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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI ANIL CHATURVEDI, AM & SHRI PARTHA SARATHI CHAUDHURY, JM
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:
2 ITA No. 388/PUN/2017 A.Y.2012-13
“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
3 ITA No. 388/PUN/2017 A.Y.2012-13
Erroneous rejection of multiple year data of the comparable companies, though the Assessee complies with the proviso to Rule 10B(4) of the Income Tax Rules, 1962 7.1 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 not considering the multiple year data i.e. data available at the time of undertaking the transfer pricing study for determining the arm's length price of international transaction pertaining to IT enabled and market support services, though the Assessee complies with the proviso to Rule 10B (4) of the Income Tax Rules, 1962. 8. Non-granting of risk adjustment 8.1 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 not granting and rejecting the market risk adjustment submitted by the Appellant by comparing full- fledged risk bearing entities with the appellant’s captive operatives. The Appellant craves leave to add, alter, vary, omit, substantiate or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Hon'ble Income Tax Appellate Tribunal to decide this appeal according to law.”
The brief facts in this case are that : M/s. Cummins Turbo Technologies
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.
The first ground of appeal of the assessee is general in nature and hence,
no adjudication is required.
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With regard to the ground No. 2.1, the Assessing Officer did not
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.
At the time of hearing, the Ld. AR of the assessee invited our attention to
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.”
5 ITA No. 388/PUN/2017 A.Y.2012-13
The Ld. AR further submitted that these directions of the DRP were not
followed by the TPO till date.
We have perused the case record and heard the rival contentions and
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.
With regard to ground No. 2.2, the grievance is that the Assessing Officer
and DRP considered the foreign exchange gain as non-operating income while
computing the PLI of the assessee.
At the time of hearing, the Ld. AR appraised the Bench that the issue is
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.
We have perused the case record and considered the submissions as
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
6 ITA No. 388/PUN/2017 A.Y.2012-13
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.
7 ITA No. 388/PUN/2017 A.Y.2012-13
The Ld. AR of the assessee further submitted that if ground No.6 of
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.
The Ld. AR of the assessee appraised the Bench to page No. 130 of the
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
8 ITA No. 388/PUN/2017 A.Y.2012-13
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%
9 ITA No. 388/PUN/2017 A.Y.2012-13
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.
Coming to the first concern Excel Infoways Ltd., wherein the assessee points out that the said concern was not to be selected as comparable because of its fluctuating margins. The learned Authorized Representative for the assessee has filed tabulated details in this regard, wherein the margins of said concern being drastically dropped from 267.31% in earlier years to 41.48% during the year under consideration. The year-wise margins of said concern are as under:-
Financial Year OP/TC margin 2008-09 247.74% 2009-10 267.31% 2010-11 238.71% 2011-12 41.48%
Further, the said concern had closed down its ITES and BPO segment in financial year 2011-12 on account of global recession. We hold that the said concern which is in the process of closing down its ITES segment and also because of the factum of fluctuating margins, could not be selected as functionally comparable to the assessee. In this regard, we find support from the ratio laid down by the Hon’ble High Court of Gujarat in Pr. CIT Vs. Allscripts India Pvt. Ltd. in Income Tax Appeal No.258 of 2016 and Pune Bench of Tribunal in TIBCO Software India Pvt. Ltd. Vs. DCIT in ITA Nos.276/PUN/2015 & cross appeal in ITA No.334/PUN/2015, relating to assessment year 2010-11, order dated 31.01.2017 and Qlogic India Pvt. Ltd. Vs. DCIT in ITA No.227/PUN/2014, relating to assessment year 2009-10, order dated 21.10.2014. Another factor which has been pointed out by the learned Authorized Representative for the assessee is low employee cost ratio of the concern Excel Infoways Ltd.
10 ITA No. 388/PUN/2017 A.Y.2012-13
In the ITES segment, it is an admitted position that the same is oriented involving high employee cost. In case filter of employee cost is applied and concern is found to have low employee cost on sales ratio, then such a concern fails the filter and cannot be selected as comparable. Such is the proposition laid down by the Mumbai Bench of Tribunal in Goldman Sachs Services (P.) Ltd. Vs. ITO (supra). Applying the said proposition to the facts of present case, we find that the assessee had shown employees cost of 47.75%, whereas the learned Authorized Representative for the assessee points out that the employee cost ratio of Excel Infoways Ltd. and also of Universal Print Systems Ltd. was less than 25% and hence, such concern could not be selected as comparable. 19. The learned Authorized Representative for the assessee fairly pointed out that low employee cost to sales ratio may be verified by the Assessing Officer in respect of both the concerns. Accordingly, we direct the Assessing Officer to verify the claim of assessee in this regard and in case the employee cost to sales ratio was less than 25%, then both the concerns have to be excluded from final set of comparables. In respect of Excel Infoways Ltd., we have already held the same to be not comparable on account of its fluctuating margins. However, in case, it fails the low employee cost filter, then also the said concern cannot be picked up as comparable. Similarly, the employee cost ratio vis-à-vis sales ratio of Universal Print Systems Ltd. needs verification and in case it is less than 25%, then the said concern is not to be included in the final list of comparables. The Assessing Officer shall afford reasonable opportunity to the assessee and after verification, determine the arm's length price of international transactions.”
We have perused the case record and judicial pronouncements placed
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.
11 ITA No. 388/PUN/2017 A.Y.2012-13
That taking the submissions of the Ld. AR in account, wherein he has submitted that once the ground No.6 is adjudicated, other remaining grounds become academic. Therefore, since the ground No. 6 has been allowed for statistical purposes, remaining grounds become academic in nature.
In the combined result, appeal of the assessee is partly allowed for statistical purpose.
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.
12 ITA No. 388/PUN/2017 A.Y.2012-13
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