TMI Blog2017 (2) TMI 1383X X X X Extracts X X X X X X X X Extracts X X X X ..... enominator, if the Exchange Fluctuation Gain is not excluded from the numerator, it will result in absurd result. We therefore restore this matter to AO/TPO for a fresh decision with the direction that if the related turnover from which the Exchange Fluctuation Gain has arisen is the turnover of the current year then the Exchange Fluctuation Gain should be considered as operating profit of the current year for working out the percentage of profit of the assessee for current year to compare it with rate of profit of the comparables but if it is in respect of the turnover of an earlier year, then such Exchange Fluctuation Gain should be excluded from operating profit of the current year for working out the percentage of profit of the assessee for current year. Comparable selection - Held that:- Companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion on account of RPT filter confirmed. - IT (TP) A No.166 (Bang) 2016, IT (TP) A No.181 (Bang) 2016 - - - Dated:- 22-2-2017 - SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER Assessee by : Shri T. Suryanarayana. Advocate Revenue by : Shri Sanjay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,970. The Appellant prays that the AO ought to have considered the directions of the Ld. Panel and accordingly no adjustment ought to be computed in connection with the Appellant's international transactions. (b) The AO / TPO erred on facts and in law in not considering foreign exchange gain / loss as operating income / operating expense while calculating the net cost-plus margins of the Appellant and comparable companies, as per directions issued by the Ld. Panel. (c) The AO / TPO erred on facts and in law in not considering the rectified net-cost plus margin of comparable companies retained in the directions issued by the Ld. Panel. 3 Determination of arm's length price of software development services transaction (a) The Ld. Panel and the AO / TPO erred in rejecting the value of international transactions as recorded in the books of account, as the arm's length price. (b) The Ld. Panel and the AO / TPO erred in determining a new arm's length price in substitution of the arm's length price determined by the Appellant. (c) The Ld. Panel and the AO / TPO erred in law in holding the fresh comparability analysis using non contemporaneous data con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in the order issued under Section 92CA of the Act. The Ld. Panel further erred in adopting an inconsistent position in retaining Larsen Toubro Infotech Limited as a comparable, even though the said company had significant revenues from onsite activity. 4 Erroneous data used by the AO / TPO (a) The Ld. Panel and the AO / TPO erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. (b) The Ld. Panel and the AO / TPO erred in law and on facts in disregarding the application of multiple-year data while computing the margins of comparable companies. 5 Non-allowance of appropriate adjustments to the comparable companies, by the AO / TPO (a) The AO / TPO erred in law and on facts in not allowing appropriate adjustments under Rule 108 to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure adjustment, (c) research and development expenditure adjustment, and (d) risk adjustment to account for the difference in profile between the Appellant and the comparable companies. (b) The Ld. Panel and the AO / TPO erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices. 3. The DRP erred in directing exclusion of M/s. R.S. Software Pvt. Ltd., M/s. Mindtree Ltd., and M/s. Acropetal Technologies Ltd., on the ground that they have significant onsite revenue, without appreciating the fact that onsite development of software entails more cost and thereby results in lower profit margins. 4.The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not available without appreciating that proper segmental information was available on Prowess database as well as audited financials. 5.The DRP erred in directing the AO to exclude M/s. Mindtree Ltd., from the list of comparables holding it to be functionally dissimilar also for the reason that there were extraordinary event of merger when it has not been proved that such merger has any material effect on profit margin. 6.The DRP erred in directing to exclude Einfochips Ltd., from the list of comparables holding that no segmental information is available and that it fails 75% service revenue filter, by not acknowledging the fact that en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies while searching for comparable companies under TNMM. The DRP has also not appreciated that there have been no projects in visual computing labs during the relevant previous year. 12. The DRP erred in directing the AO/TPO to exclude M/s. Evoke Technologies Ltd., from the list of comparables, holding it to be functionally uncomparable due to the peculiar economic circumstances without appreciating that the expenditure incurred is a normal phenomena and a company cannot be excluded merely on abnormal profit margins. 13. The DRP erred in directing the AO/TPO to exclude Mis. R.S. Software (India) Ltd., from the list of comparables merely to maintain consistency, even in the absence of objection with respect to inclusion of the said comparables in the list. 14. The DRP erred in directing the AO/TPO to consider the foreign exchange fluctuation to be operating in nature, without appreciating that the Rule 10B(2)(d) stipulates that the net profit margin realized by the assessee in .. the international transaction shall alone be computed for comparability under TNMM. Corporate Issue: 15.The DRP erred in directing the AO to follow the ratio laid down by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, on this aspect, the matter may be restored to AO/TPO with suitable directions. 5. We have considered the rival submissions. Regarding the Corporate Tax issue as per Ground No. 15 to 17 of Revenue s appeal, we hold that this issue is covered in favour of the assessee by the judgment of Hon ble Karnataka High Court rendered in the case of Tata Elxsi Ltd. (Supra) wherein it was held that Total Turnover is sum total of Export Turnover and Domestic Turnover and therefore, if an amount is reduced from export turnover then total turnover also goes down by the same amount automatically. Respectfully following this judgment, we decline to interfere in the order of CIT (A) on this issue. Accordingly, Grounds 15 to 17 of the revenue s appeal are rejected. Regarding Ground 7 of assessee s appeal, we reject it as not pressed in view of the submissions of the learned AR of the assessee as noted above. 6. Now, we are left with T P issues in both appeals, which we decide in the light of the chart. But before that, we hold that the issue involved in Ground No. 2 (b) of the assessee s appeal is restored back to the file of AO/TPO for a fresh decision because these details are not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Seg) and 3) R S Software (India) Ltd. and their inclusion is proper as per the tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT as reported in TS 815 ITAT 2016, we reverse the order of DRP about exclusion of these 3 comparables and direct the AO/TPO to include these three in final list of comparables. 9. Now we decide about the remaining 6 comparables excluded by DRP and 4 comparables retained by DRP but for which the assessee is seeking exclusion. Out of these 6 comparables excluded by DRP, one comparable ICRA Techno Analytics Ltd. is having RPT in excess of 15% and therefore, for this reason alone, this comparable has to be excluded although DRP has excluded it for a different reason that it is having various activities and segmental data are not available. We uphold its exclusion on account of RPT filter. Exclusion of Acropetal Technologies Ltd. (Seg) is covered in favour of the assessee by the same tribunal order rendered in the case of Applied materials India Pvt. Ltd. vs. ACIT (Supra). Respectfully following the same, we uphold its exclusion. Exclusion of 1) e Zest Solutions Ltd., 2) Infosys Ltd., 3) Larsen Toubro Infotech Ltd., 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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