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2014 (11) TMI 587 - AT - Income TaxTransfer pricing adjustment Whether segmental information to be considered while computing margin of the assessee in its TP study Held that - Segmental information provided must be taken and only the AE transactions ought to be considered, unless it was shown by the TPO/DRP that there were specific issues with the same in M/s. Four Soft Ltd. Hyderabad Versus The Dy. Commissioner of Income-tax, Circle 1(3), Hyderabad 2011 (9) TMI 634 - ITAT HYDERABAD it has been held that the lower authorities were not justified in not excluding profit or loss in respect of domestic transactions for determining the profit declared by the assessee in respect of AE transactions - They were not justified in adopting the profit level achieved by the assessee in respect of all its transactions including domestic transactions as the profit level declared in respect of AE transactions - the assessee had furnished separately its working of the profit declared by it in respect of its AE transactions before the TPO as well as before the DRP - there is no legal requirement that the segment-wise working submitted before the TPO should be audited by the assessee s CA - In absence of any error being pointed out in the working shown by the assessee wherein it has claimed that it has achieved a profit level of 34.17% of the cost in respect of transactions with AE, we have no option but to accept the same - the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions - the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO - only AE segment transactions should be considered while computing the PLI - bad debts incurred by the assessee were in respect of transactions with AE the matter is remitted back to the TPO for verification Decided in favour of assessee. Computation of margin Held that - In Capital IQ Information Systems India Pvt. Ltd. v. DCIT 2014 (3) TMI 626 - ITAT HYDERABAD it has been held that the foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business - foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee - The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company - foreign exchange loss in case of providing services to AEs is to be considered as operative in nature and hence is to be included in the PLI calculation of the assessee - a portion of the foreign exchange loss is attributable to non-AE transactions and furthermore, a portion of the foreign exchange loss pertains to advances which are non-operative in nature thus, the matter is remitted back to the TPO with a direction that only foreign exchange loss attributable to AE transaction should be considered and also that only that portion of loss which is operative in nature is to be included in the PLI calculation Decided in favour of assessee. Working capital adjustment Held that - in Demag Cranes & Components (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle-1(2) 2012 (1) TMI 60 - ITAT Pune it has been held that Rule 10B(1)(e) on one side and other sub-rules in the context of TNMM and we have analysed the need for elimination of the difference, if any, in the comparable uncontrolled transactions which materially affect the profit margin in the open market - appropriate working capital adjustment is required to the margins of comparable uncontrolled transactions to generate credible comparable data on transactional net margins since the TNMM is applied thus, the TPO is directed with a direction to allow requisite adjustments on account of the impugned working capital while determining the margins of comparable. Selection of comparables KALS Information Systems Ltd. - Held that - Assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable - and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products - it cannot be said that provisions or writing back of liability is not part of operating profit or would not be taken into consideration for computing the same - bad debts and provision for bad and doubtful debts are part of the operating expenses and the TPO is directed to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies. Risk adjustment due to difference in risk profile Held that - in M/s. Excellence Data Research Pvt. Ltd., Hyderabad Versus Income Tax Officer 2014 (9) TMI 126 - ITAT HYDERABAD it has been held that allowing deduction of 1% towards risk profile uniformly cannot be adopted as a norm - this aspect requires to be re-examined by the TPO - Therefore, after excluding the above companies, if any adjustment is required to be made, Assessing Officer is directed to consider the risk profile and allow necessary deduction, based on the facts of each comparable case the matter is remitted back to the TPO for consideration of risk profile Decided in favour of assessee.
Issues Involved:
1. Rejection of Transfer Pricing (TP) Study by the TPO. 2. Consideration of segmental information for computing the margin of the assessee. 3. Incorrect computation of margin of the assessee. 4. Grant of working capital adjustment. 5. Application of filters by the TPO. 6. Selection of comparables by the TPO. 7. Use of multiple year data. 8. Risk profile for captive service provider. 9. Credit for taxes deducted at source (TDS). 10. Computation of interest liability under sections 234B and 234C. Detailed Analysis: 1. Rejection of Transfer Pricing (TP) Study by the TPO: The TPO rejected the TP study of the assessee on grounds such as the use of non-current financial year data, selection of companies with declining sales and persistent losses, and non-reliable data. The TPO conducted a fresh TP study with specific filters and determined an adjustment of Rs. 6,13,43,840 to the total income of the assessee. 2. Consideration of Segmental Information: The TPO rejected the segmental information provided by the assessee, stating it was unaudited and unreliable. The ITAT cited precedents where segmental information must be considered unless specific issues are shown. The matter was remitted back to the TPO to verify if the assessee maintained separate audited books for Software Development Services and to use only the AE segment for computing the assessee's PLI. 3. Incorrect Computation of Margin of the Assessee: The TPO considered foreign exchange loss as operating loss. The ITAT differentiated the assessee's case from the Teva India (P) Ltd. case and followed precedents where foreign exchange fluctuations are part of normal business operations. The issue was remitted back to the TPO to consider only the foreign exchange loss attributable to AE transactions and operative in nature. 4. Grant of Working Capital Adjustment: The ITAT relied on the decision in Demag Cranes & Components (India) Pvt. Ltd. and held that appropriate working capital adjustment is required. The issue was set aside to the TPO with directions to allow requisite adjustments on account of working capital while determining the margins of comparable transactions. 5. Application of Filters by the TPO: The assessee objected to certain filters applied by the TPO. The ITAT found no reason to disturb the application of filters as carried out by the TPO and dismissed the related grounds. 6. Selection of Comparables: - Bodhtree Consulting Ltd.: The ITAT followed the decision in CISCO Systems (India) Pvt. Ltd. and rejected Bodhtree Consulting Ltd. as a comparable. - Infosys Ltd. and KALS Information Systems Ltd.: The ITAT followed the Bangalore Bench's decision in CISCO Systems and held these companies should not be regarded as comparables. - Comp-U-Learn Tech India Ltd.: The ITAT directed the TPO to re-examine the comparability of this company. - CG-Vak Solutions & Exports Ltd. and Prithvi Information Solutions Ltd.: The ITAT remitted the issue back to the TPO for fresh application of filters. 7. Use of Multiple Year Data: The ground was not pressed by the assessee and was dismissed as not pressed. 8. Risk Profile for Captive Service Provider: The ITAT followed the decision in Excellence Data Research and remitted the issue to the TPO to consider the risk profile of the assessee and allow necessary deductions for risk adjustment after finalizing the list of comparables. 9. Credit for Taxes Deducted at Source (TDS): The issue was remitted back to the Assessing Officer to verify and grant credit in respect of TDS. 10. Computation of Interest Liability under Sections 234B and 234C: This ground was consequential and needed no adjudication. Conclusion: The appeal was partly allowed for statistical purposes, with several issues remitted back to the TPO for re-examination and verification.
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