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TMI Blog2015 (12) TMI 1660X X X X Extracts X X X X X X X X Extracts X X X X ..... tara. Its primary functions include the provision of electronic publishing services, such as, computerized data conversion, web-page construction, data entry/key boarding, copyediting, and CAD/CAM/GIM mapping services to its AE. The assessee undertook one international transaction of: 'Provision of IT-Enabled data Conversion services' valued at Rs. 4,38,06,911/-. It used the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the ALP of its international transaction. Profit level indicator (PLI) of Operating profit/Total cost (OP/TC) was used. The assessee reported its OP/TC at 15.50% and 15 comparable companies with their weighted average margin of three financial year endings 2005 to 2007 at 21.51%. The AO referred the matter of determination of the ALP of this international transaction to the Transfer Pricing Officer (TPO). The TPO required the assessee to furnish margin of comparables using current year data alone, which was calculated by the assessee at 14.61%. The TPO examined the list of comparable companies given by the assessee. After making certain alterations, he shortlisted 11 companies as comparable which have been tabulated on pages 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to find out the exact nature of services rendered by the assessee. The transfer pricing study report of the assessee is available on record which gives the profile of the assessee exactly on the same lines as has been incorporated above from the relevant part of the TPO's order. We have gone through the Master Services Agreement (hereinafter the `Agreement') dated 1.10.2003, between the assessee and its AE, namely, Tech Enterprises Inc., a Fairfax based incorporation having its registered office at Fairfax, Virginia, USA. This Agreement is valid for the year under consideration as well, whose copy is available at page 263 onwards of the paper book. As per this Agreement, the assessee specializes in provision of technical services, such as, data conversion, web-page construction, data entry/key boarding and software development. The assessee under this Agreement has undertaken to render 'Included services' which have been described in Exhibit-A. This Exhibit is `Statement of work' which embodies the terms of the relationship between the assessee and Tech Enterprises Inc. Para 2 of the Exhibit divulges that the assessee is responsible for providing the services defined in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of comparables with its OP/TC at 51.64%. The ld. CIT(A) echoed the assessment order on this point. The assessee is aggrieved against the treatment of this company as comparable. 6.2. After considering the rival submissions and perusing the relevant material on record, we find that this company is, inter alia, engaged in epublishing, which is an activity similar to the one done by the assessee. Even the activities of 'data digitisation' and 'print on demand conversion' are also similar to those undertaken by the assessee. However, despite having functionally similarity to a greater extent, this company cannot be considered as comparable because of a different business model adopted by it. Its Annual accounts for the year ending 31.3.2007 are available on record. It can be seen that its `Operating expenses' are to the tune of Rs. 17.35 crore out of which a sum of Rs. 13.12 crore is on account of 'Data entry charges & Vendor Payments.' This shows that 75% of the Operating expenses of this company are on outsourcing. As against this, the assessee's job work to total cost ratio is only 5%. This demonstrates that Vishal Information Technologies Ltd., though in almost similar line of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by the ld. CIT(A) on issues decided against the Revenue, which in relation to Ace Software Ltd., is the calculation of its profit ratio. When the TPO himself considered this company as comparable, in our considered opinion, there can be no reason for the ld. DR to be aggrieved against its inclusion in the appeal filed before the tribunal. The Department can take recourse to the other legal remedies, if any, available as per law in so far as its grievance against the decision of the AO/TPO is concerned. 7.4. Even rule 27 of the ITAT Rules, 1963, does not come to the rescue of the ld. DR for assailing the correctness of the order of the AO/TPO in appeal before the tribunal. 7.5. This rule provides that : "The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him." This rule manifests that the respondent, with or without having filed any cross appeal or cross objection can support the impugned order on any of the grounds decided against him. Two essential elements of the rule 27 come to the fore. First is the condition precedent for invoking this rule and the second is scope of interference by the respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.87 Cr. Operating Profit (OP) (0.34) Cr. OP/OE (6.98%) 7.8. Now, the question is whether the calculation of OP/TC of Ace Software Exports Ltd. as done by the CIT(A) is correct ? Profit level indicator has been taken as Operating Profit to Total Cost. `Operating profit' refers to Net Profit as increased by non-operating expenses, such as, Interest expense and as reduced by non-operating incomes, such as, Gain on sale of assets. The calculation of Operating income at Rs. 4.53 crore of this company as determined by the ld. CIT(A) remains at the same level as found by the TPO. Difference has arisen in the calculation of the figure of `Total Operating cost', which refers to Cost of goods sold (COGS) plus other operating expenses, such as, selling expenses and depreciation. Cost of goods sold is equal to Opening stock plus Purchases and other direct expenses debited to the Trading account as reduced by the amount of Closing stock. This shows that COGS cannot be computed without considering the figures of opening and closing stocks. If we adopt the figure of direct expenses debited to the Trading account without adjusting it with Opening and closing stock values, the resulta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 5.04% during the Financial year 2005-06 and to 0.67% for the year under consideration. We are unable to find any negative phase of economic cycle of this company which is, in fact, in sync with the increase and decrease of the assessee's turnover and profitability in the earlier two years vis-à-vis the year under consideration as has been noticed by the ld. CIT(A) on page 8 of the impugned order. Under these circumstances, we are of the opinion that the view taken by the ld. CIT(A) in ordering the inclusion of this company cannot be interfered with. We, therefore, uphold the same and dismiss the ground taken by the Revenue. 9. But for the above discussed three issues, neither the assessee nor the Revenue has challenged any other aspect of the computation of ALP of the assessee's international transaction. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for computing the ALP of this international transaction afresh in conformity with the view expressed by us herein above. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. 10. In the result, the Cross Objection of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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