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TMI Blog2014 (4) TMI 1096X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is only 4.33% which is less than 5%, therefore, in our opinion, no addition on this account can be sustained in the case of the Assessee. We, accordingly, set aside the order of CIT(A) and delete the addition sustained by CIT(A) - Decided in favour of assessee. Market cost adjustment of 10.96% to the comparable uncontrolled price - Held that:- In our opinion, no interference is called for in the order of CIT(A). CIT(A) has rightly directed the AO to allow the adjustment @ 10.96% for marketing expenses after verifying the correctness of the data submitted by the Assessee for allowing the relief. Similar direction, we noted, has been given by CIT(A) in A.Y 2004-05 and 2005-06 and has been confirmed by this Tribunal. The ld. DR could not bring any cogent material or evidence before us which may compel us to take a different view than what has been taken by the CIT(A). - Decided against revenue - ITA No. 02/PNJ/2013, ITA No. 05/PNJ/2013 - - - Dated:- 17-4-2014 - P. K. Bansal (Accountant Member) And D. T. Garasia (Judicial Member) For the Petitioner : Rakesh Agrawal For the Respondent : Asha Desai ORDER P. K. Bansal (Accountant Member) 1. These cross-ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to adjustment in the operating margin of CDR unit and thereby making addition therein to the extent of ₹ 65,01,783/- by the AO which was by taking average operating margin @ 23.72% while the CIT(A) directed the AO to take this margin @ 20.72% and confirmed the addition. 4.1 The ld. AR before us contended that the Assessee is an industrial product manufacturer and derives 98% of its revenue from manufacturing operations. It has set up a division in the year 1998-99 for providing in-house support engineering services in the field of product quality assurance, designing and product development. The said division is internally named as CDR Division. From this division, the Assessee has generated revenue from export services amounting to ₹ 4,96,68,848/-. This division was also rendering services to the other divisions of the Assessee in India. The total operating costs incurred by the Assessee was to the extent of ₹ 4,57,71,374/- which has not been disputed by the TPO. For this, our attention was drawn towards the order the TPO and it was contended that while computing the operating margin, the AO has computed the operating profit only in respect of the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the Company Turnover (INR in Crs) Operating Margin on cost 1 Maple eSolutions Ltd. 7.43 32.66% 2 Allsec Technologies Limited 92.25 28.51% 3 Datamatics Financial Services Ltd (Seg.) 2.31 24.99% 4 Transworks Information Services Ltd 163.30 19.56% 5 Cosmic Global Ltd (Seg.) 3.11 16.03% 6 Vishal Information Technologies Limited 25.64 48.03% 7 Asit C Mehta Financial Services Limited 5.68 34.52% 8 Goldstone Infratech Limited (Seg.) 5.03 29.01% 9 Spanco Limited (Seg.) 82.32 20.86% 10 Ace Software Exports Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the analogy of Onsite Revenue Filter the TPO should have applied Outsourcing execution filter . The selected company reported an operating margin of 48.03% which is very high from the Industry Average of 23% (as determined by TPO). While disposing the appeal for AY 2007-08, in the case of the appellant itself, the Ld. CIT(A) agreed to allow relied by deleting Vishal Info on the ground of super profit earning company. That year the operating margin of Vishal Info was 51.19% and in AY 2006-07, the margin was 48.03%. Hence following the same analogy, it should be excluded. 3 Asit C Mehta Financial Services Limited This company belongs to a group called Asit C. Mehta who is a share broker and its primary business is stock market related activities like rendering services of Registrar to Share Issue etc. This company of the group does not even have a standalone website. In this backdrop whether the comparison has been rightly done by TPO? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables are available, there is no need to consider segment results of any other company. Similarly, in respect of Flextronics Software Systems Ltd., it was further submitted that this company also does not qualify ITES filter of 75%. This filter is not mentioned in the body of the TP order but he made mention of application of this filter at pg. 29 of the order. The TPO had also mentioned application of this filter in the notice issued to the Assessee at pg. 7 dt. 10.8.2009. Again, for this reliance was placed on the decision of DHL Express vs. ACIT, 46-SOT-379 (supra). Further, it was submitted that the adjustment should be given for the depreciation anomaly arising out of the difference in the depreciation rates on computer hardware and software charged by the respective comparable companies (as was selected by the TPO/CIT(A) for making comparison to determine the ALP) vis- -vis the rates charged by the Assessee for its CDR unit. It was contended that the cash PLI be considered for determining the correct and fair calculation of ALP. The fundamental principles of comparability analysis is to compare like with like. Since different companies are charging different policies for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53.62% 7 Asit C Mehta Financial Services Ltd (Earlier known as nucleus netsoft GIS (india) ltd) 5.68 128.11% 8 Goldstone Infratech Limited (Seg.) (Earlier known as goldstone Teleservices ltd) 5.03 28.97% 9 Spanco ltd (Seg.) (Earlier known as spanco Telesystems Solutions Ltd.) 82.32 20.86% 20.86% 10 Ace Software Exports Ltd. 4.97 24.87% 24.87% 11 Apex Knowledge Solutions Pvt. Ltd. 4.92 29.82% 29.82% 12 R Systems International Ltd. (Seg.) 9.17 15.11% 15.11% 13 Flextronics Software Systems Ltd. (Seg.) 21.41 14.54% 14 Apex Advanced Technology Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Operating Margin (OP/OC) 8.51% It is not denied in this case that the CDR unit was rendering services not only to the associated enterprises outside India but also was rendering services to the other divisions of the Assessee company. No nominal value has been assigned in respect of the services rendered by the CDR unit to the Indian division. The CDR unit has rendered services to the AE units abroad for 94249 hrs. while in respect of Goa plant, services was rendered for 4870 hrs. The average revenue received by the CDR unit from the associated enterprises abroad comes to ₹ 527/hour. When the total revenue received from the associated enterprises abroad is ₹ 4,96,68,848/-, if we apply the same rate in respect of the services rendered to Goa plant, the nominal revenue which should have been credited to CDR unit and debited to the Goa plant comes to ₹ 25,66,471/-. In our opinion, while computing the true profit of a particular division, it is necessary that the value should be assigned in respect of services received by the other unit and it should be taken as part of the revenue of that particular uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t agree with the Assessee and has taken 14 comparable instances on the basis of which the arithmetic mean of the operating profit has been calculated at the rate of 23.72%. So far the selection of the 9 comparable companies by the TPO is concerned, the Assessee did not have any objection. The Assessee has objection in respect of the selection of 5 companies viz. Maple eSolutions Ltd., Vishal Information Technologies Ltd., Asit C. Mehta Financial Services Ltd., Goldstone Infratech Ltd. and Flextronics Software Systems Ltd. Selection of each comparable will be discussed by us separately. The common contention in respect of computation of TNMM i.e. operating profit taken by the ld. AR in respect of the comparables is that while computing the profit ratio, profit prior to depreciation should be computed as it will give true and fair profit ratio without being affected by the depreciation charged by each of the companies. We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit Loss account there are different prevalent recognized methods of depreciation. Some Assessee opt for Straight Line method, some opt fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that this company could not be selected as comparable for ITES companies as the management of this company was tainted one as the Directors of the company were involved in a fraud. The business reputation of the Rastogi group which owns Maple eSolutions was in serious indictment. In view of the question mark on the reputation of its owners, albeit for earlier years, it would be unsafe to take their results for comparison of profitability of the Assessee. In A.Y 2006-07 we noted that the profit margin has been taken by the TPO at 28.75%. When the Assessee went in appeal before CIT(A), CIT(A) has excluded this company for the purpose of comparison. No cogent material or evidence was brought to our knowledge by the ld. DR how this company is not tainted one. The decision of the co-ordinate bench is binding on us. We, therefore, respectfully following the decision of the co-ordinate bench exclude this company from the comparables. ii) Vishal Information Technologies Ltd. :- We noted that the appellate bench of the Tribunal in the case of ACIT vs. Maersk Global Service Center (India) P. Ltd., 12 taxmann.com 33 (Bom) has observed that Vishal Information Technologies Ltd. had ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nature of the services rendered by the two companies should be similar. Share broking activities cannot be compared with a company which is rendering IT related services for water treatment line of activity. This company, in our opinion, cannot be regarded to be a company which is rendering similar services as is being rendered by the Assessee. We, accordingly, exclude it from the comparables. iv) Goldstone Infratech Ltd. :- It is not denied by the ld. DR that the TPO has applied export turnover filter of 25% and in the case of this company, the export turnover filter was only 13.75% because the export revenue is only ₹ 4.25 crores as compared to total turnover of ₹ 30.89 crores. This company, therefore, cannot be regarded to be a comparable company and on this basis itself we exclude this company from the comparables. v) Flextronics Software Systems Ltd. :- We do not agree with the ld. AR that since the annual accounts of the company is for 15 months, therefore, in view of the difference in the period of reporting and by applying the financial year filter this company should be excluded. The profit may be for 15 months, more than one year, but it is only the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the said proviso during the impugned assessment year also provides that at the option of the Assessee the price which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean be taken to be the Arm s Length Price. Since the difference in the case of the Assessee is only 4.33% which is less than 5%, therefore, in our opinion, no addition on this account can be sustained in the case of the Assessee. We, accordingly, set aside the order of CIT(A) and delete the addition sustained by CIT(A) amounting to ₹ 65,01,783/-. Thus, ground nos. 1-3 taken by the Assessee is allowed. 5. Now, coming to the appeal of the Revenue, we noted that in the appeal filed initially the Revenue has taken as many as 3 grounds of appeal but subsequently the Revenue has filed modified grounds of appeal vide letter dt. 7.2.2013 in which the Revenue has taken only one ground which was initially taken as ground no. 1. 5.1 This ground relates to the relief given by CIT(A) in respect of market cost adjustment of 10.96% to the comparable uncontrolled price. The facts relating to this ground are that the TPO made TP adjustment in respect of export of finished goods to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Expenses of marketing representative in Europe (Rs.) 99,47,498 7. Expenses of international marketing from India office (Rs.) 43,90,104 8. Total expenses on international marketing [(4+5+6)] (Rs.) 4,91,16,704 9. Ratio of international marketing expenses to international [7/(1+3)] 16.36 CIT(A) after considering the submission of the Assessee and also the order for A.Y 2004-05 and 2005-06 directed the AO to allow adjustment of 10.96% for marketing cost in computing ALP for the finished goods export segment after verifying accuracy of the relevant figures as under : 17. I have carefully considered the appellant s submissions. In his remand report dated 24.05.2012 for AY 2005-06, the TPO has stated that the difference between the adjustment allowed by the TPO and the adjustment sought by the appellant was due to the exclusion by the TPO of international marketing expenses incurred in Europe and India and to the netting off of the commission income from Dubai office against expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year would be the same as that followed in earlier years, computation of the ratio would have to be modified to this extent as explained above. This ratio works out to 10.96% [(1,42,97,602/13,04,91,190)*100], as against 16.36% claimed by the appellant. I therefore direct the AO to allow an adjustment of 10.96% for marketing cost in computing the ALP in the finished goods exports segment, after verifying the accuracy of the relevant figures. 5.2 The ld. DR relied on the order of the AO while the Assessee relied on the order of CIT(A). 5.3 We have heard the rival submissions and carefully considered the same. In our opinion, no interference is called for in the order of CIT(A). CIT(A) has rightly directed the AO to allow the adjustment @ 10.96% for marketing expenses after verifying the correctness of the data submitted by the Assessee for allowing the relief. Similar direction, we noted, has been given by CIT(A) in A.Y 2004-05 and 2005-06 and has been confirmed by this Tribunal. The ld. DR could not bring any cogent material or evidence before us which may compel us to take a different view than what has been taken by the CIT(A). Thus, this ground stands dismissed. 6. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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