CUMMINS TURBO TECHNOLOGIES LTD.,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX, PUNE

आदेश / ORDER

PER PARTHA SARATHI CHAUDHURY, JM :

This appeal preferred by assessee emanates from the order of the Dy. CIT (IT)-1, Pune passed u/s. 143(3) r.w.s.144 r.w.s.92CA of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) as per following grounds of appeal:

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“1. Transfer pricing adjustment of Rs. 2,38,36,922/- 1.1 The learned Assessing Officer pursuant to the directions of Hon'ble DRP erred in law and on the facts and in circumstances of the case in making an adjustment amounting to Rs.23,836,992/- to the value of international transactions entered into by the Appellant with its associated enterprises in respect of provision of IT enabled and marketing support services. 2. Not considering write back of provision for gratuity, provision for leave entitlement and foreign exchange gain to be an "operating income" while calculating the PLI of the assessee 2.1 The learned Assessing Officer erred in law and on the facts and in circumstances of the case in not implementing the directions of Hon'ble DRP while computing the PLI of the Assessee by not considering the write back of earlier years provisions of gratuity and leave entitlement as operating items. 2.2 The learned Assessing Officer and Hon'ble DRP erred in law and on the facts and in circumstances of the case in considering foreign exchange gain as non-operating income while computing the PLI of the Assessee. 3. Erroneous consideration of operating margin of Excel Info ways ltd and Microgenetics Systems ltd 3.1 The learned Assessing Officer pursuant to the direction of learned DRP erred in law and on the facts and in circumstances of the case in considering incorrect PLI of Excel Info ways Ltd and Microgenetics Systems Ltd. 4. Erroneous calculation of working capital adjustment 4.1 The learned Assessing Officer, pursuant to the directions of the Hon'ble DRP has erred on the facts and in circumstances of the case in incorrectly computing of working capital adjustment. 5. Erroneous rejection of a comparable companies 5.1 The learned Assessing Officer pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in rejecting the following functionally comparable companies selected by the Appellant in its transfer pricing study report. • CG-VAK Software and Exports Limited • Jeevan Scientific Technology Limited • Informed Technologies Limited 6. Inclusion of functionally non-comparable companies 6.1 The learned Assessing Officer pursuant to the directions of learned DRP erred in law and on the facts and in circumstances of the case in selecting/including the following functionally non- comparable companies as comparable in the final set of comparable companies. • Excel Info ways Limited • Ninestar Information Technologies Limited • Universal Print Systems Limited

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Ltd., the assessee filed electronically its return of income for assessment year

2012-13 on 30.11.2012 declaring total income of Rs.19,73,320/- under the

normal provision of the Act and Rs.1,53,92,013/- under the provisions of

section 115JB of the Act. Thus, this case was taken for scrutiny and notice

u/s. 143(2) and u/s.142 (1) of the Act were issued and served to the assessee.

The assessment was completed u/s. 143(3) r.w.s.144 r.w.s.92CA of the Act on

which certain additions/disallowances were made as appearing in the

assessment order.

no adjudication is required.

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implement the directions of Dispute Resolution Panel (DRP) while computing

the Profit Level Indicator (PLI) of the assessee by not considering the write

back of earlier year’s provisions of gratuity and leave entitlement as operating

items.

the assessment order wherein reference to DRP’s directions was made in Page

19 and it was submitted by the Ld. AR that in principle, the DRP had allowed

this ground subject to verification. However, this direction of DRP was not

followed by the Transfer Pricing Officer. In the column (b) treatment of write

back provisions related to gratuity and leave encashment as non operating

item, the TPO has held “any provision which is made on a scientific basis has

to be allowed as a deduction. The assessee submitted that in earlier year(s),

the provisions made for gratuity and leave encashment were claimed and

allowed as a deduction by the TPO, i.e, treated as an operating item. The

assessee, therefore, contended that the write back of the said provisions

during the year under consideration should also be treated as an operating

item.

In principle, we agree with the contention of the assessee. The fact

that the said provisions made were allowed as a deduction suggested that the

AO had found them to have been made on a scientific basis and, therefore,

allowed it as a deduction, i.e. treated it as an operating item. Now for the year

under consideration, when the said provisions are written back, as a natural

corollary, the write backs should also be treated as an operating income. The

AO/TPO is directed to verify the facts as claimed by the assessee and treat

the write back of provision for gratuity and leave entitlement as' operating

income, if the facts claimed by the assessee are found to be correct.”

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followed by the TPO till date.

going through the Para 2.2 of the assessment order where reference was

made to the DRP, it is absolutely clear that directions have been given for

verification to the TPO. The Ld. AR stated that said directions were not

followed to which Ld. DR has also conceded. Accordingly, for the interest of

justice, we direct the TPO on this ground to follow the directions given by

DRP and pass a suitable order after verification of relevant facts. Hence, the

ground No. 2.1 is, thus, allowed for statistical purposes.

and DRP considered the foreign exchange gain as non-operating income while

computing the PLI of the assessee.

covered by the following three decisions of Pune bench of the Tribunal.

i) In the case of Approva Systems Pvt. Ltd. Vs. CIT, ITA No.1788/PN/2013. ii) In the case of Wika Instruments India Pvt. Ltd. Vs. DCIT, ITA No.760/PN/2015 iii) In the case of Digital Group Infotech Pvt. Ltd. Vs. DCIT, ITA No.475/PN/2017.

advanced before us. We have also perused the decisions of the Pune Bench of

the Tribunal in the case of Approva Systems Pvt. Ltd. Vs. CIT (supra.) wherein

at page 42 in Para 19.2, it is stated that correct calculation of OP/TC by

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treating foreign gain/loss as operating in nature. The relevant parts of the

order read as under:

“ 22. We have considered the rival arguments made by both the sides. As reproduced above in para 20 in the arguments advanced by the Ld. Counsel for the assessee, we find the Delhi Bench of the Tribunal in the case of Westfalia Separtator India Pvt. Ltd., (Supra) following various decisions has held that foreign exchange loss/gain is a part of the operating revenue/cost. In the following decisions also (filed in the paper book by the assessee), it has been held that foreign exchange fluctuation cannot be excluded from the computation of the operating margin of the assessee company : 1. SAP Labs India P. Ltd. Vs. ACIT – 44 SOT 156 (bang) 2. Prakash I Shah reported in (2008) 115 ITD 167 (Mum) (SB) 3. Smt. Sujata Grover Vs. Dy.CIT (2002) 74 TTJ (Del) 347 4. M/s. S. Narendra Vs. Addl.CIT – ITA No.6839/Mum/2012 – Mumbai Tribunal 5. M/s. Mercedes Benz Research & development India Pvt. Ltd. Vs. DCIT (IT/TP A.No.1222/Bang/2011 –Bangalore Tribunal 6. M/s. Trilogy E-Business Software India Private Ltd., Vs. DCIT, ITA No.1054/Bang/2011 – Bangalore Tribunal 7. Sumit Diamond (India) Pvt. Ltd. Vs. ACIT – ITA No.7148/Mum/2012 – Mumbai Tribunal 8. M/s. Foursoft Ltd. Vs. The Dy.CIT – ITA No.1495/Hyd/2010 9. Techbooks International Pvt. Ltd. Vs. ACIT – ITA No.722 – Delhi Tribunal 10.M/s. CISCO Systems (India) Private Ltd. Vs. The Dy.CIT-IT/TP A.No.271/Bang/2014 – Bangalore Tribunal 11. M/s. Midteck (India) Ltd. Vs. The Dy.CIT-IT(TP) A.No.70/Bang/2014 – Bangalore Tribunal 12. M/s. Petro Araldite Pvt. Ltd. The Dy.CIT – ITA No.1538/Mum/2014 – Mumbai Tribunal 13. ACIT Vs. NGC Network India Pvt. Ltd. – ITA No.5307/M/2008

22.1 Respectfully following the decisions of the different Benches of the Tribunal, we set aside the order of the CIT(A) on this issue and direct the Assessing Officer to consider foreign exchange fluctuation gain as part of the operating income of the assessee.

Therefore, though the TPO and DRP have stated that foreign exchange

fluctuation gain/loss as non operating income, however, following the

decision of the Co-ordinate Bench in the aforesaid cases, where it is clearly

held that the Assessing Officer to consider foreign exchange fluctuation gain

as part of the operating income of the assessee. Respectfully, following the

decisions, we allow this ground of appeal. Hence, ground No. 2.2 raised by

assessee in appeal is allowed.

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appeal is decided in favour of the assessee then other remaining grounds

become academic in nature. In view of the matter, we are going on hearing of

ground No. 6 which relates inclusion of functionally non-comparable

companies. The Assessing Officer in pursuant to the directions of DRP

selected following functionally non comparable companies as comparable in

the final set of comparable companies:

i) Excel Info ways Limited. ii) Ninestar Information Technologies Limited. iii) Universal Print Systems Limited.

paper book in the order of Pune Bench of the Tribunal in ITA

No.2847/PUN/2016 for assessment year 2012-13 wherein on the issue, it

was opined that ITes segment, wherein the assessee was cost plus entity

providing services with mark up of 10% on cost. The assessee had

benchmarked the transactions using TNMM method. However, the TPO had

applied additional filters for selection of comparable companies and accepted

only two concerns from assessee’s set of comparable selected. The learned

Authorized Representative for the assessee pointed out that four new

comparables were picked up by the TPO and the issue which is raised vide

ground of appeal No.3 was against inclusion of two concerns Excel Infoways

Ltd. and Universal Print Systems Ltd. He pointed out that the concern Excel

Infoways Ltd. could not be selected as it was showing fluctuating margins in

preceding years. It was further pointed out by the assessee that the annual

report of the said company shows that ITES and BPO segments were closed

in financial year 2011-12 on account of global recession and planned to

diversify into real estate business. Another distinguishing feature was the

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low employee cost filter. The learned Authorized Representative for the

assessee pointed out that employee cost over sales ratio of the said concern

was less than 25% as against employee cost of 47.75% of assessee. In this

regard, the learned Authorized Representative for the assessee placed reliance

on the ratio laid down by the Mumbai Bench of Tribunal in Goldman Sachs

Services (P.) Ltd. Vs. ITO (2015) 69 SOT 28 (Mumbai – Trib.). In respect of

second concern Universal Print Systems Ltd., the learned Authorized

Representative for the assessee again pointed out that the said concern was

also not comparable because of its low employee cost filter. He further

pointed out that the Assessing Officer may verify the employee cost filter of

the said concerns and if it were less than 25%, then the same merits to be

excluded from final list of comparables. On this issue, the Co-ordinate Bench

of the Tribunal has held as under:

“14. We have heard the rival contentions and perused the record. The assessee had provided Oracle support services to Emerson Climate Technologies Incorporation, USA. The assessee claimed that it was providing back office support activity in the nature of ITES services to its associated enterprises, wherein it had earned mark up of 10% on cost. The assessee had benchmarked the said transaction by using TNMM method after selecting seven external comparable companies having mean margin of 12.12%. The TPO during TP proceedings, however, applied additional filters for selection of comparable companies and retained two concerns which were selected by the assessee i.e. Jindal Intellicom Pvt. Ltd. and e4e Healthcare Services Ltd. However, the TPO introduced additional four more concerns and the final set of comparables were drawn up as under:-

OP/TC Sr. No. Name of Comparable Company As per TPO 1 Jindal Intellicom Ltd. 2.80% 2 Microgenetic Systems Ltd. 19.61% 3 e4e Healthcare Services Ltd. 19.48% 4 Ninestars Information Technologies Ltd. 19.57% 5 Excel Infoways Limited 41.48% 6 Universal Print Systems Limited 59.40%

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Arithmetic Mean Margin (ALP) 27.05%

The TPO thus, made an upward adjustment of � 43,30,700/- in 15. the segment of provision of ITES services. The DRP rejected the contention of assessee on inclusion / exclusion of certain comparables. However, it directed the TPO to adopt correct operating margins of comparable companies. Consequently, the mean margins of comparable companies was re-computed at 23.13% resulting in upward adjustment of Rs. 33,40,000/-. The assessee is in appeal against the said adjustment made in ITES segment. The plea of assessee during the course of hearing was that in case two concerns i.e. Excel Infoways Ltd. and Universal Print Systems Ltd. were excluded from the final list of comparables, then the margins shown by the assessee and mean margins of comparables were within +/- 5% range and no TP adjustment had to be made in the hands of assessee.

Financial Year OP/TC margin 2008-09 247.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48%

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before us and on the issue, the Tribunal has directed to verify the claim of the

assessee whether in case employees cost to sales ratio was less than 25%,

then both the concerns have to be excluded from final set of comparables. So

far as Excel Infoways Ltd. is concerned, the Tribunal has held that same is

not comparable on account of its fluctuation margins. With regard to

Universal Print Systems Ltd., it also needs verification and in case it is less

than 25% then the said concern is not be included in the final list of

comparables.

Respectfully following the decision of the Co-ordinate Bench of the

Tribunal, we restore the matter for verification to the Assessing Officer to

adjudicate this issue afresh after providing reasonable opportunity of hearing

to the assessee. Thus, ground No. 6 raised in appeal by assessee is allowed

for statistical purposes.

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Order pronounced on 21st day of January, 2019.

Sd/- Sd/- ANIL CHATURVEDI PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 21st January, 2019. SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to :

अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-13, Pune. 4. The Pr. CIT-5, Pune. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

// True Copy // आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.

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Date 1 Draft dictated on 08.01.2019 Sr.PS/PS 2 Draft placed before author 09.01.2019 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order