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TMI Blog2016 (4) TMI 1201X X X X Extracts X X X X X X X X Extracts X X X X ..... s more than 25% then the comparable is to be included in the list of comparables selected by TPO. X X X X Extracts X X X X X X X X Extracts X X X X ..... S. No. Name of the Company Adjusted OP/TC(%) 3 VJIL Consulting Ltd. NC 9. After examining the search process adopted by the assessee and various information furnished by the assessee relating to the functional analysis of comparables, their margin computation and their annual reports, all the comparables and the accept/ reject matrix of the assessee, ld. TPO issued a detailed show cause notice to assessee which has been reproduced from pages 9 to 15 of his order. The reply of assessee has been considered in para 8 of the order and after considering the various case laws and the comparability criteria and after detailed analysis of various risk adjustment asked for by assessee, ld. TPO finally selected following comparables, the average margin of which was 20.15%. S. No. Name of the Company OP/TC(%) 1. Goldstone Technologies Ltd. 26.64 2. Mindtree Ltd. (seg) 17.51 3. Quintegra Solutions Ltd. 21.48 4. Softsol India Ltd. 14.95 Average 20.15 10. He, accordingly, computed the ALP and corresponding adjustments as under: Operating Cost 5,74,52,357 OP/TC 20.15% Margin 1,15,76,650 Arm's Length Price 6,90,29,007 Price charged by the assessee 6,31,97,593 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified by the Appellant using Turnover less INR 1 crore' as a comparability criterion. 5. the learned AO/TPO has erred by rejecting certain comparable companies identified by the Appellant using 'Employee cost greater than 25 percent of total cost' as a comparability criterion. 6. the learned AO/TPO has erred, by wrongly rejecting certain companies from and adding certain companies to the final set of com parables for the impugned transaction on an ad-hoc basis, thereby resorting to cherry picking of comparables for benchmarking the impugned transaction. 7. the learned AO/TPO has erred by passing an order under section 92CA(3) which has computational error in the margin of certain comparable companies used in determination of ALP. 8. the learned AO/TPO has erred by not making appropriate adjustments to account for differences in working capital employed by the Appellant vis-a-vis the com parables. 9. the learned AO/TPO has erred by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the com parables. 10. the learned AO/TPO has erred in not providing the benefit of the arm's length range as provided und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are no means to ascertain the working capital deployed by the comparables throughout the year. 16. The main reason given by ld. DRP for rejecting the adjustment in regard to working capital adjustment, as sought by assessee, was that working capital adjustment should be computed on the basis of daily average of working capital deployed by the tested party and each of comparables respectively, which details were not available. 17. Ld. counsel referred to page 117 of the PB and pointed out that separate details in regard to sundry creditors and sundry debtors are available. Ld. counsel referred to page 237 of the PB wherein the segmental details in regard to IT services and R&D services have been given. He referred to page 238 of the PB, wherein the working submitted before ld. TPO in regard to working capital adjustment is given to demonstrate that all the relevant details were furnished before TPO. He referred to page 165 of the PB, wherein the TPO's order for AY 2007-08 is contained to demonstrate that necessary adjustment had been allowed in regard to capital working adjustment. He further pointed out that in AY 2009-10 the ld. DRP in para 9.4 of its directions has, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking capital adjustment to assessee as per the directions given by ld. DRP in AY 2009-10, as noted earlier. In the result ground no. 8 is allowed for statistical purposes. 21. Now coming to the issue regarding comparables, the main dispute raised by assessee is in regard to following three comparables: - CG VAK Software & Exports Ltd. - Ancent Software International Ltd. - Softsol India Ltd. 22. As regards CG VAK Software & Exports Ltd., the objections of ld. TPO were that this comparable was functionally not comparable to the tested party as it had employee compensation less than 25% and hence it failed employee cost filter. 23. Before ld. DRP the assessee pointed out that the employee cost (cost of services) as percentage of total revenue of the company was 75.55%. Ld. DRP did not accept the assessee's contention that cost of services should be taken as remuneration to employees by observing that in the annual report of the company there was no expense such as 'salary cost' or 'remuneration to employees' in its P&L A/c. Ld. DRP observed that assessee was drawing conclusions on the basis of unsubstantiated presumptions and whenever there is doubt about the functional com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this comparable was not functionally comparable to the tested party as it had turn over less than ₹ 1 crores and hence it failed the turn over filter. 27. Ld. counsel submitted that in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. (ITA no. 417/2014), the Hon'ble Delhi High Court has held that turn over filter is not an appropriate filter. 28. Ld. counsel pointed out that ld. TPO has nowhere cited any instances of functional dissimilarity of this company. On the contrary he submitted that as is evident from the P&L A/c of this comparable as contained at page 275 of the PB, the company has derived income from software services. He further pointed out that in the case of Ameriprise India Pvt. Ltd. ITA no. 2010/Del/2014, it has been held that the turnover filter is not an appropriate filter. Further, he pointed out that this company is functionally similar to the assessee. 29. We have considered the submissions of both the parties. We find that ld. DRP has confirmed the findings of ld. TPO solely on the ground that sales were less than ₹ 1 crore. No adverse comments have been made on the functional analysis by both the lower revenue authorities. Under su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. 33. We have considered the submissions of both the parties and have perused the record of the case. The very basis for enhancing the margin from 14.95% to 25.58% was the computation made by JCIT (Transfer Pricing), Hyderabad, as noted earlier. Ld. counsel has pointed out that figures adopted in regard to depreciation are not correct. Further, there is no basis pointed out by ld. JCIT in regard to expenses being attributed to let out property. 34. Ld. DRP has accepted the TPO's findings that rental income had to be excluded from the operating income. However, ld. DRP was of the opinion and rightly so that the expenses attributable to the rental income should also be reduced from the operating expenditure to compute correct margin for software development segment. Ld. DRP had given direction to JCIT(Transfer Pricing), Hyderabad to identify the expenses attributable to the rental income and recomptue the margins of the software development segment. As noted earlier, ld. JCIT has not given any basis for attribution of expenses to the earning of rental income and the figure of depreciation also has not been correctly adopted. 35. Under such circumstances, in our opinion, only the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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