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TMI Blog2016 (7) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purposes. Computing the deduction u/s.10A - Held that:- We restore this issue to the file of the AO with a direction to compute the deduction u/s.10A as per law after giving due opportunity of being heard to the assessee. - ITA No.358/PN/2013 - - - Dated:- 21-10-2015 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Ketan Ved and Shri Rugved Apte For The Respondent : Shri A.K.Modi, CIT ORDER PER R.K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 29-11-2013 passed u/s.143(3) r.w.s. 144C(13) of the I.T Act for the Assessment Year 2008-09. 2. Facts of the case, in brief, are that the assessee is a joint venture company incorporated on 21-06-2005 under the Companies Act, 1956. It is engaged in the business of designing and developing products in CAD/CAM of auto parts. The company is also providing customer support services and techno-marketing services to the group companies. It filed its return of income on 29- 09-2009 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation available). 3. Companies whose turnover was more than ₹ 200 crores or less than ₹ 2 crores. 4. Companies whose turnover included turnover from trading and manufacturing activity of more than 30% of the total turnover (this criteria was applied for comparable companies search in Prowess only). 5. Details regarding the principal activity were not available in PROWESS/Capitalise Plus. 6. Companies not having financial data of the year ended 31st March 2005. 5. Finally, the assessee identified the following 6 companies as being comparables to CRTI, the details of which are as under : S.No. Name of Co. PLI% 1 Ace Software Exports Ltd. -56.35% 2 C.S. Software Enterprise Ltd. 21.15% 3 Cambridge Solutions Ltd. 19.45% 4 Genesys International Corporation Ltd. 32.44% 5 Vama Industries Ltd. 5.69% 6 Geometric Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Profit shown by Assessee Rs.3,02,66,000 iv. Arm s Length Price (259244000 x 127.21/100) Rs.32,97,84,292 v. Adjustment to be made Rs.4,02,74,292 9. So far as the receipt of managerial services is concerned it was submitted that the AE had deputed its employees to the assessee for control, management, business development and growth of company, i.e. stewardship services through its employees. It was further stated that the receipt of services help the assessee company in managing its business smoothly since entire service receipts are from AEs and it is in business interest of the assessee to pay for benefits derived from such services. 10. During the course of TP proceedings the TPO asked the assessee to furnish the details of managerial services such as nature of services rendered by the AE to assessee, copy of agreement, evidences for receipt of services and benefit derived from such services. However, according to the TPO the assessee could not produce any other information in support of its claim except for the details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case in computing the transfer pricing adjustment on the entity level income of the Appellant instead of computing the transfer pricing adjustment on international transactions pertaining to provision of Engineering Design Services to its Associated Enterprises only. 4. Erroneous computation of operating profit of the Appellant The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in not considering sundry credit balances written back of ₹ 29,33,688 as part of the operating income of the Appellant. 5. Erroneous selection of comparable company The learned ACIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in selecting Acropetal Technologies Limited and Genesys International Corporation Limited as a comparable company. 6. Erroneous rejection of comparable companies The Learned ACIT pursuant to the directions of Ld. DRP has erred in law and on the facts and in circumstances of the case in rejecting the following companies as comparable companies : Ace Software Exports Limited and Geometric Software Solutions Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. Before the DRP it was submitted that the differences in operating margins earned by the assessee in these 2 segments are because of the different billing rates as well as difference in skill sets of the employees, who provide services in respective segments. It was argued that transfer pricing provisions are applicable only to the international transactions for testing its ALP. Consequently, economic analysis and functional comparability should be made only for the international transactions and not for the companies dealing with the unrelated parties. Relying on various decisions it was argued that the PLI should be computed only for the portion related to international transaction and not on whole entity basis. 15. However, the DRP also did not accept the contention of the assessee. Referring to pages 73 to 77 of the compilation he submitted that detailed segmental profitability was filed before the DRP. Referring to the decision of the Chennai Bench of the Tribunal in the case of 3i Infotech Ltd. Vs. ITO reported in 35 taxmann.com 582 and the decision of the Chennai Bench of the Tribunal in the case of Honeywell Electrical Devices Systems India Ltd. Vs. ACIT repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent methodology. No mistakes have been pointed out by the DRP/TPO. The Various Benches of the Tribunal are consistently taking the view that PLI should be considered only for the segment pertaining to international transactions with AEs. We accordingly hold that the TPO should not have rejected the segmental profitability of the assessee in respect of provision of Engineering Design Services to its AEs. Since the segmental profitability as submitted by the assessee has not been examined either by the TPO or the DRP and since the DRP had also directed the AO to work out the PLI of the segment consisting of the international transactions if such segmental data is available, therefore, we, in the interest of justice, direct the AO to work out PLI of the segment consisting of the international transactions only. The ground raised by the assessee is accordingly allowed for statistical purposes. 19. So far as Ground of appeal No.3 is concerned, i.e. erroneous computation of adjustment in respect of provision of services to AEs at entity level is concerned we find the issue stands decided in favour of the assessee by the decision of the Pune Bench of the Tribunal in the case of Dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing adjustment to the manufacturing activity is allowed pro tanto. 15. In view of aforesaid discussion we therefore, hold that the assessee has to succeed on the said plea and as a result Ground no. 7 raised by the assessee stands allowed. 20. Similarly, the Tribunal in the case of Sandvik Asia Pvt. Ltd. (Supra) at para No.16 of the order has observed as under : 16. We have carefully considered the rival submissions. In our considered opinion, the TPO has clearly misdirected himself in computing the transfer pricing adjustment in respect of all transactions of the assessee's Tools manufacturing segment and not limiting it to the transactions with the AEs. Pertinently, the entire exercise of conducting a transfer pricing analysis is to compute ALP of an international transaction alone. Section 92(1) of the Act prescribes that any income arising from an international transaction shall be computed having regard to the ALP. Therefore, the objective of the computing ALP is to determining the income arising from an international transaction. Therefore, the adjustment that is required to be made is to be limited to the international transactions with the AEs and not to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the rival arguments made by both the sides. It is not in dispute that no details were filed either before the AO or before the DRP. However, since it involves computation of operating profit of the assessee and since the assessee has filed certain details which were not before the TPO or the DRP, therefore, we, in the interest of justice, restore this issue to the file of the AO/TPO with a direction to give an opportunity to the assessee to justify and explain to the satisfaction of the AO/TPO that the sundry credit balances written back amounting to ₹ 29,33,688/- is part of the operating income of the assessee. The AO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. This ground by the assessee is accordingly allowed for statistical purposes. 25. In Ground of appeal No.5 the assessee has challenged the direction of the DRP in selecting Acropetal Technologies Ltd. and Genesys International Corporation Ltd. as comparable companies. 26. So far as Acropetal Technologies Ltd. is concerned it is the submission of the Ld. Counsel for the assessee that the TPO has considered overall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as comparable and deserves to be excluded from the list of comparables. 28. The Ld. Departmental Representative on the other hand while supporting the order of the TPO/DRP referred to page 101 of the appeal memo and submitted that from the segmental revenue submitted by the assessee it is not clear as to whether Acropetal Technologies Ltd. is engaged in software development or ITES. The DRP proceeded on the ground that ITES and ITES are similar, however, if they can demonstrate that they are in software development, revenue has no case. 29. So far as Genesys International Corporation Ltd. is concerned he submitted that in A.Y. 2010-11 it was excluded from the list of comparables only because of super profit. However, for A.Y. 2011- 12 no reasons have been given for such exclusion. 30. The Ld. Counsel for the assessee in his rejoinder referring to the decision of the Hyderabad Bench of the Tribunal in the case of Hyundai Motors India Engg. Pvt. Ltd.(Supra) submitted that the Tribunal has already considered this aspect and held that when all activities remain same the same has to be excluded. 31. We have considered the rival arguments made by both the sides, perused the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the company is functionally different, therefore, following the decision cited (Supra) and further considering the fact that Genesys International Corporation Ltd. was not included as comparable company in A.Yrs. 2010-11 and 2011-12 by the AO himself in assessee s own case, we direct the TPO to exclude Genesys International Corporation Ltd. from the list of comparables. 34. So far as Acropetal Technologies Ltd is concerned we hold that the said company is functionally comparable. However, since the TPO has considered the entity level profit margin of the comparable company in respect of the Engineering Design Services segment which is comparable, we direct the TPO/AO to consider only profit margin of the Engineering Design Services segment. We hold and direct accordingly. Ground of appeal No.5 is accordingly partly allowed. 35. In Ground of appeal No.6 the assessee has challenged the erroneous rejection of comparable companies. According to the Ld. Counsel for the assessee the dispute is relating to 2 companies, i.e. Ace Software Exports Ltd. and Geometric Software Solutions Ltd. So far as the Ace Software Exports Ltd. is concerned the Ld. Authorised Representative submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations falls under single segment namely software and services exports. Segment-wise performance has not been furnished. The Ld. Counsel for the assessee was unable to counter the findings given by the TPO, therefore, Ace Software Exports Ltd. has rightly been excluded. 38. So far as Geometric Software Solutions Co. Ltd. is concerned the Ld. Departmental Representative submitted that the assessee has got substantial related party transactions. Therefore, the TPO has rightly excluded the same from the list of comparables. The decision of the Pune Bench of the Tribunal in the case of Approva Systems Pvt. Ltd. cannot be applied to this case since the said case was decided under different sets of facts. He accordingly submitted that the AO is justified in rejecting the above 2 companies from the list of comparables. 39. After hearing both the sides, we do not find any infirmity in the order of the TPO/DRP in rejecting Ace Software Exports Ltd. and Geometric Software Solutions Co. Ltd. from the list of comparables. So far as Ace Software Exports Ltd. is concerned, we find the TPO has given various reasons at page 14 of the order apart from operating loss of 56% in the current ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of C.S. Software Ltd. 42. The Ld. Counsel for the assessee referred to page 17 of the TPO order and submitted that the TPO in the final set of comparables has taken the PLI margin of C.S. Software Ltd,. at 21.15%. The AO in the assessment order at page 5 has also considered the PLI margin of the same as 21.15%. However, he has considered the revised PLI margin after working capital adjustment at 34.86%. After rectification application was filed the TPO considered the OP/OC percentage at 26.82% thereafter made working capital adjustment of (-)5.98%. He submitted that a direction may be given to adopt the correct margin. 43. The Ld. Departmental Representative on the other hand has no objection if the issue is restored to the file of the AO to adopt the correct margin after verification of the records. 44. After hearing both the sides we remit the issue to the file of the AO with a direction to adopt the correct margin. The ground by the assessee is accordingly allowed for statistical purposes. 45. Ground of appeal No.8 was not pressed by the Ld. Counsel for the assessee for which the Ld. Departmental Representative has no objection. Accordingly, ground of appeal No.8 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt. Ltd. (Supra) at para 7.1 of the order has observed as under : 7.1 As seen from the records, the assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of the comparables for bringing them on par with the assessee company. The assessee's contention that the risk adjustment should be at 5.5% or at the difference of prime lend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proached the DRP who decided the issue against the assessee holding that assessee had agreed to exclude the expenditure incurred in foreign currency from the export turnover and the total turnover. Therefore, the factual objections raised by the assessee before the DRP are in the nature of additional evidences. Since the assessee has not sought the leave of the DRP for its admission, the DRP declined to entertain the arguments of the assessee. 57. The Ld. Counsel for the assessee referring to the decision of the Hon ble Bombay High Court in the case of CIT Vs. Pruthvi Stock Brokers and Shareholders Ltd. reported in 349 ITR 336 submitted that appellate authorities have power to consider claim not made in the return. He accordingly submitted that a direction may be given to the AO to compute deduction u/s.10A correctly as per law. 58. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO/TPO. 59. We have considered the rival arguments made by both the sides. The Hon ble Bombay High Court in the case of Pruthvi Stock Brokers and Shareholders Ltd. (Supra) has held that the assessee is entitled to raise not merely additional legal submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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