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2016 (5) TMI 631 - ITAT PUNE

2016 (5) TMI 631 - ITAT PUNE - TMI - Transfer pricing adjustment - Profit Level Indicator (PLI) - adjustment on account of foreign currency loss to the profit margins which are adopted for working out the PLI - Held that:- While computing PLI for the year under consideration, the loss arising on account of foreign exchange fluctuation to the tune of ₹ 35,31,729/- is to be excluded. However, the loss arising on account of export proceeds realized from exports of relevant year are to be cons .....

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AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant by : Shri Dheeraj Kumar Jain For 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(Appeal .....

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etwork (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 adjustment on account of depreciation in the hands of assessee when on verification it is seen that the depreciation rates are in fact broadly comparable with the peer companies. 4. The learned Commissioner of Income-tax(Appeals) grossly erred in holding that Rol .....

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parables. 6. The learned Commissioner of Income-tax(Appeals) grossly erred in holding that KLG Systel Ltd. is not functionally comparable to the activities of the assessee company when its Income from the Professional Fees and service charges, Closing Stock and WIP were insignificant as compared to the turnover of the assessee company; and, moreover, this company has two segments viz. Power Systems Solution and Life Cycle Solutions, both having engineering design solutions base, hence comparable .....

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ricing adjustment proposed by the TPO / Assessing Officer, which in turn has been deleted by the CIT(A). 5. Briefly, in the facts of the present case, the assessee company was engaged in the business of Technical and Engineering services, Design and Drawing, Project implementation, including computer aided design, computer aided engineering, software management services and Finite Element Analysis. In other words, the assessee was engaged in ITES services. The Assessing Officer made a reference .....

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gn 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 w .....

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he same was proposed to be rejected being functionally different. Further, the TPO selected two other concerns i.e. KLG Systel Ltd. and Rolta India Ltd. as being functionally comparable and the arithmetic mean of the margins of said companies was worked out at 33.30%. Further, the TPO was of the view that the OP/TC was to be used as PLI, which works out to 14.44% in the hands of assessee and hence, the assessee was show caused to explain as to why the adjustment should not be made to the interna .....

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by the assessee on the basis of nature of activities and the reliability of available data. With respect to un-controlled comparables, the assessee further submitted that OP / TC was not appropriate as the capital employed per year of total expenses incurred by the assessee was not comparable at all vis-à-vis Rolta India Ltd. and KLG Systel Ltd. Another aspect raised by the assessee before the TPO was that for the year under consideration, the assessee company had taken the hit of foreig .....

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tent and rational basis. Further, similar plea was raised in respect of charge of ₹ 24 lakhs due to adoption of Accounting Standard-15 regarding accounting of retirement benefits and it was claimed that the said debit 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 asses .....

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f 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 adjustment made for exceptional and non-operational items of expenses i.e. emplo .....

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14.44%. The TPO proposed an addition of ₹ 1.59 crores to be made on account of adjustment to the international transactions undertaken by the assessee. The Assessing Officer thus, in order passed under section 143(3) r.w.s. 144C(4) of the Act, made an addition of ₹ 1.59 crores to the return income of the assessee. 6. The first objection of the assessee of adoption of OP/TC as PLI was dismissed by the CIT(A) in view of the admission of the assessee before the TPO, which is recorded un .....

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uctuation, the CIT(A) held that the same definitely would be included in the cost for computing the business profit. However, the same could not be included in computing the PLI as the inclusion would mean that the transaction undertaken otherwise at arm s length would be construed as not at arm's length price, merely because foreign exchange realization, subsequent to the transaction was either more or less than the arm's length price. Further, the CIT(A) also accepted the claim of the .....

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dia 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 learn .....

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. 9. The learned Authorized Representative for the assessee in reply, pointed out that the aforesaid foreign currency fluctuation did not relate to the export proceeds to be received during the year. It related to the sale proceeds of earlier years, which were received late and hence, the loss should be excluded. He fairly pointed out that out of total loss on account of foreign currency fluctuation of ₹ 62 lakhs, loss relating to the earlier years were to the tune of ₹ 35 lakhs and .....

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there was a dispute as to the computation of PLI whether the same has to be computed by adopting OP/TC as profit level indicator or OP/Sales. The assessee before the Assessing Officer / TPO had stressed that OP/Sales should be adopted. However, on a later date, the assessee admitted to adoption of OP/TC as PLI, which has been confirmed by the CIT(A). The assessee is not in appeal against the said order of CIT(A). 12. Now, the second issue raised by the assessee is allowing adjustment on account .....

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PLI of the assessee. The reason for suffering foreign currency fluctuation loss was that the export proceeds relating to financial year 2005-06 could be collected by the assessee in 2008 only, since Dana Corporation had gone into bankruptcy proceedings under Chapter XI in USA. It was only when the plan of restructuring was submitted by Dana, USA to the Court and the same was approved and payments were allowed to be realized to the assessee. Hence, in the impugned assessment year when the export .....

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ds 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 ͅ .....

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nsideration, the loss arising on account of foreign exchange fluctuation to the tune of ₹ 35,31,729/- is to be excluded. However, the loss arising on account of export proceeds realized from exports of relevant year are to be considered while computing PLI of the assessee. In view thereof, we modify the order of CIT(A) and direct the Assessing Officer to re-compute the PLI in the hands of assessee and foreign exchange fluctuation losses of the earlier years are to be kept out of calculatio .....

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d and no adjustment is to be made on account of depreciation in the hands of assessee while computing PLI of the assessee. 15. The issue vide grounds of appeal No.4 and 5 raised by the Revenue is against the order of CIT(A) in excluding Rolta India Ltd. from the set of comparables and vide ground of appeal No.6, the Revenue is aggrieved by the order of CIT(A) in holding that KLG Systel Ltd. was not functionally comparable to the activities of assessee company. 16. As noted earlier, the assessee .....

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le 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-à-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 con .....

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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 not functionally comparable. The total sales of KLG Systel Ltd. were ₹ 144 croes and hence, again not functionally similar. The TPO rejecting the plea of assessee held that both Rolta India Ltd. and KLG Systel Ltd. were to be included in the final set of comparables. 18. The CIT(A) vide p .....

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the assessee of ₹ 13.31 crores and in view thereof, it was held that the said company is to be excluded from the list of comparables. In respect of KLG Systel Ltd., the CIT(A) from the perusal of annual report of the company noted that the said company had disclosed substantial income from professional fees and service charges and had also disclosed closing stock and work-in-progress, hence, it was held that the said concern was not functionally comparable with the assessee, who was a ser .....

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/2013, relating to assessment year 2008- 09, vide order dated 30.09.2014 held that both Rolta India Ltd. and KLG Systel Ltd. were functionally dissimilar and same had to be excluded from the final set of comparables. Reliance in this regard was placed on several decisions of various Benches of Tribunal. Since there are dissimilarities in functions, assets and risks, we hold that in view of the aforesaid FAR analysis, both the companies Rolta India Ltd. and KLG Systel Ltd. are not comparable on a .....

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over 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 .....

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