Subscription   Feedback   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Articles Highlights TMI Notes SMS News Newsletters Calendar Imp. Links Database Experts Contact us More....
Extracts
Home List
← Previous Next →

Vistcon Engineering Center (India) Private Limited Versus ACIT, Circle-7, Pune

2016 (7) TMI 238 - ITAT PUNE

Computation of adjustment in respect of provision of services to AEs at entity level - Held that:- Addition is to be confined to the component of international transactions with the AEs alone and not to the entire segmental results. The adjustment arising as a result of TP analysis is to be confined to the international transactions undertaken with the AEs alone and not in relation to non AE transactions. - Sundry credit balances written back - Held that:- It is not in dispute that no detail .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

part of the operating income of the assessee. The AO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purposes. - Computing the deduction u/s.10A - Held that:- We restore this issue to the file of the AO with a direction to compute the deduction u/s.10A as per law after giving due opportunity of being heard to the assessee. - ITA No.358 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

6. It is engaged in the business of designing and developing products in CAD/CAM of auto parts. The company is also providing customer support services and techno-marketing services to the group companies. It filed its return of income on 29- 09-2009 declaring total income of ₹ 49,791/-. The AO made a reference u/s.92CA(1) of the I.T. Act to the TPO for the computation of ALP in relation to the international transactions carried out by the assessee during the year. 2.1 In response to the n .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s selected TNM method as the most appropriate method to benchmark the international transaction relating to rendering of IT based engineering services. The operating profits earned by comparables have been computed on operating revenue. However, during the course of TP proceedings the assessee submitted the details of PLI of the assessee as well as comparables with PBIT/operating cost. For benchmarking the international transactions, the assessee identified comparable companies from the field of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ng reasons : 1. Financial data from PROWESS/Capitaline Plus or the companies official website was not available. 2. The companies were engaged in providing services to associated enterprises or were engaged in other significant international transactions (to the extend information available). 3. Companies whose turnover was more than ₹ 200 crores or less than ₹ 2 crores. 4. Companies whose turnover included turnover from trading and manufacturing activity of more than 30% of the tota .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Ltd. 19.45% 4 Genesys International Corporation Ltd. 32.44% 5 Vama Industries Ltd. 5.69% 6 Geometric Ltd. -0.35% Arithmetic Mean 3.67% TVEPL 10.45% 6. Based on the above analysis the weighted means of comparable companies was worked out at 3.67% while operating margin of the TVEPL (assessee) is 10.45%. It was accordingly submitted that its transactions with the AEs in respect of ITES and marketing support services can be considered at Arms Length. 7. However, the TPO after examining the various .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

entity. One of the criteria is selection of companies with turnover exceeding ₹ 2 crores and lower than ₹ 200 crores. After applying the quantitative and qualitative filters the TPO selected the following companies as the final set of comparables, the details of which are as under : Sr.No. Name of the company PLI margin (OP/OC) 1 Genesys International Corporation Ltd. 47.40% 2 HDO Technologies Ltd. 22.33% 3 Acropetal Technologies Ltd. 39.47% 4 C.S. Software Ltd. 21.15% 5 Vama Indust .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ceipt of managerial services is concerned it was submitted that the AE had deputed its employees to the assessee for control, management, business development and growth of company, i.e. stewardship services through its employees. It was further stated that the receipt of services help the assessee company in managing its business smoothly since entire service receipts are from AEs and it is in business interest of the assessee to pay for benefits derived from such services. 10. During the cours .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

supporting evidences the AO treated the ALP of this transaction as NIL and accordingly proposed an adjustment of ₹ 45,53,203/- to be made to the ALP. While doing so, he relied on the decision of the Bangalore Bench of the Tribunal in the case of Gem Plus India Pvt. Ltd. Vs. ACIT vide ITA No.352/Bang/2009 for A.Y. 2003-04. 11. The AO passed the draft assessment order on 30-12-2011 by making the above additions as proposed by the TPO. The assessee approached the DRP who vide order dated 04-0 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Tax, Circle 7, Pune ["ACIT"] u/s. 143(3) r.w.s.144C(13) of the Income-tax Act, 1961 ["the Act" ] in pursuance of the directions of the learned Dispute Resolution Panel, Pune ["DRP"] dated September 04, 2012 for the assessment year 2008-09 on the following among other grounds: 1. Transfer Pricing Adjustment : The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ciated Enterprises. 3. Erroneous computation of adjustment in respect of provision of Engineering Design Services to Associated Enterprises at the entity level. The learned CIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in computing the transfer pricing adjustment on the entity level income of the Appellant instead of computing the transfer pricing adjustment on international transactions pertaining to provision of Engineering Des .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and in circumstances of the case in selecting Acropetal Technologies Limited and Genesys International Corporation Limited as a comparable company. 6. Erroneous rejection of comparable companies The Learned ACIT pursuant to the directions of Ld. DRP has erred in law and on the facts and in circumstances of the case in rejecting the following companies as comparable companies : Ace Software Exports Limited and Geometric Software Solutions Limited 7. Erroneous computation of operating margin of c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

k adjustment denied. The Ld. ACIT pursuant to the directions of Ld. DRP has erred in law and on the facts and in circumstances of the case in not granting the risk adjustment. 10. Variation/reduction of 5 percent from the arithmetic mean denied. The Ld. ACIT pursuant to the directions of Ld. DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5% percent as per proviso to section 92C(2) of the Act. 11. Erroneous computation of deduction u/s.10 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

, on account of the unanticipated transfer pricing adjustment. 14. Each one of the above grounds of appeal is without prejudice to the other. 15. The Appellant reserves the right to amend, alter or add to the grounds of appeal. 13. Ground of appeal No.1 being general in nature is dismissed. 14. So far as ground of appeal No.2 is concerned the Ld. Counsel for the assessee submitted that the TPO made an adjustment to the assessee s international transaction of the provision of IT based Engineering .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ce in skill sets of the employees, who provide services in respective segments. It was argued that transfer pricing provisions are applicable only to the international transactions for testing its ALP. Consequently, economic analysis and functional comparability should be made only for the international transactions and not for the companies dealing with the unrelated parties. Relying on various decisions it was argued that the PLI should be computed only for the portion related to international .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

. ACIT reported in 64 SOT 119 he submitted that it has been held that the PLI should be considered only for the segment pertaining to international transactions with AEs. 16. The Ld. Departmental Representative on the other hand heavily relied on the order of the TPO/DRP. He submitted that the DRP has already held that in principle PLI should be computed only on international transaction. Accordingly, they held that PLI should be computed according to the segment consisting of the international .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ith a direction to verify the same. 17. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO in the instant case made an adjustment to the assessee s international transaction of the provision of IT based Engineering Services considering the operating margin of 11.67% of the whole entity. While doing so, he rejected the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

segment consisting of the international transactions only if such segmental data is available. 18. It is the submission of the Ld. Counsel for the assessee that he has filed such segmental profitability before DRP, copies of which are placed at pages 73 to 80 of the paper book. From pages 73 to 80 of the appeal memo we find the assessee has given segmental profitability based on scientific and consistent methodology. No mistakes have been pointed out by the DRP/TPO. The Various Benches of the Tr .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt consisting of the international transactions if such segmental data is available, therefore, we, in the interest of justice, direct the AO to work out PLI of the segment consisting of the international transactions only. The ground raised by the assessee is accordingly allowed for statistical purposes. 19. So far as Ground of appeal No.3 is concerned, i.e. erroneous computation of adjustment in respect of provision of services to AEs at entity level is concerned we find the issue stands decid .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

this aspect and find ourselves inclined to uphold the plea of the assessee. Ostensibly, the objective of determining the arm s length price u/s 92C of the Act in relation to an international transaction carried out by an assessee with its AE is to supplant the provisions of Sect ion 92(1) of the Act , which prescribes that income arising from an international transaction shall be computed having regard to the ALP, and the meaning of the expression international transaction is contained in sec. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nd certain precedents by way of decisions of the co-ordinate Benches, finally accepted the plea of the assessee in the following words: 49. All these cited decisions in general and the decision in the case of M/s.Jt .Jin Electronics I P. Ltd. Vs. ACIT 36 SOT 227, in particular are uniform in asserting that the TP adjustments are to be computed not considering the entity level sales. Rather it should be done ideally considering the relatable sales drawing the quantitative relationship to the impo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

djustment to the manufacturing activity is allowed pro tanto. 15. In view of aforesaid discussion we therefore, hold that the assessee has to succeed on the said plea and as a result Ground no. 7 raised by the assessee stands allowed. 20. Similarly, the Tribunal in the case of Sandvik Asia Pvt. Ltd. (Supra) at para No.16 of the order has observed as under : 16. We have carefully considered the rival submissions. In our considered opinion, the TPO has clearly misdirected himself in computing the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

income arising from an international transaction. Therefore, the adjustment that is required to be made is to be limited to the international transactions with the AEs and not to the entity/segmental level transactions. Similar view has been expressed by our Coordinate Benches in the cases of (i) IL Jin Electronics India (P) Ltd. (supra); (ii) Kyungshin Industrial Motherson Limited (supra); and, (iii) Demag Cranes & Components (India) Pvt. Limited (supra). Following the aforesaid precedents .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t to the entire segmental results. Thus, on Ground of Appeal No. 2, assessee succeeds as above. 21. Respectfully following the above decisions of the Coordinate Benches of the Tribunal cited (Supra) and in absence of any contrary material brought to our notice by the Ld. Departmental Representative, we hold that addition is to be confined to the component of international transactions with the AEs alone and not to the entire segmental results. The adjustment arising as a result of TP analysis is .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

submitted that the detailed break-up of the amount of ₹ 29,33,688/- was given which shows that the amount pertains to revenue items and is clearly operating in nature and ought to be considered as such. He accordingly submitted that a direction may be given to the AO to look into the same and decide accordingly. 23. The Ld. Departmental Representative on the other hand submitted that it is not a part of the operating profit. The safe harbour rule excludes such type of expenses. Therefore, .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nity to the assessee to justify and explain to the satisfaction of the AO/TPO that the sundry credit balances written back amounting to ₹ 29,33,688/- is part of the operating income of the assessee. The AO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purposes. 25. In Ground of appeal No.5 the assessee has challenged the direction o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al profitability of Engineering Design Services needs to be considered for the comparison. The DRP held that the IT based services segment is also similar to the segment of the Engineering Design Services and accordingly rejected the ground raised by the assessee. He submitted that the operating profit/operating cost of the relevant segment of the said comparable company for the year under consideration is 32.92% before considering the working capital adjustment. He submitted that the Engineerin .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rmation provided in the annual report. Further, it owns intangible assets of computer and GIS database and has acquired new business. Referring to the copy of the assessment order for A.Y. 2010-11 and 2011-12 he submitted that the TPO, based on the submissions made by the assessee, has dropped Genesys International Corporation Ltd. from the final set of comparables. Referring to the decision of the Hyderabad Bench of the tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd. Vs. ITO vide I .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of Sumphony Marketing Sales India Pvt. Ltd. reported in 38 taxmann.com 5 (Bangalore) order dated 14-08-2012 the Tribunal has held that this company cannot be regarded as comparable and deserves to be excluded from the list of comparables. 28. The Ld. Departmental Representative on the other hand while supporting the order of the TPO/DRP referred to page 101 of the appeal memo and submitted that from the segmental revenue submitted by the assessee it is not clear as to whether Acropetal Technolo .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

his rejoinder referring to the decision of the Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd.(Supra) submitted that the Tribunal has already considered this aspect and held that when all activities remain same the same has to be excluded. 31. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. As re .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ench of the Tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd. (Supra) while excluding Genesys International Corporation Ltd. as comparable company has observed as under : V. GENESYS INTERNATIONAL CORPORATION LTD. This company is listed at Sl. No.11 in the list of comparable companies chosen by the TPO. As far as this company is concerned, the stand of the assessee has been that this company is functionally not comparable and that it has a different employee skill set and that this com .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vil engineers, etc. Besides the above, this company also carries out R&D services and own intangibles. The aforesaid facts, in our view, will take this company out of the list of comparables. Similar view was also taken in the case of Symphony Marketing Solutions India(p) Ltd (supra) by the Bangalore Bench. In view of the above, we are of the view that this company cannot be regarded as a comparable and deserves to be excluded from the list of comparables. 33. Since the assessee company is e .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

self in assessee s own case, we direct the TPO to exclude Genesys International Corporation Ltd. from the list of comparables. 34. So far as Acropetal Technologies Ltd is concerned we hold that the said company is functionally comparable. However, since the TPO has considered the entity level profit margin of the comparable company in respect of the Engineering Design Services segment which is comparable, we direct the TPO/AO to consider only profit margin of the Engineering Design Services segm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

d that this company had reported operating loss of 56%. Further, the business of the company relates to database creation (e-publishing) pertaining to Information Technology enabled services. The company has debited stock variance which is unexplainable in case of service company. Further, it has incurred expenditure towards software sourcing and therefore is a service recipient and not a service provider. He submitted that although detailed arguments were made before the DRP for inclusion of th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al related party transactions. Accordingly, the TPO held that companies with significantly more than 25% related party transactions cannot be treated as uncontrolled transactions. He submitted that when less comparables are available the RPT can be relaxed as held by the Pune Bench of the Tribunal in the case of Approva Systems Pvt. Ltd. and vice versa vide ITA No.1788/PN/2013 and ITA No.1803/PN/2013 order dated 13-01-2015. It has been held in the said decision that if sufficient number of 100% .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

as rejected Ace Software Exports Ltd. not only for abnormal loss, but he had also given various other reasons such as nature of business of the company which relates to database creation (e-publishing) pertaining to Information Technology Enabled Services. Further, it is reported in segment/product-wise performance that the company s operations falls under single segment namely software and services exports. Segment-wise performance has not been furnished. The Ld. Counsel for the assessee was un .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

case was decided under different sets of facts. He accordingly submitted that the AO is justified in rejecting the above 2 companies from the list of comparables. 39. After hearing both the sides, we do not find any infirmity in the order of the TPO/DRP in rejecting Ace Software Exports Ltd. and Geometric Software Solutions Co. Ltd. from the list of comparables. So far as Ace Software Exports Ltd. is concerned, we find the TPO has given various reasons at page 14 of the order apart from operati .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

n is available. The company has debited stock variation which is unexplainable in the case of a service company. The various issues raised by the TPO has not been addressed by the Ld. Counsel for the assessee. In absence of any distinct features brought to our notice against the findings given by the TPO while rejecting Ace Software Exports Ltd. from the list of comparables we find no infirmity in the order of the AO/TPO/DRP in rejecting the same from the list of comparables. Therefore, rejectio .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ightly rejected as comparable company. The decision of the Tribunal in the case of Approva Systems Pvt. Ltd., (Supra) as relied on by the Ld. Counsel for the assessee is not applicable to the facts of the present case. In that case the threshold filter of 75% was adopted by the AO which was upheld by the CIT(A). The Tribunal after considering the totality of the facts of the case held that Export filter should be relaxed to 50% from 75%. Here, in the instant case the RPT filter has been consider .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

age 17 of the TPO order and submitted that the TPO in the final set of comparables has taken the PLI margin of C.S. Software Ltd,. at 21.15%. The AO in the assessment order at page 5 has also considered the PLI margin of the same as 21.15%. However, he has considered the revised PLI margin after working capital adjustment at 34.86%. After rectification application was filed the TPO considered the OP/OC percentage at 26.82% thereafter made working capital adjustment of (-)5.98%. He submitted that .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the assessee for which the Ld. Departmental Representative has no objection. Accordingly, ground of appeal No.8 is dismissed as not pressed . 46. Ground of appeal No.9 by the assessee relates to denial of risk adjustment benefit. 47. The Ld. Counsel for the assessee submitted that the assessee did not provide any risk adjustment in the TP documentation as the margin of the comparable companies presented in the TP report was in line with the assessee s operating margin. The comparable companies .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

justment. Referring to the following decisions he submitted that the assessee is entitled to risk adjustment : 1. Intellinet Technologies India Pvt. Ltd. Vs. ITO reported in (2012) 22 taxmann.com 28. 2. Sony India Pvt. Ltd. Vs. DCIT reported in (2008) 114 ITD 448. 3. E-Gain Communication Pvt. Ltd. Vs. ITO reported in AIT- 2008-370-ITAT. 48. The Ld. Departmental Representative on the other hand submitted that although risk adjustment may be granted but how it has to be granted has not been proper .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

een the taxpayer and the comparables. Considering the PLR as 12.61 and the bank rate at 6% the risk premium comes to 6.61%. He accordingly submitted that adopting the above approach the risk adjustment for the year ended March 31st 2008 is 6.61%. In case the same is not acceptable he submitted that risk adjustment based on CAPM can be computed. 50. We have considered the rival arguments made by both the sides. The Bangalore Bench of the Tribunal in the case of Intellinet Technologies India Pvt. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

keting and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ical purposes. 51. The Coordinate Benches of the Tribunal are also allowing risk adjustment to the assessee subject to fulfillment of various other conditions. In view of the above discussion and relying on the decision of the Bangalore Bench of the Tribunal, we restore the issue to the file of the AO with a direction to consider the allowability of risk adjustment to the assessee. The AO is directed to decide the issue in accordance with law after giving due opportunity of being heard to the as .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

uting the deduction u/s.10A incorrectly. 55. Facts in brief, are that the assessee while calculating the benefit u/s.10A has not excluded the expenditure incurred in foreign currency for the purpose of calculating export turnover as provided in Explanation 2 (iv) of section 10A. On being questioned by the AO it was submitted that while considering deduction u/s.10A of the Act all the funds to be considered as expenses in foreign currency as well as receipts against the same needs to be ignored. .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

by ₹ 4,73,965/-. 56. Against the draft order the assessee approached the DRP who decided the issue against the assessee holding that assessee had agreed to exclude the expenditure incurred in foreign currency from the export turnover and the total turnover. Therefore, the factual objections raised by the assessee before the DRP are in the nature of additional evidences. Since the assessee has not sought the leave of the DRP for its admission, the DRP declined to entertain the arguments of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

what is new what is new
  ↓     bird's eye view     ↓  


|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version