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TMI Blog2016 (4) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... parent company. The assessee company also provided various back office services in the nature of IT support services, transaction processing and data processing services to its associated enterprises. 3. During the year under consideration the assessee company had entered into following international transactions: S. No. Nature of Transaction Method used By assessee Amount 1. Payment of royalty TNMM 7,20,41,545 2. Import of books TNMM 1,23,30,355 3. Export of books TNMM 61,42,016 4. Receipt of royalty TNMM 15,42,563 5. Provision of IT Support Services TNMM 6,31,97,593 6. Reimbursement of expenses to & from AEs At cost 1,77,14,406 7. Reimbursement of expenses from AEs 8. Reimbursement of server expenses At cost 9,68,339 Total 17,48,01,359 4. The assessee used TNM method with operating profit over the total cost as the PLI for TP analysis. 5. Ld. TPO noticed that the results as submitted by the taxpayer in the segments of software and software activities were as under: Particulars IT Support Services Income Service income 6,31,97,593 Operating Income 6,31,97,593 Expenditure Cost of ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 20.15 10. He, accordingly, computed the ALP and corresponding adjustments as under: Operating Cost 5,74,52,357 OP/TC 20.15% Margin 1,15,76,650 Arm's Length Price 6,90,29,007 Price charged by the assessee 6,31,97,593 Difference 58,31,414 % of difference with the International Transaction 9.23% 11. Ld. TPO denied the working capital adjustment sought for by assessee. 12. Before ld. DRP the assessee had taken various objections, after considering which, ld. DRP confirmed the findings of ld. TPO and further enhanced the margin in respect of Softsol India Ltd. to 25.58% as against 14.95% adopted by ld. TPO. Being aggrieved the assessee is in appeal before us and has taken following grounds of appeal: "On the facts and circumstances of the case and in law, the learned Assessing Officer ("AO") has. erred in passing the assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 ("the Act") after considering the adjustments proposed by the learned Transfer Pricing Officer ("TPO") in her order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("DRP" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r differences in the risk profile of the Appellant vis-a-vis the com parables. 10. the learned AO/TPO has erred in not providing the benefit of the arm's length range as provided under proviso to Section 92C of Act for the purposes of computing the ALP under section 92F of the Act. 11. the learned AO has erred while giving credit of the taxes paid and computing the interest payable under section 2348 of the Act." 13. Ld. counsel for the assessee submitted that primarily there are two issues - first being working capital adjustment denied to assessee and second regarding exclusion of certain comparables and inclusion of certain comparables including the wrong computation of margins by ld. DRP in regard to Softsol India Ltd. 14. As regards the working capital adjustment denied to assessee and confirmed by ld. DRP, ld. counsel referred to page 36 of TPO's order where ld. TPO has discussed the issue regarding working capital adjustment. The main objection of ld. TPO, with reference to the working capital adjustment submitted vide letter dated 28.9.2011 by assessee, was that the assessee had a consolidated P&L a/c and the segmental reporting of software development and back of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that necessary adjustment had been allowed in regard to capital working adjustment. He further pointed out that in AY 2009-10 the ld. DRP in para 9.4 of its directions has, inter alia, observed that since the balances of inventories, trade debtors/ receivables and trade creditors/ payables were not available on daily basis for the comparables, therefore TPO was directed to take following into consideration: "a) compute the average of opening and closing balances of lnventories, trade debtors/receivables, trade creditors/payables of both the tested party and the com parables b) work out the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as is used in the PU) both for the tested party and the comparables, c) determine the difference between the tested party's ratio with that of each comparables. d) thereafter multiply the above difference by interest rate i.e. 581 Prime Lending Rate as on so" June of the relevant financial year. e) lastly, these adjustments are to be added to the .profit margin of comparable companies as finally determined in accordance with the directions of this Panel." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to employees' in its P&L A/c. Ld. DRP observed that assessee was drawing conclusions on the basis of unsubstantiated presumptions and whenever there is doubt about the functional comparability, it is better to drop such comparable rather than indulging in presumptions. Ld. DRP did not accept the assessee's contention that some companies may include employee cost as a separate item in their financial statements while others may aggregate it under the expenses such as administrative expenses, sales and marketing expenses etc. Ld. DRP observed that employee cost is always shown as a different line item in the profit and loss account. 24. Ld. counsel submitted that this comparable has been accepted in the case of Kenexa Technologies Pvt. Ltd. (page 254 of the PB). Ld. counsel submitted that this comparable passes the employee cost filter of more than 25% as adopted by ld. TPO. He submitted that the employee cost is 46% of the total cost. In this regard ld. counsel referred to page 56 & 57 of the PB, wherein the objections raised before ld. DRP are contained in which it was pointed out that ld. TPO nowhere cited any instances of functional dissimilarity of this company vis a vis the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indings of ld. TPO solely on the ground that sales were less than Rs. 1 crore. No adverse comments have been made on the functional analysis by both the lower revenue authorities. Under such circumstances in view of the decision of Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. (supra), this comparable has to be included in the list of comparables selected by ld. TPO. We direct accordingly. 30. As regards Softsol India Ltd. the main contention of ld. counsel for the assessee is that since no opportunity was provided by ld. DRP while increasing the margin from 14.95% to 25.58%, therefore, this comparable should be excluded. He further submitted that computation provided by ld. DRP does not tally with the financials of Softsol India Ltd. 31. Ld. counsel referred to page 316 of the PB, wherein the financial statements of Softsol India Ltd. are contained and pointed out that in the fixed asset schedule the figures of depreciation in regard to building is Rs. 68,30,762/-, whereas ld. DRP has wrongly taken the figures at Rs. 85,10,646/-. In this regard Ld. counsel referred to page 20 of the appeal set wherein the computation made by JCIT (Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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