TMI Blog2016 (4) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... O. - ITA no. 6114/Del/2012 - - - Dated:- 26-4-2016 - SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA : JUDICIAL MEMBER Appellant by : Shri G.C. Srivastava Adv. Shri Anubhav Jain Adv. Assessee by : Shri A.M. Govil CIT(DR) O R D E R PER S.V. MEHROTRA, A.M: This is assessee s appeal against the assessment order dated 28.9.2012 passed by the Assessing Officer pursuant to DRP s directions u/s 144C(5) of the Income-tax Act, 1961, relating to AY 2008-09. 2. Brief facts of the case are that the assessee company is a joint venture between MHUSA and the TATA Group of India. In the year under consideration the assessee company was engaged in the business of publishing and trading of books and educational material and also providing the associated related services. The company also dealt in school, college, medical and professional books. The company got these books published from local parties and imported them. The company also provided certain administration and other similar services to its parent company. The assessee company also provided various back office services in the nature of IT support services, transaction processing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: S.no. Name of the company Weighted Average (%) 1 Goldstone Technologies Ltd. 11.50 2. Mindtree Consulting Ltd. 16.98 3. Quintegra Solutions Ltd. 15.18 4. VJIL Consulting Ltd. 5.85 Mean 12.38 7. Ld. TPO noticed that assessee had used multiple year data to determine the margin of the comparables in the TP study and, therefore, on the basis of current year data, he required the assessee to furnish update margins of the comparables. The assessee, accordingly, submitted the following update margins of comparable sin regard to IT support service segment: S. No. Name of the Company OP/TC(%) 2 Ancent Software International Ltd. (16.18) 4 CG Vak Software Exports Ltd. (5.74) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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 ). Each of the ground is referred to separately, which may kindly be considered independent of each other. That, on the facts and circumstances of the case and in law, 1. the learned AO/TPO has erred in making an addition of IN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 office support services segment had been made only for the purposes of TP study of international transactions. Ld. TPO observed that since financials of the company showed consolidated income from both the segments, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The above working is primarily based on the guidelines provided by OECD Transfer Pricing guidelines, 2010. 18. He, therefore, submitted that assessee be allowed working capital adjustment. 19. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, 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 assessee. Further, at per page 21 of the annual report of this company, schedule 15 to accounts, cost of services has been shown as under: Cost of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014, it has been held that the turnover filter is not an appropriate filter. Further, he pointed out that this company is functionally similar to the assessee. 29. We have considered the submissions of both the parties. We find that ld. DRP has confirmed the findings of ld. TPO solely on the ground that sales were less than ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out that figures adopted in regard to depreciation are not correct. Further, there is no basis pointed out by ld. JCIT in regard to expenses being attributed to let out property. 34. Ld. DRP has accepted the TPO s findings that rental income had to be excluded from the operating income. However, ld. DRP was of the opinion and rightly so that the expenses attributable to the rental income should also be reduced from the operating expenditure to compute correct margin for software development segment. Ld. DRP had given direction to JCIT(Transfer Pricing), Hyderabad to identify the expenses attributable to the rental income and recomptue the margins of the software development segment. As noted earlier, ld. JCIT has not given any basis for attribution of expenses to the earning of rental income and the figure of depreciation also has not been correctly adopted. 35. Under such circumstances, in our opinion, only the direct expenses attributable to the earning of rental income viz. 23,37,991/- is to be excluded and the margins to be recomputed. We are not inclined to accept the submission of ld. counsel for the assessee that this comparable should be excluded entirely from the l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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