TMI Blog2016 (4) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... r support servicing and techno marketing services to its associate enterprises i.e. TACO and Visteon International Holdings, USA, thus companies functionally dissimilar with that of assessee need not to be added to final comparable list. Erroneous computation of deduction under section 10A - claim of the assessee was rejected, in view of the assessee being agreed to exclude the expenditure incurred in foreign currency from export turnover and total turnover - Held that:- In view of the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. (2012 (7) TMI 158 - BOMBAY HIGH COURT) the appellate authorities had power to consider the claim not made in the return of income. The Tribunal in turn, following the same directed the Assessing Officer to compute the deduction under section 10A of the Act as per law after giving an opportunity of hearing to the assessee. The learned Authorized Representative for the assessee pointed out that during the assessment proceedings relating to the instant assessment year i.e. 2009-10, this plea was raised before the Assessing Officer. However, following the consistency, since the issue has been set-aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the facts and in circumstances of the case in not sharing the search matrix and FAR analysis for fresh search carried out by learned Transfer Pricing Officer ( TPO ). 5. Erroneous selection of comparable company The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in selecting the following companies as comparable companies: Acropetal Technologies Limited Genesys International Corporation Limited E4e Healthcare Business Solutions Private Limited Cosmic Global Limited 6. Erroneous application of export filter in selection of comparable companies The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in erroneous application of export filter in selection of comparable companies. 7. Erroneous rejection of comparable companies The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in rejecting ICRA Techno Analytics Limited as a comparable company. 8. Erroneous computation of op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Desk utilization charge, Payment of fees Managerial and technical fees. In respect of reimbursement of expenses to associate enterprises and reimbursement of expenses from associate enterprises, no method was selected. Further, in TNMM analysis, the operating profits earned by comparables have been computed on operating cost. The assessee had identified comparable companies on the basis of FAR analysis and had referred prowess and capitaline plus database to get the information of comparable companies. The assessee in its TP study report had selected 9 companies as comparables for benchmarking the international transaction and had arrived at average PLI of comparables at 18.91% based on the data of financial year 2008-09 as against PLI margins of assessee itself of 19.84%, hence claim of the assessee was that its international transactions were at arm's length price. The TPO during the course of TP proceedings noted that the international transactions in respect of cost allocation expenses were not at arm's length price and the TPO issued show cause notice to the assessee and proposed additional/modified filters or criteria for selection of appropriate comparables and fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sociate enterprises should be considered as profitability of the assessee since the profits earned by domestic sales do not reflect profits earned from any international transaction, was not accepted by the TPO, in view of the DRP rejecting the said claim of assessee in assessment year 2008-09. The assessee also requested that working capital adjustment should be re-worked, but the TPO noted that certain figures of PLI margins were incorrect and the TPO re-worked the working capital adjustment. Accordingly, PLI of the comparables were computed after working capital adjustment and the arithmetic mean worked out to 32.87%. As against this, PLI margins of assessee was 19.84% and an adjustment of ₹ 3,80,04,052/- was proposed to the arm's length price of international transaction of the assessee. The Assessing Officer proposed draft assessment order, against which the assessee filed objections before the DRP, Pune, who in turn, dismissed the claim of the assessee since the TPO had already considered all the issues. The Assessing Officer thereafter, in order passed under section 143(3) r.w.s. 144C of the Act made an addition of ₹ 3,80,04,052/- in respect of transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble only to the international transactions for working out the arm's length price of providing services to its associate enterprises. Consequently, the economic analysis and functional comparability should be made only for the international transactions and not for the whole entity. 12. We find that similar adjustment of the PLI by only considering the segmental profitability of exports made by the assessee to its associate enterprises to be considered for working out the PLI of assessee company, arose before Pune Bench of Tribunal in assessee s own case in assessment year 2008-09 and the Tribunal vide order dated 21.10.2015 held as under:- 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 contention of the assessee that adjustment should be made only on segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffording reasonable opportunity of hearing to the assessee. The ground of appeal No.2 raised by the assessee is allowed for statistical purposes. 14. The issue in ground of appeal No.3 raised by the assessee is against computation of adjustment in respect of provision of engineering design services to its associate enterprises at entity level. 15. The Assessing Officer/TPO while computing transfer pricing adjustment had computed the same in respect of all the transactions of assessee and not limited itself to the transactions with associate enterprises. Under section 92C(1) of the Act, any income arising from an international transaction is to be computed having regard to the arm's length price. The objective of computing arm's length price is to determine income arising from any international transaction undertaken by the person, hence while working out the adjustment required to be made, the same is limited to the international transactions with associate enterprises and not to the entity level transactions. Accordingly, where separate data is not available, then the principle of proportionality is to be applied and where the data relating to control and uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired to be made only after the assessee had been allowed a reasonable opportunity of being heard. Considered in the aforesaid light, in the present case it is axiomatic that so far as the issue of the PLI adopted by the assessee in respect of Tools manufacturing segment of Operating Profit/Operating Revenue is concerned, the same has been altered by the TPO without giving the assessee any opportunity of being heard and therefore in our view the matter ought to be remanded back to the AO/TPO for consideration afresh. We hold so. Thus, on this aspect also assessee succeeds. 21. By way of Ground of Appeal Nos. 7 and 8, assessee has assailed the addition of ₹ 30,70,02,006/- made by the Assessing Officer by holding that international transactions of the Tools manufacturing segment were not at arm s length. The appellant-company has assailed the said addition on three aspects. The first aspect is that the Assessing Officer erred in rejecting the segmental results of Rajasthan Udyog Tools Limited and Hittco Tools Limited, which have been adopted by the assessee as comparable cases. On the said aspect, plea of the assessee is that out of the five comparables cases considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee with its associate enterprises. The learned Authorized Representative for the assessee further pointed out that the concern Acropetal Technologies Ltd. selected by the TPO was functionally different and there was difference in business model. The said company was showing super normal profits and further, there was low employee cost. It was further pointed out by the learned Authorized Representative for the assessee that the consideration of only engineering design services segment for PLI computation of Acropetal Technologies Ltd. was directly covered in favour of the assessee by the decision of Tribunal in assessee s own case for assessment year 2008-09. 20. On perusal of order of Tribunal in assessment year 2008-09, we find that the Tribunal had held that the said concern Acropetal Technologies Ltd. was functionally comparable to the assessee. However, since the TPO had considered entity level profit margins of the comparable company in respect of engineering design services segment which was comparable, directions were given to the TPO/Assessing Officer to consider only the profit margins of engineering design services segment. The learned Authorized Representative for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... content provider specializing in land based technologies. Further, the said company also carried out R D services and owned intangibles. The functional profile of the said company is same in assessment year 2009-10 also. Further, the Hyderabad Bench of Tribunal in assessment year 2009-10 in Hyundai Motors India Engineering (P.) Ltd. Vs. DCIT (supra) has rejected the said concern being functionally different, first on account of its technical software services being provided and also having super normal profits. Following the same line of reasoning as in the earlier year and since the said concern functionally is not comparable to the assessee, we direct the Assessing Officer/TPO to reject the same from final set of comparables. We hold so. 25. The next concern to which objections have been raised by the learned Authorized Representative for the assessee is exclusion of Cosmic Global Ltd. being functionally not comparable and having super normal profits. 26. In this regard, the learned Authorized Representative for the assessee pointed out that Pune Bench of Tribunal in Maximize Learning Pvt. Ltd. Vs. ACIT in ITA No.267/PN/2014, relating to assessment year 2009-10, order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The said translation charges are approximately 60.17% of the total cost incurred by the said concern and the employee cost comprises of merely 17.32% of the total cost. It was therefore contended that the aforesaid facts justify an inference that the said concern was not adopting the normal and routine business model for an otherwise normal ITES provider. The proportion of expenditure incurred on outsourcing and employee costs show that the said concern seems to have outsourced the functions to different vendors. The aforesaid was highlighted to point out that the operating business model of Cosmic Global Ltd. was totally different from that of the assessee. In this context, the Ld. Representative pointed out that the TPO had rejected the Ace Software Exports Limited from the list of comparables and one of the reasons ascribed was that the said concern was incurring major expenditure on software sourcing charges. The TPO in the context of Ace Software Exports Limited came to conclude that the said concern was not a service provider but a recipient of the services and therefore it was rejected as a comparable. The Ld. Representative emphasized that if Ace Software Exports Limited wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) and also in M/s Capital IQ Information Systems (India) Pvt. Ltd. vs. Addl.CIT (supra) while deciding the appeals of the relevant assessees in assessment years 2009-10 had held that M/s Cosmic Global Ltd. is not to be considered as a comparable. The relevant observations of the Tribunal in BNY Mellon International Operations (India) Private Limited vs. DCIT (supra) are as under :- 16. The third concern, which is sought to be excluded by the assessee is Cosmic Global Ltd.. Before the TPO also, assessee had canvassed that the said concern was functionally not comparable to the assessee. It was pointed out that the said concern is engaged into translation, transcription of data which is entirely different from the functions being performed by the assessee. The TPO has rejected the plea of the assessee by merely noticing that in the preceding assessment year 2008-09, the stated concern was selected by the assessee as a comparable concern. 17. Before us, the Ld. Representative for the assessee pointed out that the plea of the assessee for exclusion of Cosmic Global Ltd. is supported by the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity. Even though this company is in assessee's TP study, it has raised objection before the TPO that this company's employee cost is less than 21.30% and most of the cost is with reference to the outsourcing charges or translation charges, and as such this is not a comparable company. The TPO, though considered these submissions, rejected the same, on the reason that this does not impact the profit margin of the company. Opposing the view taken by the TPO, it is submitted that this company cannot be selected as comparable, as similar issue was discussed by the coordinate Bench of the Tribunal(Delhi) in the case of Mercer Consulting (India) P. Ltd. (supra), vide paras 13.2 to 13.3 which read as under- 13.2. Now coming to the factual matrix of this case, we find from the material on record that outsourcing charges of this case constitute 57.31% of the total operating costs. This does not appear to us to be a valid reason for eliminating this case from the list of comparables. On going through the Annual accounts of Cosmic Global Limited, a copy of which has been placed on record, we find that its total revenue from operations are at ₹ 7.37 crore divided into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Global Ltd. has functioned is quite dissimilar to the business model of the assessee while carrying out the activity of an ITES provider. Moreover, none of the objections raised by the assessee have been met by the TPO on the basis of any cogent reasoning. On that count also, we find that the plea of the assessee to exclude M/s Cosmic Global Ltd. from the final set of comparables is justified. The objection of the TPO that the said concern was found comparable by the assessee in earlier year cannot be the sole basis to include the said concern in the list of comparables, in view of the aforesaid discussion. Thus, assessee succeeds on this aspect. 18. Since the said concern, M/s Cosmic Global Ltd. was operating in different business model than the assessee in the year under consideration also, the same needs to be excluded from the final set of comparables and accordingly we direct the Assessing Officer to exclude the same from the final set of comparables. Following the same parity of reasoning, we hold that M/s Cosmic Global Ltd. is to be excluded from the final set of comparables. 28. The issue before us is similar and in view of the functionality being different and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at para 7.1 of the order has observed as under : 7.1 As seen from the records, the assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing 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 margin of the comparables for bringing them on par with the assessee company. The assessee's contention that the risk adjustment should be at 5.5% or at the difference of prime lending rate of the RBI an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices were raised on the customers only in respect of engineering design provided to them and no separate charge was made on account of salary and travelling expenditure incurred for the company. Since these items were not included in the turnover, there was no question of reducing the same from export of total turnover. The claim of the assessee was not allowed by the Assessing Officer or DRP. 38. We find that similar issue of computation of deduction under section 10A of the Act was raised by the assessee before the Tribunal in assessment year 2008-09. The said claim of the assessee was rejected, in view of the assessee being agreed to exclude the expenditure incurred in foreign currency from export turnover and total turnover. However, before the DRP, the assessee raised the plea against the same, which was not accepted by DRP. Before the Tribunal, the assessee claimed that in view of the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Pruthvi Brokers Shareholders Pvt. Ltd. (2012) 349 ITR 336 (Bom), the appellate authorities had power to consider the claim not made in the return of income. The Tribunal in turn, following the same directed the Assessing Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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