TMI Blog2018 (1) TMI 1613X X X X Extracts X X X X X X X X Extracts X X X X ..... r of ₹ 1909.60 lacs in the case of international transactions with AE. CIT(A) confirmed the rejection by holding that the turnover of the third party segment is very much less compared to that with AE. CIT(A) further held that the appellant has not proved the allocation of the common cost between AE and non AEs and whether they are scientific and at arm s length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. The Comparable CG-Vak Sofware Exports Limited was rejected as the turnover of the company is less than 1 crore and hence does not qualify turnover filter. The turnover of the relevant segment of the company is 86.10 lacs but just because this company does not pass the turnover filter of 1 crore should not have been rejected as the business is exactly similar to that of the appellant company. If the aforementioned two companies are accepted as comparable, as exhibited elsewhere, the average of the 5 comparables comes to 15.17% whereas that of the appellant company comes to 30.90%. We further find that the appellant company has earne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were considered to be at arm s length. 6. During the course of the transfer pricing assessment proceedings, the appellant company also submitted additional analysis in the form of Internal Transaction Net Margin Method. The net margins derived from AE business was higher than that of Non AE business and hence again the transactions were considered to be at arm s length. 7. While framing the transfer pricing assessment order, the TPO rejected the Internal CUP and also rejected the Internal TNMM as submitted during the course of transfer pricing assessment proceedings. The TPO concluded the proceedings by applying the external TNMM by adopting five comparables. The TPO rejected the search undertaken by the appellant company and the external comparable companies given by the appellant. 8. Assessee carried the matter before the ld. CIT(A) but without any success. 9. The ld. CIT(A) held that internal CUP as well as internal TNMM was not applicable to the facts of the case in hand. Though, the ld. CIT(A) rejected 3 out of the 5 comparables selected by the TPO but confirmed the upward adjustment. Rejecting all the comparables given by the assessee. The ld. CIT(A) held only 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng margin of the appellant from the AE segment was derived at 30.90% and the operating margins in the non AE segment was derived at ₹ 74.92%. 14. The TPO rejected the internal TNMM analysis on the basis that as the appellant has made operating loss in non AE business, the transactions with non AEs are not at independent rates and they have been undertaken only to increase capacity utilization. The total turnover of Non AE segment of ₹ 5.67 lacs as against the turnover of ₹ 1909.60 lacs in the case of international transactions with AE. The ld. CIT(A) confirmed the rejection by holding that the turnover of the third party segment is very much less compared to that with AE. The ld. CIT(A) further held that the appellant has not proved the allocation of the common cost between AE and non AEs and whether they are scientific and at arm s length. We find that the TPO has nowhere disputed the common cost allocation made by the appellant. We also find that the ld. CIT(A) has also never raised any doubt on the allocation. Insofar as the difference in the turnover, we find that the Tribunal Delhi Bench in the case of Lummus Technology Heat Transfer BV Vs. DCIT 42 taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 R Systems India Limited (Segment) 1,23,65,000 25,11,72,000 4.92% Average 15.1% ETPL (Tested Party) 5,72,59,082 18,53,32,713 30.90% 17. The ld. CIT(A) rejected Allsec Technologies Limited as comparable by observing as under:- 4.2.7.7 Allsec Technologies Limited is primarily engaged in the business of operating a call center, The services provided by the company include data verification, processing of orders received through telephone calls, telemarketing, monitoring quality of calls of other call centers, customer services and HR and payroll processing for domestic companies. For the period ended 31 March 2009, 31 March 2008 and 31 March 2007, 90 percent, 99 percent and 99 percent of the operating revenues respectively were derived from the above mentioned services. Therefore, this company is functionally comparable, however, because I have rejected all companies having export turnover less than 75%, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iminishing of Allsec Technologies Ltd for the last three years. The second reason given by the TPO for discarding this case from the list of comparables is export less than 75% of the total turnover. We observe that albeit this contention of the TPO is correct that this case does not pass the filter or test laid down by the TPO, but the fact of the matter is that the actual ratio of export revenue to total turnover of Allsec Technologies stands at 74.45% as shown on page 84 of the paper book. If we literally consider the filter applied by the TPO, this case does not pass the test. However, it is seen that the assessee included this case in the list of comparables by applying the filter of excluding the cases in which export revenue was less than 25% of the total revenue. There can be no hard and fast rule for putting a specific ceiling in a particular filter. The filters are not sacrosanct as not statutorily prescribed. These are used or modified for selection or rejection of comparables as per the convenience of the concerned party. If an assessee wants to include a certain case in the list of comparables which suits its requirements, then, it will suitably modify the filter itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is exactly similar to that of the appellant company. 20. If the aforementioned two companies are accepted as comparable, as exhibited elsewhere, the average of the 5 comparables comes to 15.17% whereas that of the appellant company comes to 30.90%. 21. We further find that the appellant company has earned foreign exchange gain on revaluation of its outstanding revenue receivables which were not considered as part of operating profit by the TPO as well as CIT(A). We find that the foreign exchange gain earned by the appellant pertained towards revaluation of its debtors as on the balance sheet date which means that exchange fluctuation was towards revenue item. Further, Safe Harbour Rules are only applicable to those assessee who have opted for Safe Harbour Rules and the same is made effective from A.Y. 2013-14 onwards. 22. We find support from the decision of the Co-ordinate Bench in the case of Rajratna Metal Industries Ltd. Tribunal Ahmedabad Bench in ITA No. 1050/Ahd/2015. The relevant findings read as under:- 7. The Revenue s third and last substantive ground pleads that the lower appellate authority has erred in deleting arm s length price adjustment of ₹ 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ater whereas the facts of this case pertain to the assessment year 2010-H (Financial year 2009-10). As a consequence, the impugned order cannot be interfered with. No question of law thus arises. The appeal is consequently dismissed. 24. In the light of the above discussion, foreign exchange fluctuation should be considered as operating in nature for the purposes of computing the operating profit of the appellant as well as comparable companies. 25. Considering the facts in totality, the Upward Adjustment of ₹ 37,716,838/- is uncalled for and we direct the same to be deleted. 26. In the result, the appeal filed by the Assessee is allowed. 27. Before parting, we find that the revenue in its written submission has referred to three comparable companies provided by the TPO namely ; (i) Accentia Technologies Ltd. (ii) Acropetal Technologies Ltd. (iii) Coral Hub Limited 28. The First Appellate Authority has held that these companies are incomparable to the business of the appellant and therefore the ld. CIT(A) has ruled in favour of the appellant The revenue is not in appeal before us. Therefore, no adjudication is required on these three companies. Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
