TMI Blog2016 (9) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... as operating in nature for marketing support services. The Appellant’s margin is within 5% range of the average margin of the comparables. Thus, the international transactions of the Appellant should be considered to be at arm’s length. With these directions, we set aside the issues to the file of the TPO to rework the ALP. - IT(TP)A No.57/Bang/2015, CO No.81/Bang/2015 - - - Dated:- 30-9-2016 - SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER SHRI S JAYARAMAN, ACCOUNTANT MEMBER Revenue by : Dr. PK Srihari, Addl. CIT Assessee by : Shri Padam Chand Khincha, CA O R D E R PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER: This appeal by the assessee is directed against the order of Commissioner of Income-tax (Appeals) IV, Bangalore dated 12/11/2014 and it pertains to the assessment year 2010-11. CO No.81/Bang/2015 2. The assessee has raised the following grounds of appeal. Ground on comparables retained/confirmed by the TPO and CIT(A) 1. The learned TPO and the learned CIT(A), Bangalore has erred in selecting/confirming the selection of comparables viz., ICRA Techno Analytics Ltd (seg.) and Kals Information Systems Ltd (seg.) for the computation of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss as non-operating in nature 8. The learned TPO has erred in treating foreign exchange gain or loss as non-operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. On facts and in the circumstances of the case and law applicable, foreign exchange gain or loss should be considered as operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. Ground on working capital adjustment 9. The learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, working capital adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on risk adjustment 10. The learned TPO and CIT(A) has erred in not allowing risk adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, risk adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on inappropriate computation of operating margin of comparables and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 7.89% 11 R Systems International Ltd 2.56% 12 Saksoft Ltd 9.38% 13 Sonata Software Ltd. 28.92% 14 Thinksoft Global Services Ltd 16.96% 15 Aditya Birla Minacs IT Services Ltd -5.11% 17 Bristlecone India Ltd -2.12% 18 CG VAK Softwaare and Exports Ltd -16.20% 19 Sagarsoft (India) Ltd - 1.33% 20 Sunderam Infotech Solutions Ltd -8.34% Average of Mean 6.55% Less: Working Capital Adjustment 4.88% Adjusted Average Mean 1.67% Ground No. 1 of the CO are dealt with hereunder: 7. The comparables selected by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s restricted to 1.98% and the adjusted mean margin is computed at 20.73%. 9. The CIT(A) observations with respect to software development segments is as follow. CIT(A) Observation (Software Development Segment) SL. No .Name of the Company Sales (Rs. In crores Operating Margin on Cost Adjusted Operating Margin on Cost CIT(A) Order 1 ICRA Techno Analytics Ltd. (seg) 11.89 24.94% 23.79% Accept 2 Infosys Ltd. 21,140.00 44.98% 43.79% Reject 3 Kals Information Systems Ltd(seg) 2.16 34.41% 29.54% Accept 4 Larsen Toubro Infotech Ltd. 1,776. 76 19.33% 18.53% Reject 5 Mindtree Ltd (seg) 698.02 14.83% 11.87% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables Sl.No. Name of the Company Operating Margin on Cost Working capital Adj.Margin 1 Persistent Systems Solutions Ltd. 15.38% 14.28% 2 RS Software (India) Ltd. 10.29% 9.59% 3 Thinksoft Global Services Ltd. 17.05% 13.10% Arm s length margin 14.24% 12.32% 12. We heard both parties. 13. We find that the decision in the case of DCIT Vs M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, is held as follows. (1) ICRA Techno Analytics Ltd. (seg) 2. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- Having heard the contention, on perusal of the annual repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. 7. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. 16. Respectfully following the decision of the co-ordinate Bench in the case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder u/s 92CA Sl.No. Name of the Company Operating Margin on Cost 1 Asian Business Exhibition Conferences Ltd 60.13% 2 Cyber Media research Ltd. 13.68% 3 HCCA Business Services 19.09% 4 Hindustan Housing Co Ltd 38.12% 5 ICC International Agencies Ltd., 13.72% 6 Killick Agencies Mktg. Ltd. 17.36% 7 Priya International Ltd 11.47% Arithmetic Mean 24.80% 27. Computation of arm s length price by the TPO and the adjustment made: Aram s length mean margin 24.80% Operating Cost (A) 1,87,62,380 Arm s length price 124.80% of operating cost (B) 2,34,15,450 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibitions events, delegate fees, sponsorships and entry charges. c. As per significant accounting policies, the company has revenues recognition policy for income from exhibitions events, delegate fees, sponsorships and entry charges. 31. In view of the ITAT decision in the case of ACIT v RGA Services India Pvt. Ltd TS-580-ITAT-2015(mum)-TP AY 10-11 and DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under:- 8. However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition Conference Ltd., a comparable selected by the TPO and retained by the DRP. 9. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the assessee and held that this company received income in the nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to the functions carried out by the assessee. 10. Before us, the ld. AR of the assessee has submitted that func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE s, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has select ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 15. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in the absence of any contrary fact on record brought before us, we do not find any reason to interfere with the finding of the DRP, when the functions and business activity of this company was found to be different from marketing and sales support services of the assessee. Accordingly, the objection of the Revenue is rejected. 33. Learned Counsel submitted that Hindustan Housing Co. Ltd. Should be rejected as it has a substantial Related Party Transactions at 26.97% and hence fails RTP filter. 34. Learned counsel submitted that Killick Agencies Mktg. Ltd. Should be rejected as it is functionally different from the Appellant for the following reasons: a. Commission/servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables in sales and support services segment which are to be retained are as follows. SN Name of the Company Operating Margin on Cost as per TPO 1 Cyber Media Research Ltd. 13.68% 2 ICC International Agencies Ltds., 13.72% 3 Priya International Agencies Ltd., 11.47% Arm s length margin 12.96% 39. We also direct that TPO to grant risk adjustment following decisions of the coordinate bench in the case of M/s Bearing Point Business Consulting Pvt. Ltd., in ITA No.1124/Bang/2011, wherein it has been held as follows:- IV. Risk adjustment: 5.5 According to the assessee, it is operating in a risk mitigated environment. It was submitted that the risk assumed by it are lesser than those assumed by the companies in an uncontrolled condition, therefore, an adjustment for risk is to be granted. The reasoning for the above submission is that higher the risk, the higher the profit. 5.5.1 In the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Ground No.9 the TPO is directed to provide appropriate working capital adjustment for the sales and marketing segment. 43. Ground No.8 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature for marketing support services. 44. The Appellant s margin is within 5% range of the average margin of the comparables. Thus, the international transactions of the Appellant should be considered to be at arm s length. With these directions, we set aside the issues to the file of the TPO to rework the ALP. 45. Ground 11 is conceptual Ground No.12 is general. ITA No.57/Bang/2015 The Revenue has raised the following grounds of appeal: 1. The order of the CIT(A) is opposed to law and the facts and circumstances of the case. 2. The CIT(A) erred in law as well as on facts in directing the TPO on marketing support segment to grant working capital adjustment under TNM methodology as per prevailing norms without appreciating that the directions issued are beyond the mandate of the provisions of sec. 251(1)(a) of IT Act which does not empower the CIT(A) to set ..... X X X X Extracts X X X X X X X X Extracts X X X X
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