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TMI Blog2018 (12) TMI 1133X X X X Extracts X X X X X X X X Extracts X X X X ..... factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than the one chosen earlier, the ALP can be determined, the TPO as well as the CIT(A) should take into consideration such a plea before them, provided, it is demonstrated as to why the change in the method will produce better or more appropriate ALP on facts of the case. Therefore, we reject the contention of the ld. DR and also the observation of the TPO that the assessee cannot resort to adopt the Cost Plus Method (CPM) instead of TNMM for its purchase and sale of services. No infirmity in choosing the Cost Plus Method (CPM) by the assessee to determine the arm’s length price (ALP) of sale of services and purchase of services, hence we delete the transfer pricing adjustment - Decided in favour of assessee Disallowance u/s 14A other than what the assessee had suo-moto disallowed - Held that:- As decided in the case of REI Agro Ltd. Vs. DCIT [2013 (9) TMI 156 - ITAT KOLKATA] has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod adopted by ld. Commissioner are not in sync with reality. 3. Other grounds raised by the assessee are as follows: (1) Ground No.1 raised by the assessee relates to disallowance under section 14A, other than what the assessee had suo-moto disallowed. (2) Ground No.3 raised by the assessee relates to additions made with respect to unbilled revenue to the tune of ₹ 17,44,27,000/-, which is already included in the revenue/income of the company. 4. We shall first take-up additions challenged on account of Transfer Pricing Adjustment as has been raised vide ground No. 2, which is reproduced below for ready reference: Ground No.2 raised by the assessee relates to upward adjustment on arm s length price to the tune of ₹ 1,45,89,355/- wherein the assessee objected that method adopted by ld. Commissioner are not in sync with reality. 5. The brief facts qua the issue of transfer pricing adjustments of ₹ 1,45,89,355/- are that M/s. R.S. Software (India) Ltd. was incorporated on 02.12.1987, as a private limited company and subsequently converted into a public limited company in 1992. The company is in the software industry and engaged in developing cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise in a comparable uncontrolled transaction, or a number of such transactions, is determined; 3. Calculating any adjustment to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; 4.Arriving at the arm s length price in relation to the supply of the property or provision of services by the enterprise which is the sum arrived at by adding the adjusted mark up to the costs as in 1 above. 13.1 Identification of costs: The cost identification is done internally, and it includes all costs directly associated with the work, which is in terms of the manpower cost and other identified direct costs for the manpower involved in the project. No part of indirect costs are considered neither appropriations nor allocations. This step is not very critical as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15872.32 RSI billing 373.96 1.5% 351.38 1.9% 53.12 0.33% 13.2.6 Based on the above, the margins earned by RSSL in respect of its entire business operations can itself as a parameter for ascertaining the GP margin. In this regard, we take the average of the last three years margin from the audited accounts of RSSL. The same is calculated as below: Description Year 2011-12 (in Rs. Lacs) Year 2010-11 (in Rs. Lacs) Year 2009-10 (in Rs. Lacs) Revenue from operations 24713.96 18826.38 16128.96 Other income 95.76 3.75 58.55 Total income 24809.72 18830.13 16187.50 Total expenses 21477.47 16294.48 15008.09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od (CPM), which requires comparison of gross profit and not operating profit ratio. Therefore, the assessee, evidently employed TNMM, and not CPM in its benchmarking exercise. On examination of Transfer Pricing Study Report (TPSR) and faulty benchmarking undertaken by the assessee, the ld. TPO noted that assessee s Bench marking exercise is not correct, therefore, ld TPO issued show cause notice, seeking rejection of TP-Study Report and informing selection of new comparable employing TNMM for benchmarking in an appropriate manner. 7. In response, the assessee submitted its reply on 18.01.2015 and defended the use of Cost Plus Method (CPM). However, the TPO noted that in the name of using CPM, the assessee has actually employed TNMM in the TP Study Report. Therefore, the question of applicability of CPM in TP Study Report, does not arise, when the assessee itself taken PBIT/sales, as profit indicator, which is the NPI used in TNMM. Therefore, the TPO rejected Cost Plus Method (CPM) adopted by the assessee and used the TNMM and selected the list of comparable of arm s length margins as follows: Sl. No. Name of company Oper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PLI of the assessee: Operating revenue 247,13,96,000 Total expenses Rs.214,77,00,000/- Less: Finance Cost Rs.44,00,000/- Operating expenses (total cost) 214,33,00,000/- Operating profit Rs.32,80,00,000/- OP/OR (Rs.32,80,00,000/- / 247,13,96,000) 13.28% OP/TC (Rs.32,80,00,000/- / 214,33,00,000/-) 15.30% Thus, PLI of assessee OP/OR was 13.28% and OP/TC was at 15.30%. However, ld. TPO computed OP/OR at 20.59% and OP/TC at 27.21% and treated arm s length margin of the assessee company. 8. The ld. TPO computed the arm s length price of purchase as follows: Purchase of services: Sl. No. Particulars Amount (in Rs.) 1. Operating Revenue 247,13,96,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggrieved by the stand so taken by TPO/Assessing Officer, the assessee carried the matter, by filing an application, before ld DRP, but without any success. The Ld DRP examined the comparable companies selected by the TPO, and reached on the conclusion that all the comparable companies so selected by the TPO should be retained. The ld DRP, examined the company wise comparable selected by the ld. TPO and held that functions of the comparable companies were comparable broadly to the assessee company, and ld DRP also furnished its findings, company-wise, which is given on Page No.5 to 10 of the DRP order. Having analysed the comparable companies, the ld. DRP confirmed the order passed by the ld. TPO/Assessing Officer. 7. Aggrieved by the order of the ld. DRP/ Assessing Officer, the assessee is in appeal before us. 8. Learned counsel for the assessee begins by pointing out that the assessee has adopted the Cost Plus Method for calculating the arm s length margin (ALM) in respect of its international transactions. The counsel explained the steps involved in application of the Cost Plus Method(CPM) as follows: (1). Identification of Direct and Indirect Costs for providing the Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total income 24809.72 18830.13 16187.50 Total expenses 21477.47 16294.48 15008.09 Profit before tax (PBT) 3332.25 2535.65 1179.41 Interest component 44.31 84.90 231.54 Profit before interest and taxes(PBIT) 3376.56 2620.55 1410.95 PBT/Revenue from Op (3332.25/24713.96) 13.48 13.46 7.3% PBIT/Revenue from Op (3376.56/24713.96) 13.66 13.91 8.75% Average PBT% age for three years (13.48+13.46+7.30)/3 11.43% Average PBIT% age for three years(13.66+13.91+8.75)/3 12.10% From the above table, ld Counsel explained the Bench that even after considering the PBIT (which in effect is the gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MM method is most appropriate method for the assessee. 10. We have given a careful consideration to the rival submissions and perused the materials available on record, we note that the main dispute in the assessee s case under consideration is the selection of method. The assessee differs in his TP-study Report about the use of cost plus method (CPM) whereas the Ld TPO and the ld. DRP recommended the Transactional Net Margin Method (TNMM) as the most appropriate. We note that so far the transfer pricing methods are concerned, the section 92C of the Act prescribes methods for computation of arm s length price. The provisions of section 92C, to the extent relevant for our analysis, is given below for ready reference: Section 92C: Computation of arm s length price. ( 1) The arm s length price in relation to an international transaction or specified domestic transaction, shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely:- ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner, namely: ( c) cost plus method, by which,- ( i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; ( ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; ( iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; ( iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); ( v) the sum so arrived at is taken to be an arm s length price in relation to the supply of the propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses 21477.47 16294.48 15008.09 Profit before tax (PBT) 3332.25 2535.65 1179.41 Interest component 44.31 84.90 231.54 Profit before interest and taxes(PBIT) 3376.56 2620.55 1410.95 PBT/Revenue from Op (3332.25/24713.96) 13.48 13.46 7.3% PBIT/Revenue from Op (3376.56/24713.96) 13.66 13.91 8.75% Average PBT% age for three years (13.48+13.46+7.30)/3 11.43% Average PBIT% age for three years(13.66+13.91+8.75)/3 12.10% We draw the conclusion from the above table, which is taken from the TP-Study Report of the assessee, that Profit Before Tax (PBT) is at 11.43%, which is Gross profit ratio of the assessee and Profit Before Interest and Tax (PBIT) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP and some other method should be resorted. The ultimate aim of the TPO to examine whether the price or the margin arising from an international transaction with a related party is at ALP or not. The determination of the ALP is the key factor for which the MAM is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed method other than the one chosen earlier, the ALP can be determined, the TPO as well as the CIT(A) should take into consideration such a plea before them, provided, it is demonstrated as to why the change in the method will produce better or more appropriate ALP on facts of the case. Therefore, we reject the contention of the ld. DR and also the observation of the TPO that the assessee cannot resort to adopt the Cost Plus Method (CPM) instead of TNMM for its purchase and sale of services. Therefore, we find no any infirmity in choosing the Cost Plus Method (CPM) by the assessee to determine the arm s length price (ALP) of sale of services and purchase of services, hence we delete the transfer pricing adjustment to the tune of ₹ 1,45,89,355/- 13. Now we shall take other grounds raised by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Average assets (Rs. In Lakhs) 9436.685 C 8D(ii) disallowance (interest * (Average investment/average assets) = A* (B/C) 137960 Rule 8D(iii) 0.5% of Average investment =0.5% of B 255475 Total disallowance (in Rs.) 393435 17. On the other hand, the ld. DR of the Revenue has primarily reiterated the stand taken by the Assessing Officer/DRP. 18. After giving our thoughtful consideration to the submission of the parties and perusing the judicial decisions relied upon by the Ld. AR, we find that the issue involved in the present appeal is no longer res integra. We note that coordinate bench of ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) has held that it is only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. DRP had already given instruction to the Assessing Officer to examine whether the assessee had included unbilled revenue in his turnover and offered for tax or not. We note that the Assessing Officer had not followed the direction of the ld DRP in right perspective and he did not examine accounts of the assessee to find out whether the assessee had offered the same for taxation or not. Therefore, now we direct the Assessing Officer/TPO to examine the books of accounts of the assessee and if the assessee has included the turnover on accrual basis of accounting and offered for taxation then the addition should not be made or if this unbilled revenue has not been included in the Assessment Year under consideration and has been included in the subsequent Assessment Year, the same fact should also be examined that the assessee has offered for taxation the said unbilled revenue in subsequent year. Therefore, we direct the Assessing Officer to examine this fact with respect to the books of accounts, we also direct the assessee to submit relevant documents and books of accounts to substantiate his claim before the Assessing Officer, therefore, we allow this ground for statistica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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