9911796707
TMI Blog2017 (3) TMI 1533X X X X Extracts X X X X X X X X Extracts X X X X ..... verify the claim of assessee and delete the addition. The grounds of appeal No.2 and 3 raised by the assessee are thus, decided on preliminary issue. Selection of comparables - Held that:- The assessee had provided support services to its associate enterprises i.e. supply based development services, wherein the revenue earned was 9,34,38,095/-. Further, the assessee had made provision of IT services to the extent of 59,64,133/- which constitute IT and other business support services. Thus companies dissimilar with that of assessee need to be rejected as comparable. Adjustments made to application engineering services segment - Held that:- The application engineering services was comprised of customization of business of turbocharges to particular vehicle models of different customers, where the best design of turbocharges is already developed and patented and the assessee provides services relating to customization of the best design as per the requirements of customer. Thus companies dissimilar with that of assessee need to be rejected as comparable. X X X X Extracts X X X X X X X X Extracts X X X X ..... round 7 Rejection of Ace Software Exports Ltd ('Ace') as a comparable company Erred in rejecting Ace Software Exports Limited as a comparable company. Ground 8 Selection of companies having super normal profits Erred in including comparable companies with super normal profits. Other grounds of objections Ground 9 Non consideration of contemporaneous data Erred in conducting an analysis based on information subsequently available for determining arm's length price which was not available at the time of complying with the transfer pricing regulations. Ground 10 Denial of adjustment for risk differences Erred in rejecting adjustment on account of differences in the functional and risk profile of comparable companies vis-a-vis the Appellant. Ground 11 Denial of benefit of +/-5% range while computing the adjustment amount Erred in computing the arm's length price, without taking into account the lower 5 per cent variation from the mean arm's length price determined. Ground 12 Erred in initiating penalty proceedings under section 271(1)(c) of the Act and levying interest under section 234B, 234C and 234D of the Act. 3. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly comparable to the Appellant (i.e Agrima Consultants International Limited, L&T Ramboll Consulting Engineers Limited and Mahindra Consulting Engineers Limited); Working capital adjustment 20. erred in not granting working capital adjustment to the operating margins of the comparable companies to account for difference in the working capital of the Appellant in the AE segment vis-a-vis comparable companies be allowed to the Appellant; 4. Briefly, in the facts of the case, the assessee had furnished return of income declaring total income at Nil. The assessee was engaged in the business of sale of Turbo charges and components by getting the same manufactured from its consignment manufacturers. The assessee also re-sells turbocharges and components imported from its associate enterprises and also provide after sales services to the customers. The Assessing Officer made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (in short 'the TPO') for computation of arm's length price of international transactions undertaken by the assessee. The TPO noted that the assessee had undertaken several international transactions during the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e between the revenue earned by the assessee and the arm's length price determined by the TPO does not exceed 5% and hence, it is covered under proviso to section 92C(2) of the Act. Under the umbrella of manufacturing segment, the TPO had cumulated the international transactions pertaining to import of components from manufacturing, export of manufactured goods and payment of royalty and computed PLI of transactions pertaining to manufacturing segment. The computation of PLI of assessee is as under:- Particulars F.Y. 2007 -08 (Rs.) Operation income (A) 2,02,57,09,464 Operating cost-excluding assignment fees (B) 1,85,30,09,270 Add: Assignment fees (C) 10,10,43,750 Operating cost (D=B+C) 1,95,40,53,020 Operating profit (E=A-D) 7,16,56,444 OP/OC (F=E/D) 3.66% 10. The arithmetic mean of operating margins on operating cost of comparables was computed at 8.54%. The learned Authorized Representative for the assessee has given the working which reads as under:- Particulars Amount (INR) Operating Revenue of the Appellant 2,02,57,09,464 105% of Operating Revenue of the Appellant 2,12,69,94,937 Operating Cost (as considered by the Ld. TPO) 1,95,40,53,020 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the TPO was within range of +/- 5% of the actual revenue from the international transaction. The perusal of the order of TPO and the details filed by the assessee reflect that the margins of international transaction relating to manufacturing segment was were within +/- 5% of actual revenue earned from the manufacturing segment and hence, we direct the Assessing Officer to verify the claim of assessee and delete the addition. The grounds of appeal No.2 and 3 raised by the assessee are thus, decided on preliminary issue. 14. Now, coming to the second segment undertaken by the assessee i.e. Provision of business support services and supply based development services and information technologies (BSS Segment). 15. The assessee provided two kinds of services under the said segment; supply based development services and information technology and business support services to its associate enterprises. The learned Authorized Representative for the assessee had explained the nature of services provided by the assessee to its associate enterprises in BSS segment. The assessee had picked up 12 comparables on multiple year data basis and the average margins of comparables worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionally comparable, then how later on it becomes non-functional. He further pointed out that the margins of companies, which were applied by TPO, were originally selected in the TP study report, by taking margins of three years; but when the TPO directed that one year's data should be applied, large number of companies were excluded by the assessee. The learned Authorized Representative for the assessee pointed out that as per average margins of three years data, PLI of ICRA worked out to 35.84%, which was accepted by the assessee to be comparable but on re-working the data by applying one year's data, the margins are 26.78% but the same are not acceptable to the assessee. He referring to the observations of TPO at pages 25/26 of the order, pointed out that the nature of business of assessee was specialized base knowledge and IT services. He further stated that the learned Authorized Representative for the assessee has not pressed the issue on the basis of profits but only pressed the issue of the said concern being functionally different but in the TP study on FAR analysis, the said concern was found to be functionally comparable. He further stressed that there was no plea that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has pointed out that ICRA Online Ltd. is engaged in conducting research and preparing reports, which in turn, may be used as tool for analysis. Further, it is also engaged in selling of product namely MFI explorer. The learned Authorized Representative for the assessee referred to the financial reports of ICRA in this regard and also website extract of the said concern. 20. The next contention of the assessee was that the said concern owned high end proprietary software and also that the year under consideration was an exceptional year as the operating income had decreased but the employee cost had increased. The said concern was also adopted as comparable by the TPO in assessment year 2007-08. However, the same was excluded by the Tribunal for abnormal profits. The learned Authorized Representative for the assessee has further pointed out that even where a company was included in the TP study report by the assessee himself, the said company needs to be rejected if it is found to be functionally different. In this regard, reliance was placed on the following decisions:- a) Special Bench Ruling in the case of Quark Systems Pvt. Ltd. (TS-23- ITAT -2009) b) Decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion of said company on the ground that it is not functionally comparable. The learned Authorized Representative for the assessee pointed out that the said concern had developed software for pay roll processing, which was owned by it and the income through software was earned during assessment year 2008-09 as also in assessment year 2007-08. He referred to the order of Tribunal in ITA No. 03/PN/2012 (supra) and pointed out that the Tribunal had directed to exclude TSR Darashaw Ltd. from the final set of comparables as it was functionally non-comparable. The learned Authorized Representative for the assessee also pointed out that the super normal profits at 81.73% were earned by the said concern and hence the same should be rejected as comparable to the assessee. 23. The learned Departmental Representative for the Revenue stressed that where the assessee himself had included the said concern in its TP study and the same could not be rejected on the ground that it has earned super normal profits during the year. In this regard, he placed reliance on the ratio laid down by the Special Bench in Maersk Global Centres Vs. ACIT in ITA No.7466/Mum/2012, order dated 07.03.2014, wherein i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was that it was earning super normal profits and also it was functionally different. The margins of profits earned by the said concern for the year under consideration were 158.22%. The second issue which was pointed out by the learned Authorized Representative for the assessee was that there was fluctuating profits of the said concern, wherein during the year under consideration, the segmental margins are 159.37% as against 11.25% in assessment year 2007-08 and 76.76% in assessment year 2006-07. The third issue for rejection of said concern was that the said concern was functionally non-comparable as it was organizing events with various kinds of sponsorers. In this regard, the learned Authorized Representative for the assessee placed reliance on various decisions of Tribunal including the Delhi Bench of Tribunal in Premier Exploration Services Pvt. Ltd. Vs. ITO in ITA No.5293/Del/2012 , relating to assessment year 2008-09, order dated 22.11.2013. 26. The learned Departmental Representative for the Revenue reiterated its submissions as in respect of earlier TSR Darashaw Ltd. 27. In order to apply the margins of any concern, the first test which has to be applied is the tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t limb of objection that the said concern was having varying profits. The learned Authorized Representative for the assessee has pointed out that there is fluctuation in operating margins of Access India Advisors Ltd. and there was short decrease in margins for the succeeding years, which established that the assessment year 2008-09 was an exceptional year. Operating margins i.e. operating profit / operating cost of the assessee in assessment year 2006-07 was 20.50%, in assessment year 2007- 08 was 16.48% and in assessment year 2008-09 was 45.97%. The assessee claimed it is to be super normal profits. It is further pointed out by the assessee that in the succeeding years, the margins have decreased i.e. in assessment year 2009-10, it was 6.62% and in assessment year 2010-11, it was (-) 74.60% and hence, the concern with such varying margins could not be held to be functionally comparable. The perusal of tabulated details filed by the assessee in its written submissions reflect that there is substantial increase in turnover in assessment year 2008-09 and then there is constant decline in the turnover in the succeeding year. The margins shown by the concern are also deviating from ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee. 34. The grounds of appeal No.4 and 5 i.e. adjustment in respect of BSS segment are partly allowed and even ground of appeal No.10 for risk adjustment is allowed for statistical purposes. 35. The grounds of appeal No.6, 7 and 8 are in respect of adjustments made to application engineering services segment. 36. The assessee has explained that the application engineering services was comprised of customization of business of turbocharges to particular vehicle models of different customers, where the best design of turbocharges is already developed and patented and the assessee provides services relating to customization of the best design as per the requirements of customer. In order to analyze the international transactions of AE segment, the assessee had followed TNMM method and had selected concerns totaling 15. However, the TPO directed the assessee only to consider single year's data and the assessee re-computed the margins of comparables but excluded certain concerns. The TPO applied the margins of most of the concerns which were initially selected by the assessee as functionally comparable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filled, then the said concern is to be rejected from the list of comparables. 40. The next contention raised by the learned Authorized Representative for the assessee was in allowing risk adjustment in AE segment also. 41. We have heard the rival contentions and perused the record. The case of the assessee was that in case few of the concerns were excluded / included then, the margins shown by the assessee would be within +/- 5% mean margins of comparables and limited submissions were made by the learned Authorized Representative for the assessee in this regard, which we shall deal with in the following paras. The first concern which the assessee wants to be included in the final list is Ace Software Exports Ltd. The assessee has furnished tabulated details of operating profits, operating cost and operating margins of the said concern for the past three years which reads as under:- Particular AY 2006-07 (Rs.) AY 2007-08 (Rs.) AY 2008-09 (Rs.) Operating Profit (A) 36,63,704 (34,26,797) (1,73,00,667) Operating Cost (B) 4,62,48,015 4,86,99,104 4,73,47,807 Operating Margin (A/B) 7.92% -7.04% -36.54% 42. The perusal of the above details reflects that the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... except ground of appeal No.18 were not pressed by the assessee in final arguments i.e. in applying RPT filter while considering inclusion of Artefact Project Ltd. We have already adjudicated on this issue in the paras hereinabove and restore this issue back to the file of Assessing Officer and hence, this ground of appeal is allowed for statistical purposes. All the other grounds of appeal i.e. grounds of appeal No.13 to 20 except ground of appeal No.18 are dismissed as not pressed and are academic in nature and even ground of appeal on working capital adjustment is not pressed. 46. The assessee had filed certain submissions in which reference was made to the inclusion / exclusion of some other concerns also, but no submissions have been made by the learned Authorized Representative for the assessee in this regard and hence, the same are rejected. 47. The next plea raised by the assessee was only in respect of grant of risk adjustment which we have already directed the Assessing Officer to allow following the principle laid down in the case of Sony India Pvt. Ltd. (supra). The balance additional grounds of appeal raised by the assessee have been first argued and then withdrawn on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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