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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 ..... considering the adjustment in the operating margin of CDR unit, as has been asked for by appellant, in relation to in-house work performed by CDR unit of the company for its manufacturing plant at Goa and thereby disregarding revenue to the extent of Rs. 24,11,233/-. while the Revenue has taken the following effective grounds of appeal : 1. In the facts and circumstances of the case, the learned CIT(A) erred in allowing marketing cost adjustment of 10.96% to the comparable uncontrolled price ignoring the fact that volume discount adjustment made by the TPO has already factored in this adjustment. 3. The brief facts of the case are that the Assessee is engaged in manufacture of fibre glass pressure vessel used for water treatment. Return showing income of Rs. 4,37,44,500/- was filed on 29.11.2006. The AO made reference to Joint Director of Income Tax (Transfer Pricing), Bengaluru for determination of the arm's price length in respect of the Assessee's transaction with associated enterprises. TPO passed order u/s 92CA on 30.10.2009 suggesting transfer price adjustment of Rs. 4,05,98,402/-. The AO added the said amount in the order passed u/s 143(3). Besides this, the AO also di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the average operating profit to operating expenses ratio was 9.08%. The list of the comparable companies is given as under : S.No. Name of the Company Turnover (Rs.) Profit from Operations (Rs) Operating Margin to Sales (%) 1 ACF Software Exports Ltd. 54,982,366 3,393,105 6.17 2 Apex Advanced Technology P. Ltd. 48,963,534 7,906,382 16.15 3 Apex Knowledge Solutions P. Ltd. 49,216,221 7,149,832 14.53 4 CS Software 115,678,198 15,690,366 13.56 5 VAMA Industries Ltd. 70,968,208 8,035,310 11.32 6 VJIL Consulting Ltd. 153,813,632 2,638,204 1.72 Arithmetic Mean 9.08 TPO rejected the selection of the Assessee but he has selected a different set of comparables of 14 companies and worked out the operating margin @ 23.72%, the details of which are as under : S.No. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shal 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? The ratio of operating margin to cost is 34.52%. 4 Goldstone Infratech Limited (Seg.) It is primarily a Polymer Insulation manufacturing company. It BPO segment worked only till 2007, as such not a consistent player in ITES/BPO segment. During the year 2006, its revenue from BPO segment was Rs. 5.03 crore, out of that Rs. 30.89 lacs was from exports. As such it does not satisfy the export turnover filter of 25% applied by TPO in his selection. The ratio of operating margin to cost is 29.01%. It doesn't fulfil the export turnover filter as its export turnover was 13.75% of its total revenue (4.25 crore (Exports)/30.89 crore (Turnover) 5 Flextr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect 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 depreciation accounting, this leads to larger differences in the year to year operating margin of the companies. The ICAI guidance note on TP also recognises that the accounting treatment of expenses and depreciation is a critical factor in computing ALP. The reliability of the operating margin of comparable companies is severely affected if there are problems in the application of uniform depreciation policy. Reliance was placed on following case laws for adopting cash PLI/adjusting of the rate of depreciation for determining the ALP. 1. DCIT vs. Reuters India (2013) 24 ITR (T) 231 (Mumbai) 2. BA Continuum India Vs. ACIT (2013) 40 Taxmann.com 311 (Hyderabad) 3. Schefenacker Motherson Ltd. vs. ITO [2009] 123 TTJ 509 (DELHI) 4. Amdocs Business Services Vs. DCIT (2012) 54 SOT 46 (Pune) Our attention was drawn towards the chart tabulating the accounting policy relating to the depreciation as adopted by the various companies to prove that there are divergent/mix policy of charging depreciation followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by taking the revenue received from the export of services to the associated concerns and without taking any revenue into consideration in respect of the services rendered by the CDR unit of the Assessee to the other unit in Goa. We also noted that the TPO has considered the total operating costs of the CDR unit which has been incurred by the unit not only in respect of services rendered to the associated concerns outside India but also in respect of services rendered to the unit in India and on that basis the operating profit was worked out in the following manner : S.No. Particulars Amount in INR 1. Revenue from Export of services 4,96,68,847 2. Operating Cost 4,57,71,374 3. Operating Profit 38,97,473 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd has calculated the operating profit of these companies @ 9.08% but the TPO did not 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 recognize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 outsourced a considerable portion of their business and the Assessee had carried out the entire operations by itself and therefore this case is rightly excluded. For the purpose of comparison, in our opinion, not only the business model of the companies should be similar but the business execution model should also have similarity. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Rs. 4.25 crores as compared to total turnover of Rs. 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 operating margin (which is always on percentage basis) which is considered for working the operating profit. This, in our opinion, cannot affect the percentage of the operating profit. While calculating the profit, the effect of period is in-built therein as the percentage is always computed on the basis of the operating profit divided by the tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 the AE. The Assessee contended before the CIT(A) that the Assessee has incurred a sum of Rs. 11,89,39,839/- for soliciting business and procuring sale order. These expenses relate to sales (both domestic and exports) to unrelated parties. Although the ratio of the marketing expenses to non-AE sales works out to 26%, the Assessee made a conservative downwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenses incurred in that office. He further stated that if the computation were made by the TPO in AY 2004-05 in pursuance of the CIT(A)'s order were adopted for AY 2005-06, the adjustment for marketing expenses would work out to 12.31%. 18. On the basis of the TPO's report, I have, vide my appellate order in ITA No. 130/MRG/2008-09, dated 19.11.2012 for AY 2005-06, held that in allowing adjustment for marketing expenses, the TPO had wrongly considered the expenses incurred by the appellant only in Dubai office, while the CIT(A)'s direction was to adopt total marketing expenses, including those incurred in the company's European and Indian offices. Secondly, the TPO had netted off the Dubai office expenditure against the Dubai office income, without considering the ratio of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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