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TMI Blog2015 (7) TMI 251X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd. was also excluded on the ground that it had also failed export filter which filter has not been challenged before us and has been accepted by the taxpayer. Thus, having regard to the above, we direct the inclusion of M/s. Cressanda Solutions Ltd. as a comparable for the purpose of determining the arm‟s length price. - Decided partly in favour of assessee. Tata Elxsi Limited erroneously considered in the final set of comparable companies - Held that:- As relying on case of Adaptech India (P) Ltd. vs. ITO [2014 (12) TMI 50 - ITAT HYDERABAD] Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee.Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arms length price for the assessee, hence, should be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant at 6.54% as against 7.91% considered in the transfer pricing documentation. 2.3 That the DRP/TPO erred on facts and in law in not appreciating that exchange fluctuation income or expense is an integral part of the sales made or expense incurred by the appellant during the course of its business and accordingly shall be considered as operating income/expense while computing the operating income of the appellant and comparable companies. 2.4 That the DRP erred on facts and in law in upholding filters of (i) turnover less than 5 crores and (ii) export sales less than 75% of total sales applied by the TPO, for the purpose of the benchmarking analysis applying TNMM. 2.5 That the DRP/TPO erred on facts and in law in rejecting the following comparable companies on the basis of filter of export sales less than 75%, not appreciating that the companies were otherwise functionally comparable to the appellant. Name of company OP/OC(%) CSS Technergy Limited 5.89 B2B Software Technologies Limited 0.53 Intense Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is engaged in providing software development services to its AE i.e. Agilis International Inc. During the relevant previous year, the assessee received a total consideration of ₹ 12,50,07,838/- in respect of international transaction of provision of software development services to its AE. For the purpose of benchmarking the international transaction of provision of software development services, the assessee applied Transactional Net Margin Method as the most appropriate method by considering itself as the tested party and operating profit to operating cost ratio (OP/OC) as the most appropriate Profit Level Indicator ( PLI ). The PLI of the assessee is computed at 7.91% as under: Particulars Amount (Rs.) Revenue from software development services 125,007,838 Gain on foreign exchange fluctuation 1,596,327 Others 26,633 Operating revenue 126,630,798 Personnel expenses 80,567,701 Operating and other expenses 34,212,43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 58.12 Trinethra Infra Ventures Ltd. 7.88 Evoke Technologies (India) Pvt. Ltd. 20.02 Cepha Imaging Pvt. Ltd. (30.38) Compulink Systems Ltd. [Merged] (10.21) J B Software (India) Pvt. Ltd. [Merged] (8.26) Twinstar Industries Ltd. 1.91 G-cube Webwide Software Pvt. Ltd. 16.89 Emergys Software Pvt. Ltd. 29.01 SJ Corporation Ltd. 18.89 Skava Systems Pvt. Ltd. 37.19 vMoksha Technologies Pvt. Ltd. (6.09) Vrinchi Technologies Ltd. 11.14 Average 7.83 3.3 On the basis of the aforesaid, it was submitted that since OP/OC ratio of the assessee at 7.91% was higher than the average operating profit to cost ratio of comparable uncontrolled enterprises at 7.83%, therefore, the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price at a Margin of 29.45% 151,902,229 Price Received 125,018,950 105% of the Price Received 131,269,898 Proposed Adjustment u/s 92CA 26,883,279 3.7 On appeal before the DRP, the DRP vide an order dated 2.12.2014 directed the TPO to exclude three comparables namely M/s. Infinite Data Systems Pvt. Ltd., M/s. Sonata Software Ltd. and M/s. Zylog Systems Ltd. from the final set of comparable companies. Accordingly, average operating profit to operating cost ratio stood reduced to the comparable list companies to 17.29% and, as a result, adjustment to ₹ 1,26,14,209/- which was determined in the manner hereunder: S.No. Company Name Adjusted PBIT/Cost (%) 1 CTIL Ltd. 18.11 2 Evoke Tech 18.56 3 Persistent Systems and Solutions Ltd. 11.37 4 Sankhya Infotech 18.11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unrelated parties. Reference in this regard is also made to the OECD Guidelines on transfer pricing, wherein, it has been held that foreign exchange gains and losses should be included or excluded for the determination of the net profit depends on whether the foreign exchange gain or losses are of a trading nature and whether or not the tested party is responsible for them. Reliance was placed on the decision of Delhi Bench of the Tribunal in the case of DCIT v. Sony India Pvt. Ltd. reported in 114 ITD 448 and M/s. Techbooks International Pvt. Ltd. vs. ACIT in ITA No. 722/Del/2014 wherein it has been held that foreign exchange fluctuation should be considered as operating item while computing operating profit. The learned DR however supported the action of the DRP and TPO in treating foreign exchange fluctuation as operating item. 5.1 Having considered the submissions made by both the parties, we find that the issue is no longer res-integra and stands decided in the case of M/s. SSP India Pvt. Ltd. ITA No. 1309/D/2014 dated 29.5.2015 wherein too basis of the DRP on SAFE HARBOUR Rules was rejected by holding as under: 14 Having considered the rival submissions, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this segment is not possible without purchases and forex gain is in relation to such purchase transactions, we have no hesitation in holding that it is an item of operating cost. 15 The learned DR during the course of arguments, supported the action of the authorities below only on the ground that DRP has rejected the contention of the appellant by observing as under: The operating income/expenditure was never defined in any of the legislation so far. It was the conventional wisdom which went into the components of operating income/expenditure while calculating the operating profit. However, the position has changed since the notification of CBDT issued on 18.9.2013. This is the notification on Safe Harbour Rules‟. Rule 10TA(j)(k) and (l) define the concept of operating expense , operating revenue and operating profit respectively. According to this Rule, loss or income arising on account of foreign currency fluctuations are excluded from the calculation of operating expense and operating income respectively. Therefore the TPO was correct in excluding forex items from the calculation of operating profit. This objection of the assessee is rejected. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No. Company Name Sales (in cr.) 1. B2B Software Technologies Ltd. 4.19 2. Cressanda Solutions Ltd. 1.41 6.1 Having considered the rival submissions, we find that the DRP rejected the contention of the appellant for inclusion of M/s. B2B Software Technologies Ltd. and Cressanda Solutions Ltd. as comparable for the following reasons: The companies having turnover of less than ₹ 5 crore are generally excluded because the margins earned by these companies fluctuate to extremes because of the narrow base. The reliability of the data in respect of the small companies is also not always very high. These companies‟ contribution towards overall turnover of the industry is negligible. The relaxibility of the financial data for companies with low levels of sales/operating income can be significantly reduced because the same persons are often both major shareholders and also the key employees, thereby obliterating the economic distinction between profits and salaries. Small com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the appellant submitted that the company is not comparable for the reason that Tata Elxsi Ltd. is having a high turnover of 376.37 crores. It was submitted that the companies with such high turnover cannot be considered comparable to the assessee since the scale of operations would differ significantly. Reliance in this regard was placed on the decision of the Delhi bench of the Tribunal in the case of Agnity India Technologies Pvt. Ltd. vs. ITO (ITA No. 3856/Del/2010) and it was submitted that the appeal preferred by the revenue against the exclusion of M/s. Infosys Technologies Ltd. has been dismissed by the Hon‟ble High Court. It was further submitted that the said company is engaged in product design services, innovation design engineering services and visual computing labs. It was submitted that the company is engaged in specialized and niche domain of software products/services and therefore cannot be considered as comparable to the appellant, a contract software development service provider. 7.1 Having considered the rival submissions, we find that the aforesaid comparable was considered by the Hyderabad Bench of the Tribunal in the case of Adaptech India (P) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejection of M/s. CG VAK Software Exports Limited from final set of comparables by holding that such company is not passing the filter of employee cost to total cost less than 25%. 8.1 Having considered the rival submissions, we find that this issue has been considered by the Hyderabad Bench of the Tribunal in the case of Kenexa Technologies Pvt. Ltd. vs. DCIT in ITA No. 243/Hyd./2014 for assessment year 2009-10 by observing as under: 43. In ground No. 2, 6, 5, the assessee has objected to the rejection of comparable companies by TPO in the course of applying employee cost filter. The ITAT Bangalore Bench in the case of CISO Systems India Pvt. Ltd. has held with respect of CG-VaK Solutions Exports Ltd. has held as under: (ii) The submission of the ld. counsel for the assessee was that in the case of assessee, this test is satisfied. In this regard our attention was drawn to page 818 to 824 of the assessee‟s paper book wherein annual report of this company has been provided. Attention was drawn to the fact that in the profit loss account of the audited accounts, he cost of services has been shown as an expenditure and in Schedule 15 to the Notes to Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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