in the case of assessee company to bring the depreciation in line with the depreciation charged on lower side by the peer companies for comparison of PLI. In this regard, similar plea was raised in respect of Mahindra Engineering Design and Development Co. and HDO Technologies Ltd. The TPO was of the view that both the concerns Rolta India Ltd. and KLG Systel Ltd. were functionally comparable to the assessee and hence, the same have to be included in the final set of comparables. With regard to the second plea of the assessee that the PLI of OP / Sales be not replaced by OP / TC and operating profit be taken as per the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. and KLG Systel Ltd., the CIT(A) noted from the annual reports of the companies that the same were not functionally comparable to the assessee since the turnover of Rolta India Ltd. was ₹ 599 crores as against the value of international transactions of engineering design services of the assessee of ₹ 13.31 crores. Further, KLG Systel Ltd. was found to have disclosed substantial income from professional fees and service charges and had also disclosed closing stock and work-in-progress and hence, was held to be not functionally comparable with the assessee, which was a service provider. 7. The Revenue is in appeal against the order of CIT(A). 8. The learned Departmental Representative for the Revenue pointed out that the ground of appeal No.1 raised by the Revenue is general in nature. In respect of ground of appeal No.2, the learned Departmental Representative for the Revenue pointed out that the CIT(A) has erred in holding that foreign currency fluctuation was non-operational item and has to be debited from the profits margin while calculating PLI. Reliance in this regard was placed on various decisions as mentioned in grounds of appeal itself. 9. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed to be realized to the assessee. Hence, in the impugned assessment year when the export proceeds were received by the assessee, the Rupee had become stronger against the Dollar and the loss was suffered due to such lower realization of Rupee. The loss on account of late receipt of export proceeds relating to financial year 2005-06 totaled to ₹ 35,31,729/- out of total loss of ₹ 62,04,360/-. The nature of foreign exchange fluctuation loss is on account of two factors i.e. one on account of sale proceeds of exports made in the earlier years received late, such sale proceeds which are received late by the assessee are not relatable to the export sales of the year under consideration, hence the same are to be excluded from the profit margins. However, the foreign exchange losses relating to sales of the current year are to be adopted for computing business profits in the hands of assessee and thereafter, work out the PLI of the assessee. The learned Authorized Representative for the assessee fairly conceded before us that out of total losses of approximately ₹ 62 lakhs, losses to the tune of about ₹ 35 lakhs relate to earlier year and the balance losses rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable and picked up two more concerns i.e. KLG Systel Ltd. and Rolta India Ltd. The arithmetic mean of margins of the said concerns worked out at 33.30% as against PLI of the assessee on the basis of OP / TC at 14.44%. The said OP/TC was worked out on the basis of segmental details available vis- -vis IT design engineering and related services. The submissions of the assessee before the TPO was that Rolta India Ltd. was engaged in providing integrative engineering design, procurement and construction management services for power process, infrastructure and marine business line and was not functionally similar. It was further pointed out that the turnover of the said company was huge as compared to the turnover of assessee at 13.31 crores. 17. With regard to KLG Systel Ltd., it was pointed out that the said concern was engaged in trading of software packages and the said fact is borne out by the information disclosed in the Profit Loss Account. It was stressed by the assessee before the TPO that KLG Systel Ltd. was not in development of software and / or IT enabled engineering software development services. The said concern was engaged in selling bought out software and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 20. Another aspect pointed out by the learned Authorized Representative for the assessee before the authorities below and even before us is the difference in turnover of the said concerns vis- -vis the assessee. For the year under consideration, the assessee had declared turnover of ₹ 13.31 crores on account of providing software services to its associate enterprises, whereas the turnover of both the concerns was much higher. 21. The learned Departmental Representative for the Revenue pointed out that the CIT(A) had erred in excluding Rolta India Ltd. on the premise that its turnover was ₹ 599 crores. However, as per segmental details, turnover of this concern was ₹ 347 crores and on the other hand, the assessee had chosen a concern i.e. Infotech and its turnover was ₹ 423.16 crores. 22. Though the Revenue has raised ground of appeal in this regard, however, no financial statements of Infotech has been provided. With regard to comparability of turnover, we find merit in the reliance placed upon by the learned Authorized Representative for the assessee on the ratio laid down by the Hon ble Bombay High Court at Goa in CIT Vs. M/s. Pentair Water Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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