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TMI Blog2016 (5) TMI 631X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad; Deutsche Bank A.G. V /s DCIT reported in 86 ITD 431; Kodiak Network (India) P. Ltd. Vs. ACIT, ITA No.970/Bang/2011; and M/s. Capital IQ Information Systems (I) P. Ltd. (Hyd.) (order pronounced in the Court on 23.11.2012) 3. The learned Commissioner of Income-tax(Appeals) grossly erred in allowing adjustment on account of depreciation in the hands of assessee when on verification it is seen that the depreciation rates are in fact broadly comparable with the peer companies. 4. The learned Commissioner of Income-tax(Appeals) grossly erred in holding that Rolta India Ltd. has to be excluded from the comparable set when the segment turnover of this comparable is actually Rs. 347 Crs. and not Rs. 599 Crs.; and also when the Assessee company itself has chosen a comparable, namely, Infotech Enterprise, with a turnover of Rs. 423.16 Crs. 5. The learned Commissioner of Income-tax(Appeals) further grossly erred on fact as the assessee company has itself not used the turnover filter in the search matrix for identification of the uncontrolled comparables. 6. The learned Commissioner of Income-tax(Appeals) grossly erred in holding that KLG Systel Ltd. is not functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the arithmetic mean of margins of comparables selected by the assessee which was 28.32%. The assessee had selected seven concerns as functionally comparable. The TPO at the first instance was of the view that the PLI was to be computed with average margins of comparables for assessment year 2008-09. Further, the TPO was of the view that the concerns selected by the assessee i.e. Onward Technologies Ltd. was not functionally comparable to the assessee and hence, the same was proposed to be rejected being functionally different. Further, the TPO selected two other concerns i.e. KLG Systel Ltd. and Rolta India Ltd. as being functionally comparable and the arithmetic mean of the margins of said companies was worked out at 33.30%. Further, the TPO was of the view that the OP/TC was to be used as PLI, which works out to 14.44% in the hands of assessee and hence, the assessee was show caused to explain as to why the adjustment should not be made to the international transactions undertaken by the assessee. In reply, the assessee explained that both the two concerns selected by the TPO i.e. KLG Systel Ltd. and Rolta India Ltd. were functionally not similar and hence, could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and KLG Systel Ltd. were functionally comparable to the assessee and hence, the same have to be included in the final set of comparables. With regard to the second plea of the assessee that the PLI of OP / Sales be not replaced by OP / TC and operating profit be taken as per the adjustment made for exceptional and non-operational items of expenses i.e. employee retirement benefits and foreign currency loss by adding to the operating profit and also addition of income of operational nature i.e. reversal of provision for doubtful debts. In reply, the assessee furnished a letter, wherein it was accepted that the OP/TC needs to be taken as PLI instead of OP/Sales. With regard to the adjustment to be made on account of various factors, the same were rejected and arithmetic mean of margins was computed at 28.01% as against OP/TC shown by the assessee at 14.44%. The TPO proposed an addition of Rs. 1.59 crores to be made on account of adjustment to the international transactions undertaken by the assessee. The Assessing Officer thus, in order passed under section 143(3) r.w.s. 144C(4) of the Act, made an addition of Rs. 1.59 crores to the return income of the assessee. 6. The first object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has erred in holding that foreign currency fluctuation was non-operational item and has to be debited from the profits margin while calculating PLI. Reliance in this regard was placed on various decisions as mentioned in grounds of appeal itself. 9. The learned Authorized Representative for the assessee in reply, pointed out that the aforesaid foreign currency fluctuation did not relate to the export proceeds to be received during the year. It related to the sale proceeds of earlier years, which were received late and hence, the loss should be excluded. He fairly pointed out that out of total loss on account of foreign currency fluctuation of Rs. 62 lakhs, loss relating to the earlier years were to the tune of Rs. 35 lakhs and the balance loss related to the current year and that had to be considered while computing PLI of the assessee company. 10. We have heard the rival contentions and perused the record. The ground of appeal No.1 raised by the Revenue is general in nature and hence, the same is dismissed. 11. Now, coming to the issue in ground of appeal No.2 i.e. with regard to treatment of foreign currency fluctuation loss and its treatment while computing PLI of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. The learned Authorized Representative for the assessee fairly conceded before us that out of total losses of approximately Rs. 62 lakhs, losses to the tune of about Rs. 35 lakhs relate to earlier year and the balance losses relate to this year. The Mumbai Special Bench of Tribunal in the case of Prakash L. Shah reported in 115 ITD 167 (SB) had held that gain due to exchange rate difference in the year of receipt on account of earlier exports and allowance of deduction under section 80HHC of the Act in such later year was not sustainable. Following the simile, we hold that while computing PLI for the year under consideration, the loss arising on account of foreign exchange fluctuation to the tune of Rs. 35,31,729/- is to be excluded. However, the loss arising on account of export proceeds realized from exports of relevant year are to be considered while computing PLI of the assessee. In view thereof, we modify the order of CIT(A) and direct the Assessing Officer to re-compute the PLI in the hands of assessee and foreign exchange fluctuation losses of the earlier years are to be kept out of calculation of PLI for the year under consideration. The ground of appeal No.2 is partl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stressed by the assessee before the TPO that KLG Systel Ltd. was not in development of software and / or IT enabled engineering software development services. The said concern was engaged in selling bought out software and hence not functionally comparable. The total sales of KLG Systel Ltd. were Rs. 144 croes and hence, again not functionally similar. The TPO rejecting the plea of assessee held that both Rolta India Ltd. and KLG Systel Ltd. were to be included in the final set of comparables. 18. The CIT(A) vide para 2.6.3 at page 8 after going through the annual report of Rolta India Ltd. noted that the engineering design automation domain enjoys market share of 90% and its other activities also show that it was into development of software, hence, the CIT(A) did not agree with the objection of assessee that the said company was not functionally comparable. However, the turnover of Rolta India Ltd. was Rs. 599 crores as against the value of international transaction of engineering design services of the assessee of Rs. 13.31 crores and in view thereof, it was held that the said company is to be excluded from the list of comparables. In respect of KLG Systel Ltd., the CIT(A) from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find merit in the reliance placed upon by the learned Authorized Representative for the assessee on the ratio laid down by the Hon'ble Bombay High Court at Goa in CIT Vs. M/s. Pentair Water India Pvt. Ltd., reported in 282 CTR 160 (Bom), wherein it has been laid down that where the concerns picked up are large and distinct companies and where the area of development of subject services are different and as such the profit earned therefrom could not be benchmarked or equated with the tested party. Reliance in this regard was placed on the ratio laid down by the Hon'ble Delhi High Court in CIT Vs. Agnity India Technologies (P.) Ltd. (2013) 36 taxmann.com 289 (Del), wherein it was held that turnover is obviously a relevant factor to consider the comparability. 23. In the facts of the present case before us, the turnover of Rolta India Ltd. was Rs. 599 crores or at best Rs. 347 crores and the turnover of KLG Systel Ltd. was Rs. 112.53 crores, which was much higher than the turnover shown by the assessee at Rs. 13.31 crores. Hence for all the above said reasons being functionally dissimilar and because of huge turnover, the said two concerns are to be excluded from the final set of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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