9911796707
TMI Blog2016 (9) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd., Vs ITO in IT(TP) [2013 (1) TMI 773 - ITAT BANGALORE] foreign exchange gain or loss should be considered as operating in nature for marketing support services. The Appellant’s margin is within 5% range of the average margin of the comparables. Thus, the international transactions of the Appellant should be considered to be at arm’s length. With these directions, we set aside the issues to the file of the TPO to rework the ALP. X X X X Extracts X X X X X X X X Extracts X X X X ..... on-operating in nature 8. The learned TPO has erred in treating foreign exchange gain or loss as non-operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. On facts and in the circumstances of the case and law applicable, foreign exchange gain or loss should be considered as operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. Ground on working capital adjustment 9. The learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, working capital adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on risk adjustment 10. The learned TPO and CIT(A) has erred in not allowing risk adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, risk adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on inappropriate computation of operating margin of comparables and the assessee 11. The learned T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows: Sl.No. Name of the Company Operating Margin on Cost W.cap adjusted Maragin 1 ICRA Techno Analytics Ltd. (seg) 24.94% 23.79% 2 Infosys Ltd. 44.98% 43.79% 3 Kals Information Systems Ltd. (seg) 34.41% 29.54% 4 Larsen & Toubro Infotech Ltd. 19.33% 18.53% 5 Mindtree Ltd. (seg) 14.83% 11.87% 6 Persistent Systems & Solutions Ltd. 15.38% 14.28% 7 Persistent Systems Ltd. 30.335% 27.20% 8 RS Software (India) Ltd. 10.29% 9.59% 9 Sasken Communication Technologies 17.36% 15.52% 10 Tata Elexi (seg) 20.93% 16.32% 11 Thinksoft Global Services Ltd. 17.05% 13.10% Arithmetic Mean 22.71% 20.32% Computation of arm's length price by the TPO and the adjustment made: Arm's length mean margin 22,71% Less: Working capital adjustment 1.98% Adjusted mean margin after working capital adjustment 20.73% Operating Cost (A) 13,75,90,785 Arm's length price - 120.73% of operating cost (B) 16,61,13,355 Total operating Revenue © 15,74,03,549 Short fall being Adjustment u/s92CA (BC) 87,09,806 8. The TPO has computed the working capital adjustment at 2.39%. The TPO has contended that there must be a upper cap for the adjustment to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CRA Techno Analytics Ltd. (seg) 2. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 3. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. 16. Respectfully following the decision of the co-ordinate Bench in the case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from the list of comparables selected by TPO/AO. 17. Hence based on final list of comparable companies 3 in Nos. viz. Persistent Systems, RS Software, Think Soft, the working capital adjustment comes to 1.92% which is lesser than 1.98 adopted by the TPO. 18. The appellant's margin for software division is as under:- Particulars Amount(INR) Operating Revenue as per TPO 15,74,03,549 Operating Cost as per TPO 13,75,90,785 Operating Profit 1,98,12,764 OP/OC 14,40% 19. Ground No.2 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature. 20. With respect to ground No. 3 working capital adjustment, the CIT(A) has held that the action of the TPO in restricting working capital adjustment to 1.98% is cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial circumstances 1 2 Cyber Media Research Ltd.* 13.68% Accept 2 3 HCC A Business Services 19.09% Reject 4 Hindustan Housing Co Ltd 38.12% Reject b) Fails RPT filter 5 ICC International Agencies Ltd., 13.72% Accept 6 Killick Agencies & Mktg. Ltd. 17.36% Reject c)Fails RPT filter 3 7 Priya International Ltd 11.47% Accept 24.80% 29. The learned counsel for the assessee submitted as follows:- 30. Asian Business Exhibition & Conferences Ltd., should be rejected as it is functionally different from the Appellant for the following reasons: a. As per director report, the company is engaged in the business of organizing exhibitions and conference. b. As per profit and loss account, the company has revenues from exhibitions & events, delegate fees, sponsorships and entry charges. c. As per significant accounting policies, the company has revenues recognition policy for income from exhibitions & events, delegate fees, sponsorships and entry charges. 31. In view of the ITAT decision in the case of ACIT v RGA Services India Pvt. Ltd TS-580-ITAT-2015(mum)-TP AY 10-11 and DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company has held at paras 11 and 12 as under:- "11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE's, Asian Business Exh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein it is held as under: (1) HCCA Business Services Pvt. Ltd. 13. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 14. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 15. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany is acting as an agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company was found to be in the business of marketing support services which is similar to the assessee. 36. Also we find that RTP filter is substantial at 16.4% and hence the following decision of 24/7 Customer.Com Pvt. Ltd., (Supra), we direct the TPO to exclude this comparable. 37. Following the co-ordinate bench decisions stated (Supra) we direct that TPO to exclude Asian Business Exhibition & Conferences Ltd., Cyber Media Research Ltd.,, HCCA Business Services Pvt. Ltd., Hindustan Housing Co. Ltd., and Killick Agencies & Marketing Ltd. 38. Hence the final comparables in sales and support services segment which are to be retained are as follows. SN Name of the Company Operating Margin on Cost as per TPO 1 Cyber Media Research Ltd. 13.68% 2 ICC International Agencies Ltds., 13.72% 3 Priya International Agencies Ltd., 11.47% Arm's length margin 12.96% 39. We also direct that TPO to grant risk adjustment following decisions of the coordinate bench in the case of M/s Bearing Point Business Consulting Pvt. Ltd., in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (INR) Total Operating Revenue 2,06,39,290 Operating Cost as per TPO 1,87,62,380 Operating Margins 18,76,910 OP/OC 10.00% 41. Hence, we direct the TPO to grant risk adjustment in light of the decision of Bearing Point (Supra). 42. Ground No.9 the TPO is directed to provide appropriate working capital adjustment for the sales and marketing segment. 43. Ground No.8 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature for marketing support services. 44. The Appellant's margin is within 5% range of the average margin of the comparables. Thus, the international transactions of the Appellant should be considered to be at arm's length. With these directions, we set aside the issues to the file of the TPO to rework the ALP. 45. Ground 11 is conceptual Ground No.12 is general. ITA No.57/Bang/2015 The Revenue has raised the following grounds of appeal: "1. The order of the CIT(A) is opposed to law and the facts and circumstances of the case. 2. The CIT(A) erred in law as well as on facts in directing the TPO on marketing support segment to grant w ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
