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TMI Blog2011 (9) TMI 453X X X X Extracts X X X X X X X X Extracts X X X X ..... , JJ. N.K. Chand for the Appellant. Ms. Lalita Krishnamurty and M.P. Rastogi for the Respondent. ORDER Rajpal Yadav, Judicial Member - The revenue is in appeal before us against the order of Learned CIT(Appeals) dated 28.06.2010 passed for assessment year 2003-04. The solitary grievance of the revenue is that Learned CIT(Appeals) has erred in deleting the addition of Rs. 55,78,476 made by the Assessing Officer in the arm's length price of international transactions conducted by the assessee with its associate enterprises and whose adjustment was recommended by the learned Transfer Pricing Officer. 2. The brief facts of the case are that assessee company has filed its return of income on 02.12.2003 declaring loss of Rs. 7,39,640. The case of the assessee was selected for scrutiny assessment and a notice under section 143(2) of the Act was issued on 7.10.2004 which was duly served upon the assessee. The assessee company at the relevant time was engaged in providing software development services. It has provided services to its associate enterprises only. Assessing Officer found value of international transactions representing services provided by the assessee to its associate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the following factors will be the basis for comparability. (a) Only comparables having data for the year 2003 will be analyzed and (b) Comparables having a turnover ranging from Rs. 1 cr and 10 cr will be analyzed. No data for F.Y. 2003 could be found in the database for Net Axis software and as such this comparable was not considered. The turnover of M/s. Soffia Software Ltd. for the year 2003 was Rs. 42.98 cr. And as such it was excluded from comparability analysis. Final List of comparables and determination of the Arm's Length Price The final list of comparables chosen, in view of the discussions above is as under: The corresponding Operating Profit Margins on total cost selected is as under: S.No. Name of the Company OP/TC (%) 1 Ace Software Exports Limited 10.88 2 Mega Channels Software 2.77 3 Online Media Solutions 13.29 4 ICSA Software 14.72 Mean 10.41% 3. The assessee has shown its operating profit at 1.96% whereas the mean operating profit margin of comparables worked out by him is of 10.41%. He calculated the arm's length price as under: "4.2 The arm's length price of services provided to its associated enterprises is calculated as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative analysis of the result arrived at a conclusion that profit margin shown by the assessee is within the tolerance band provided in section 92C of the Act. 5. Learned DR while impugning the order of the Learned CIT(Appeals) placed on record the financial details of all the comparables. He pointed out that the assessee has demonstrated before the Learned CIT(Appeals) that its profit margin on international transaction is within the tolerance band provided in sec. 92C of the Act, therefore, no adjustment is required. In this exercise, assessee has included other income of the comparables and excluded the expenses relatable to those incomes which give a different results. Taking us through the details of Ace Software Exports Ltd., he pointed out that the assessee did not consider the stock adjustment of Rs. 4,02,370. Similarly, assessee has included the miscellaneous expenses of Rs. 3,52,262 but did not include other income of Rs. 5,70,928. If these adjustments are carried out in a logical way then a higher profit margin would come up. After going through the details submitted by the Learned DR, we confronted the assessee and directed learned counsel for the assessee to prepare a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry expenses* Public issue expenses * Project expenses Total 352,262 - - 352,262 805 514,894 471,269 966,768 4,220 233.586 - 237,806 *In alternative column the figure of expenditure has been adopted as that of Ld. DR column after excluding such miscellaneous expenses. The Ld DR has pleaded that if miscellaneous income is being excluded for computing Operating Profit then proportionate miscellaneous expenses should also computing Operating Expenses. In that case the OP/TC of four comparables would be as follows: FIRST RAIN SOFTWARE CENTRE PRIVATE LIMITED A/Y-2003-04 PLI COMPARABLES Operating Income sales Other Income Stock adjustment Operating Cost Purchases Stock Adjustment operating expenses/personnel exp Administration expenses Depreciation Miscellaneous expenses Operating Profit OP/TC ACE Software Exports* Limited Online Media Solutions ICSA Ld DR 42,184,267 570,928 402,370 Alternative 42,184,267 - 402,370 Ld. DR 17,058,988 726,942 Alternative 17,058,989 - Ld. DR 34,191,030 70,000 Alternative 34,191,030 - 43,157,585 42,586,637 17,785,931 17,058,989 34,261,030 34,191,030 (402.370) 24,720,037 9,421,351 4,553,622 - 24, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng cost. On this, Learned DR did not dispute. The only dispute now remains how much miscellaneous expenses are to be excluded from the operating cost. There is no dispute that expenses which are not relatable to earning of operating income are to be excluded for working out the profit margin. The learned counsel for the assessee demonstrated that all the expenses debited under the head "miscellaneous expenses" cannot be said that they have no nexus with operating income. There are certain expenses which are necessary for maintaining the status of the company. We find that exact details of expenses could not be ascertained in respect of comparables. These details have been taken out from capital line database and not directly from there books of account. There are small adjustments. The determination of arm's length price is not based on any mathematical formula which could be achieved with mathematical precession. It is a scientific mechanism based on comparables data which on small variation give different results. Such as, had the filter claimed by the assessee in respect of employees cost is being adjudicated then there would not be any adjustment. Learned TPO in the findings ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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