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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBE
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBE
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Assessment years : 2007-08 & 2008-09
M/s. Wipro GE Healthcare P. Ltd., Vs. The Deputy Commissioner of (for the merged entity of GE Medical Income Tax, Systems India P. Ltd), Circle 11(3), Plot No.4, Kadugodi Industrial Area, Bangalore. Bangalore – 560 067. PAN: AAACG 7655G APPELLANT RESPONDENT
Appellant by : Shri K.R. Pradeep, Advocate Respondent by : Shri C.H. Sundar Rao, CIT-I(DR)(ITAT) Bangalore.
Date of hearing : 16.09.2019 Date of Pronouncement : 20.09.2019
O R D E R Per N.V. Vasudevan, Vice President
IT(TP)A No.1156/Bang/2011 and IT(TP)A No.1471/Bang/2012 are appeals by the assessee against the final orders of assessment dated 21.09.2011 and 27.09.2012 passed by the Dy.CIT, Circle 11(3), Bangalore u/s. 143(3) r.w.s. 144C of the Income-Tax Act, 1961 [“the Act”] relating to assessment year 2007-08 and 2008-09 respectively.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 2 of 38 IT(TP)A No.1156/Bang/2011
At the time of hearing, the ld. counsel for the assessee made a prayer for restricting adjudication of this appeal only insofar as concise grounds of appeal filed by the assessee before the Tribunal. The concise grounds of appeal read as follows:-
Concise Grounds of Appeal A snap-shot of the detailed Grounds of Appeal is as under: I. Transfer Pricing A. Contract Manufacturing Segment: 1. Cost Plus Method ("CPM") has been taken as the most appropriate method instead of Transactional Net Margin Method ("TNMM"), as applied by the Appellant; 2. functional comparability ought to take precedence over product comparability 3. the comparable companies selected by the TPO is not comparable even based on product comparability; B. Software services segment: 4. The learned AO/learned TPO/Hon'ble DRP erred in determining the ALP of provision of software services and proposing a transfer pricing adjustment of Rs. 71,470,061. 5. The learned AO/learned TPO/Hon'ble DRP erred in: 5.1. in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis 5.2. in adopting the arm's length mark-up to be 23.20 % [working capital adjusted margin]
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 3 of 38 5.3. in taking recourse to Section 133(6) of the Income-tax Act, 1961 ("the Act") 5.4. in considering 25% as the threshold limit for the Related Party Transactions ("RPT") filter. 5.5. in rejecting the upper limit for sales turnover filter proposed by the Appellant without providing any empirical analysis. 5.6. in not maintaining consistency in applying the filters of rejecting companies with software development revenue less than 75% of the total revenue and companies of different year end. 5.7. in upholding the actions of the learned TPO in applying the onsite filter for selection of software comparable companies with the use of the data obtained u/s 133(6) of the Act 5.8. in accepting companies which are not comparable to the appellant 6. That the learned AO/learned TPO/Hon'ble DRP erred in disregarding the use of multiple year data 7. That the learned AO/learned TPO/Hon'ble DRP erred in disregarding the fact that the Appellant has not shifted profits. 8. That Hon'ble DRP erred in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 9. That the learned AO/learned TPO/Hon'ble DRP erred in not allowing the benefits of market risk adjustment to the Appellant. 10. That the learned AO/learned TPO/Hon'ble DRP erred in not allowing the benefit of range of +/- 5%
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 4 of 38 C. Engineering Services and ITES segments: The learned AO/ learned TPO/ Hon'ble DRP erred: 11. in determining the ALP of provision of engineering Services and IT enabled services [ITES] and in proposing a transfer pricing adjustment of Rs.230,203,182/-. 12. in considering the engineering services segment as functionally similar to ITES segment and benchmarking the engineering services segment with ITES comparable companies. 13. in considering the Rule 10 A definition as the basis of functional characterisation of engineering services segment by ignoring the fact that in the earlier years they had accepted the ALP of engineering services segment by benchmarking with engineering services comparable companies instead of ITES companies. 14. Erred in rejecting the TP documentation, and in doing so has grossly erred: 14.1. in upholding the rejection of comparability analysis conducted in the TP documentation and performing a fresh comparability analysis. 14.2. in adopting the arm's length mark up to be 28.30 %. [working capital adjusted margin] pertaining to the rendering of engineering services and ITES 14.3. in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Act, which in many instances are inconsistent with the data disclosed in audited reports. 14.4. in considering 25% as the threshold limit for the RPT filter. 14.5. inconsistency in applying the filters
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 5 of 38 14.6. in accepting companies which are functionally not comparable 14.7. in accepting companies having RPT exceeding 10% 15. in disregarding the use of multiple year data. 16. in concluding that the Appellant is exposed to single customer risk without evaluating the business arrangement of the Appellant. 17. erred in not allowing the benefits of market risk adjustment to the Appellant. 18. erred in not allowing the benefit of range of +/- 5% Corporate Tax Re- computation of deduction under section 10A of the Income Tax Act, 1961 (‘Act') Ignoring the concept of parity between Export Turnover and Total Turnover enunciated by the High Courts and not removing the expenses from Total Turnover also, when they are removed from Export Turnover. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.”
The assessee has also filed application for admission of certain additional grounds, but admission and adjudication of those additional grounds may not be necessary as the issues emerging in the concise grounds of appeal need to be remanded to the TPO for fresh adjudication and the assessee is always at liberty to raise the issues sought to be raised in the additional grounds in the set aside proceedings before the AO/TPO.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 6 of 38
The assessee is a company engaged in the business of manufacturing of medical diagnostic equipment parts. The assessee had international transactions with Associated Enterprise and therefore the payments/receipts from the AE in the international transaction has to satisfy the Arms Length Price (ALP) as laid down in the provisions of section 92 of the Act. There were basically 4 segments for which the arm’s length price (ALP) had to be determined viz., (1) Contract Manufacturing Segment, (2) Software services (3) Information Technology Enabled Services [ITeS], and (4) Engineering Services. The break up of the details of international transactions and the operating profit on sales and operating profit on cost in each of the segment was as follows:-
Segmental results : Description Manufacturing Software ITES Engineering TOTAL services 332,90,62,967 39,45,24,963 5,37,54,606 111,51,83,463 489,25,25,999 Revenues 301,43,33,165 37,57,38,061 4,83,18,549 103,35,10,225 447,19,00,000 cost 31,47,29,802 1,87,86,902 54,36,057 8,16,73,238 42,06,26,000 profit 9.45% 4.76% 10.11% 7.32% 8.60% OP / Sales 10.44% 5.00% 11.25% 7.90% 9.41% OP / Cost
We shall now deal with each of the segments and the issues raised by the assessee in the grounds of appeal.
Contract Manufacturing Segment
As far as contract manufacturing segment is concerned, the TPO determined the ALP by adopting the Cost Price Method [CPM] as the Most Appropriate Method [MAM]. The determination of ALP by applying CPM was made by the TPO as follows:-
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 7 of 38
“11.8 Determination of Arm's Length Price: Mean Arm's length Gross Margin 41.89% on Cost Less: Adjustment for selling & distribution expenses 7.26% on Cost Adjusted mean Gross Margin 34.63% on Cost In the case of taxpayer, the cost of production is arrived at as under (Based on the details given in Annexure C12 of the TP study) Description Amount (Rs) Sales 3329062967 Change in stock NA Raw material expenses 270,73,42,070 Packaging expenses / consumables 3,20,20,503 Purchase of finished goods 0 Power, fuel & water charges NA Compensation to employees 11,96,42,332 Indirect taxes NA Royalties, technical know-how 99,28,847 fees, etc. Lease rent & other rent NA Repairs & maintenance 4,03,94,544 Insurance premium paid 0 Outsourced mfg. jobs (incl. job 0 works, etc.) Depreciation 5,46,58,810 Cost of Production 296,39,87,106 Gross Margin 36,50,75,861 Gross Margin to Cost of 12.32% Production
Gross Cost incurred for contract manufacturing activity (as A Rs. 296,39,87,106/- arrived at above) Arithmetical mean gross markup on cost B 34.63% Arms length Price @ 134.63% of the Cost C Rs. 399,04,15,841/- Price shown in the international transactions D Rs. 332,90,62,967/- Shortfall being adjustment u/s.92CA D - C Rs. 66,13,52,874/-
The above difference of Rs. 66,13,52,874/- is treated as an adjustment under manufacturing segment.”
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 8 of 38 7. It is not in dispute before us that the assessee objected to the aforesaid adjustment made by the TPO and the DRP considered the price received in the international transaction as at arm’s length. Therefore, the grievance projected by the assessee in concise grounds of appeal No.1.1 to 1.4 will not survive. Nevertheless, the ld. counsel for the assessee submitted that in AY 2006-07, the Tribunal in assessee’s own case in IT(TP)A No.1414/Bang/2010 by its order dated 23.6.2017 vide para 4 held that TNMM will be the most appropriate method for determining ALP and restored the issue of determination of ALP to AO/TPO for fresh consideration. It is the stand of assessee before that even applying TNMM, the transaction is at arm’s length and has in this regard placed reliance on the submissions filed on 18.1.2018 before us in the form of synopsis. The ld. counsel for the assessee made a request that accepting the submissions made in the synopsis, it should be held that even as per TNMM, no adjustment is required in determination of ALP.
We have considered the submissions and are of the view that the grievance projected by the assessee in this regard is purely academic because addition made consequent to determination of ALP has been deleted by the DRP and the revenue is not in appeal against the order of DRP. It appears to us that this ground has been taken by the assessee purely by way of abundant caution and we are of the view that no adjudication is required on this issue as raised in the concise grounds of appeal and recording the submissions of the assessee as above would be sufficient. Consequently, the grounds 1 to 3 are dismissed as academic and not requiring any adjudication.
Software services segment
As far as software services segment is concerned, the TPO computed the ALP of the international transaction of rendering software
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 9 of 38 development services to AE by choosing 26 comparable companies as per the chart given as Annexure-I to this order.
The TPO determined the ALP as follows:-
“21.8 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI : 25.14% Less: Working capital adjustment (Annexure-C) : 1.94% Adj. Arithmetic mean PLI 23.20% Arm's Length Price:
Operating Cost (Rs. 37,57,38,061/- + Recovery of Rs. 38,90,38,637/- expenses received of Rs. 1,33,00,576/-) Arm's Length Margin 23.20% of the Operating Cost Arm's Length Price (ALP) @123.20% of operating Rs. 47,92,95,600/- cost
21.9 Price Received vis-à-vis the Arm's Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price @ 123.20% of operating cost Rs. 47,92,95,600/- Price charged in the international transactions (Rs. 39,45,24,963/- Recovery of expenses received of Rs. Rs. 40,78,25,539/- 1,33,00,576/-) Shortfall being adjustment u/s 92CA Rs. 7,14,70,061/-
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 10 of 38 The above shortfall of Rs. 7,14,70,061/- is treated as transfer pricing adjustment u/s 92CA. If any filter or criteria applied by the taxpayer for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept / reject matrix changes resulting in a new comparable set including those companies which are not taken either by the taxpayer or by the TPO in its final comparable set and which may not be finding place in this order. In essence, any disturbance in any one of the criteria of the taxpayer or the TPO results in fresh comparability analysis and the TPO should be given an opportunity if such situation arises. Based on the above detailed discussion, the arm's length price of the international transactions pertaining to providing software development services is determined at Rs. 47,92,95,600/- (including recovery expenses received) instead of Rs. 40,78,25,539/- (including recovery expenses received) charged in its international transactions resulting in an adjustment to the extent of Rs. 7,14,70,061/-.” 11. The assessee preferred objections before the DRP, but was not successful in getting the addition deleted. Aggrieved by the order of DRP, which was incorporated in the final order of assessment by the AO, the assessee has raised concise grounds 4 to 10. The ld. counsel for the assessee submitted that similar addition made by the AO in the AY 2006- 07 was subject matter of appeal by the assessee before the Tribunal in IT(TP)A No.1414/Bang/2010 and the Tribunal by order dated 23.6.2017 set aside the order of DRP/AO and remanded the issue to TPO for fresh consideration. In the light of the decision of the Tribunal for AY 2006-07, the issue requires to be set aside to the AO. The ld. counsel for the assessee also prayed that the TPO should be directed to apply turnover filter on the higher side also in the light of decision of ITAT Bangalore Benches in the case of Cenduit India Services Ltd. in IT(TP)A No.59/Bang/2016 dated 24.04.2019. We direct the AO to consider the claim of assessee in this regard in accordance with the law. The TPO shall
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 11 of 38
decide the issue afresh keeping in mind the directions of the Tribunal for AY 2006-07 and after affording opportunity of being heard to the assessee.
Engineering Services & ITeS
As far as the dispute in the Engineering Services & ITeS segment is concerned, the concise grounds of appeal are grounds 11 to 18. The assessee rendered ITeS as well as engineering services. It is the plea of assessee that engineering segment is different from ITeS and that the TPO was not justified in treating the engineering services segment also as ITeS. The computation of ALP in the engineering segment done by the TPO was as follows:-
Net margin on cost earned by GEMS India for Engineering
Particulars Amount (IN R) Operating Income 111,51,83,463 Operating Expenses 103,35,10,225 Operating Profit (Op. Income - Op. Expenses) 8,16,73,238 Operating margin to total cost (OP/TC) 7.90%
Comparable companies selected by GEMS India in the engineering segment and their arithmetic mean S.No. Company name Operating Margin Geometric Software Solutions Co. Ltd. 8.13% 1 2 Infotech Enterprises Ltd. 18.45% 10.66% 3 Larsen & Toubro Infotech Ltd. 4 Lurgi India Co. Ltd. -3.90% Mean 8.33% [Page 125 of Volume I of Paper Book] 13. The Assessee claimed that its profit margins are within the +/- 5% variation to the profit margins of comparable companies permitted under the provisions of Sec.92C(2) of the Act.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 12 of 38 14. The TPO however held that Engineering services provided by the Assessee was akin to ITES and therefore he combined the financials of both ITES and Engineering services segment and by doing so arrived at a OP/OC of 8.05%. The Assessee had benchmarked the ITES and Engineering services segment separately in its TP Analysis. But this was disregarded by the TPO.
The TPO selected 27 comparable companies in the ITES segment and arrived at an average arithmetic mean profit margin of 30.21% and after allowing a reduction of 1.91% determined the shortfall being adjustment u/s.92CA at Rs.23,02,03,182/- in the combined ITES and Engineering services segment. The calculations of the TPO in this regard are found at Paragraph 39.5 & 39.6 of his order. The DRP confirmed the action of the TPO.
The learned counsel for the Assessee submitted that the services provided by Assessee in the Engineering services segment were in the nature of engineering drawing/designs (both 2D and 3D models) like CAD, CAM etc. The engineering segment has been analyzed independently in the TP report and in the prior years by the Learned TPO, Hon'ble DRP and CIT (Appeals). The TPO until AY 2006-07 has not disputed the separate analysis of engineering segment and has also accepted the comparable companies provided in the TP report of the Assessee. The Assessee submitted that knowledge services do not constitute CAD /CAM driven engineering services. Engineering services is a separate recognized service line which can be distinctly demarcated from the IT Services, BPO services or KPO services. Hence, engineering services cannot be ideally compared with KPO or BPO services. He also brought to our notice that in the preceding years i.e. AY 2004-05, AY 2005-06 and AY 2006-07, the Learned TPO, Hon'ble DRP and Hon'ble CIT(Appeals) had accepted the
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 13 of 38
engineering services company as comparable companies proposed by the Assessee and have not combined or compared it with the ITES comparable companies. Placing reliance on the prior year orders of DRP AY 2006-07 and CIT(A) AY 2004-05, he gave the computation of net margin to total cost of the comparable companies for AY 2007-08 as given in the table below.
Working capital Particulars Source Unadjusted adjusted margin margin (OP/TC) (OP/TC) FY 2006-07 FY 2006-07 UB Engineering Ltd. CIT(A) order -24.43% -25.71% AY 04-05 Hi Quality Steels Ltd. 2.45% 2.36% RJ Shah & Co. Ltd. 21.65% 9.34% Raunaq International Ltd. 8.55% 7.59% TCE Consulting Engineers DRP order 22.69% 21.18% AY 06-07 Ltd.
Average 6.18% 2.95%
The learned counsel for the Assessee claimed that the adjusted operating profit to total cost of comparable companies was 6.28%. The Assessee’s margin for the engineering segment was 7.90% which was higher than the aforementioned adjusted margins of the comparable companies. Based on the above submission, he pleaded that the engineering service segment is not comparable to ITES, BPO or KPO services and hence it will not be appropriate to aggregate the engineering service segment with the ITES segment. The learned DR relied on the order of the TPO/DRP.
We have heard the submissions and we find that the TPO/DRP did not accept the stand taken by the assessee and it considered engineering segment also as part of ITeS, despite a separate TP analysis having been carried out by the assessee in engineering services and ITeS. It is also the
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 14 of 38 plea of assessee that engineering services and ITeS have been considered as separate segments in the safe harbour guidelines framed under the Income-tax Rules, 1968 and this also supports the plea of assessee. We also find that in the preceding years 2004-05, 2005-06 & 2006-07, the engineering segment has been considered separately from the ITeS. The ld. DR, however, pointed out that the services rendered by the assessee were akin to ITeS and the conclusion of the revenue authorities have to be upheld.
After considering the rival submissions, we are of the view that rule of consistency will apply and consistent with the approach adopted for the AYs 2004-05 to 2006-07, engineering services segment should be considered as distinct from ITeS and comparable companies chosen accordingly. We hold and direct accordingly and set aside the orders of the DRP and remand the issue for fresh consideration by the TPO/AO in accordance with the above observations and in accordance with law, after affording opportunity of being heard to the assessee.
The only other ground that remains for consideration in the concise grounds of appeal is the issue with regard to exclusion of certain items of expenditure incurred in foreign exchange from the total turnover without excluding the same from the export turnover.
The Assessee was entitled to claim deduction u/s.10A of the Act on the profits derived from its Software Technology Parks of India (STPI) registered unit. Sec.10A(4) provides the methodology of computation of deduction u/s.10A of the Act and it lays down that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 15 of 38 undertaking. Export turnover has been defined under Explanation 2 (iv) to Sec.10A as:
"export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.”
While computing the deduction u/s.10A of the Act, the AO noticed that during the relevant assessment year, the Assessee had incurred certain expenditure in foreign currency, which was not reduced from the export turnover while computing deduction under section 10A of the Income Tax Act, 1961. The AO therefore excluded the aforesaid sum from the export turnover without excluding them from the total turnover. As a result, the deduction claimed u/s.10A of the Act by the Assessee was allowed at a lesser sum than what was claimed by the Assessee. It was the plea of the Assessee in the appeal against the assessment order before the CIT(A) that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Communication expenses were incurred not for export of computer software outside India and therefore the exclusion from export turnover as done by the AO was not correct. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 16 of 38 regard has placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) wherein it was held that while computing deduction u/s.10A of the Act expenses that are reduced from the export turnover should also be reduced from the total turnover. The DRP did not allow the claim of the Assessee.
Aggrieved by the order of DRP, the Assessee is in appeal before the Tribunal. The learned DR relied on the order of the DRP.
We have considered his submission. Taking into consideration the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that expenditure incurred in foreign currency should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon’ble Karnataka High Court has been upheld by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 & Ors. dated 24.04.2018. In view of the above, we allow the alternative plea of the Assessee.
In the result, this appeal of the assessee is partly allowed.
IT(TP)A.No.1471/B/2012(AY 2008-09)
As far as this appeal by the Assessee for AY 2008-09 is concerned, the concise grounds of appeal filed by the Assessee that needs adjudication are as follows:
“Concise Grounds of Appeal A snap shot of the Detailed Grounds of Appeal is as under:
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 17 of 38 I. Transfer pricing 1. Contract Manufacturing Segment: 1.1. The learned DRP has taken a contrary stand compared to the position taken by the Honourable DRP and CIT(A) in the earlier years; 1.2. Cost Plus Method ("CPM") has been taken as the most appropriate method instead of ("TNMM"), as applied by the Appellant; 1.3. functional comparability ought to take precedence over product comparability; 1.4. the comparables selected by the TPO is not comparable even based on product comparability; 1.5. erred in withdrawing the average selling and marketing adjustment granted by the learned TPO in the transfer pricing order without issue of any notice; 1.6. if TNMM is applied, the margins will be within +/-5 percent range at ALP; and 1.7. Has not provided the working capital adjustment and selling and marketing adjustment under CPM and a contrary position has been adopted against the position approved in the preceding years by the Honourable DRP and CIT(A).
Engineering Services: 2.1. The learned DRP has taken a contrary stand compared to the position taken by the Honourable DRP and CIT(A) in the earlier years; 2.2. considering the engineering services segment as functionally similar to ITES segment and benchmarking the engineering services segment with ITES comparable companies, though ; 2.3. the Appellant has provided two separate benchmarking analysis; and
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 18 of 38 2.4. Our stand was accepted in the earlier years and a contrary stand has been taken in this year, without adducing any reason. 3. ITES and Software services segments: The Honourable DRP and the learned AO have erred in: 3.1. changing the functional characterisation of engineering services segment, thereby taking a contrary stand this year, without any reason; 3.2. in not granting adjustment for market; 3.3. in taking a RPT limit of 25%, which is against the guidance set in several case laws, including those of the Hon'ble Bangalore Tribunal; 3.4. inconsistency in applying filters like export earnings etc. and not applying necessary filters like employee cost filters, which are again not consistent with the guidance of several case laws; 3.5. upholding the actions of the learned TPO in applying the export filter, accepting companies with significant advertisement expenses and research and development expenses and companies having different year end; and 3.6. selecting wrong comparables, inconsistent with the guidance of several case laws.
II. Corporate Tax 1. Re- computation of deduction under section 10A of the Act Ignoring the concept of parity between ET and TT enunciated by the High Courts and not removing the expenses from TT also, when they are removed from ET 2. Disallowance of expenses under section 14A Has Ignored the fact that, the disallowance under section 14A can be made only if the actual expense are incurred in relation to exempt income and the assessee has not incurred any such expenditure.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 19 of 38
III. Prayer In view of the above, the Company would like to submit that, as 92% of the demand has arisen due to contrary stand taken by the Honourable DRP from the earlier years, pressing for payment of such demand would cause undue hardship to the Company. Therefore, request the Honourable bench to post the hearing and grant the relief to Company at the earliest.”
As in AY 2007-08, one of the disputes in this appeal is also determination of ALP in respect of international transactions in the four different segments viz., Contract Manufacturing segment, Engineering Design Services, ITES Segment and SWD services segments. The arguments advanced in AY 2008-09 are also identical to the arguments advanced on these issues in AY 2007-08.
As far as Ground No.1 raised by the Assessee in the grounds of appeal is concerned, the facts are that the Assessee entered into a contract for contract manufacturing with its AE and therefore the said transaction was an international transaction and the price received by the Assessee in the said transaction has to pass the ALP test as laid down in Sec.92 of the Act. The Assessee adopted TNMM as the MAM for determining ALP. The net margin on cost earned by the Assessee in the contract manufacturing segment was as follows:
Operating Income Rs.2,832,793,348 Cost of Production Rs. 2,704,125,868 Gross Profit (Op. Income - Cost of Rs. 128,667,480 Production) Gross Margin on Cost of Production 4.76% Total Operating Expenses Rs. 2,729,518,203 Operating Profit Rs. 103,275,145 Operating /Net margin (OP/TC) 3.78%
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 20 of 38
The Assessee chose comparable companies and the average arithmetic mean profit of such comparable companies after permissible variation u/s.92C(2) was within Arm’s Length Price.
The learned TPO rejected the analysis carried out by the Assessee and rejected all the comparable companies selected in the TP Study. The learned TPO adopted Cost Plus Method ("CPM") as the most appropriate method and granted selling and marketing adjustment for the below mentioned comparable companies. The following Comparable companies were selected by TPO and their arithmetic mean of profit margin was as follows:
SI. Name of the Company Unadjusted No. 1 Alpha X-Ray Technologies (India) 26.96% 2 Artficial Limbs manufacturing 28.09% 3 Centenial Surgical Surture Ltd 56.27% 4 Iscon Surgicals Ltd 18.56% 5 Poly Medicure Ltd 19.56% 6 Shree Pacetronix Ltd 47.99% 7 South India Surgicals Company Limited 33.28% ARITHMETIC MEAN 32.96%
The TPO has granted average marketing adjustment of 7.18% on the above. However no working capital adjustment was granted. The learned TPO imposed an adjustment as shown in the table below.
“Computation of arm's length price by TPO and the adjustment made
Arm's Length Mean Margin 32.96% Less: Marketing Adjustment 7.18% Adjusted mean margin of the comparable companies 25.78% Operating Cost 2,704,125,868 Arm's Length Price (ALP) 134.63% of Operating Cost 34,01,249,516 Price charged in international transactions 2,832,793,348 Short fall being adjustment u/s. 92CA 5,68,456,168
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 21 of 38
The DRP confirmed the order of the TPO. Before us, the learned counsel for the Assessee submitted that working capital adjustment proportionate to the cost of production and selling and marketing adjustment on actual basis ought to have been provided. It was submitted that even after considering the comparable companies selected by the TPO, the price received by the Assessee should be regarded as at ALP, if working capital adjustment and marketing adjustment is allowed at actuals, the details of which are given below. It was submitted that the method of providing adjustments at actuals was also approved by the Hon'ble DRP for AY 2007-08 and AY 2006-07 and the Hon'ble CIT (A) in AY 2005-06 and AY 2004-05 [DRP order for AY 2007-08 and AY 2006-07 and the CIT(A) order for AY 2005-06 and AY 2004-05. Margin of the comparable companies post working capital and selling and marketing adjustment on actuals is as given below:
Company Gross Working Selling & Adjusted Margin/COP Capital Marketing Gross Adjustment Adjustment Margin/COP [A] [B] [C] [D=A-B-C] Artificial Limbs 14.28% 8.76% 10.78% -4.72% 10.620/0 Centennial Surgical 55.39% 7.10% 39.25% 16.94% 3.10% 5.06% 8.93% Poly Medicure Shree Pacetronix 37.21% 9.31% 6.59% 22.06% 22.94% 7.37% 8.86% 6.96% South India Surgicals Co. Ltd Iscon Surgical 17.18% 6.62% 6.04% 4.30% Alpha X-Ray 28.44% 5.92% 10.09% 12.86% Average 27.48% 6.9% 12.4% 8.72% GEMS India 4.76%
It was submitted that if the Assessee’s argument is accepted and the working capital adjusted arithmetic mean of the 7 comparable companies as shown in the tables above i.e. 8.72% is taken, then the same
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 22 of 38
would be within the range of + / - 5% of the Assessee's Net Margin, no TP adjustment is required and therefore the TP adjustment made by the TPO is liable to be quashed. It was further submitted that the TPO adopted Transactional Net Margin Method ("TNMM") as the most appropriate method for AY 2009-10 and AY 2011-12. The ITAT also accepted TNMM as the MAM in Assessee’s own case for AY 2006-07 and the matter was remitted back to the file of the TPO for further verification by the TPO. It was submitted that by adopting TNMM as the most appropriate method for the contract manufacturing segment, the net level margin of the Assessee would be at ALP even considering the TPO’s set of comparable companies. The Margin of the comparable companies adopting TNMM as the most appropriate method, was also given and the same is as follows:
Company OP/TC Artificial Limbs 1.45% Centennial Surgical 55.39% Poly Medicure 4.20% Shree Pacetronix 11.31% 22.94% South India Surgicals Co. Ltd.
Iscon Surgical 8.68% Alpha X-Ray 4.48% Average 6.33%
Range Computation
Particulars Assessee’s 5% -5% Segment Revenue 2,83,27,93,348 2,97,44,33,015 2,69,11,53,680 Cost 2,72,95,18,203 2,72,95,18,203 2,72,95,18,203 Operating 10,32,75,145 244914812 -38364522 Profit OP/OC 3.78% 8.97% -1.41%
Therefore, even if TNMM is considered as the most appropriate method then the operating margin of the company would be within the range of + / -
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 23 of 38 5% of the Assessee's Net Margin, no TP adjustment is required and therefore the TP adjustment made by the TPO is liable to be quashed.
It was also submitted that reimbursement of expenses received should not be included in the cost base. It was argued that reimbursements of expenses received are expenses incurred on behalf of related parties for administrative convenience and only represent "pass through costs". These reimbursements were not received against any specific services rendered by the assessee to its AEs. These were pure cost reimbursements (e.g. travel expenses, hotel stay expenses) which the assessee had incurred behalf of its AE for administrative convenience and later got reimbursed at cost. It was submitted that the reimbursement of expenses received be allowed without a mark-up and not be added back to the operating revenue for the purposes of an adjustment. The learned counsel for the Assessee placed reliance on the Bangalore Tribunal ruling in the case of FCG Software Services India Ltd [IT. TP A No. 1242/Bang/2012] wherein the ITAT held that if the receipts are mere recovery of expenses incurred without service element, then the same should not be considered as part of the cost base for computation of mark- up.
The learned DR relied on the order of the DRP.
We find that the ITAT Bangalore in Assessee’s own case for AY 2006-07 in IT(TP) A.No.1414/Bang/2010 order dated 23.6.2017 remanded the issue of determination of ALP in the contract manufacturing segment to the TPO/AO for fresh consideration holding that TNMM should be the MAM for determination of ALP. Facts and circumstances of the case being identical in AY 2008-09, following the decision of the Tribunal, we set aside the impugned order with similar directions as was given in AY 2006-07 and direct the TPO/AO to determine ALP in accordance with the directions
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 24 of 38
contained in the earlier order of the Tribunal and keeping in view the other submissions on merits made by the Assessee before us. Gr.No.1 is thus treated as allowed for statistical purpose.
As far as Ground No.2 is concerned, the preliminary issue is as to whether engineering services should not be regarded as being ITES in nature and comparable companies ought not to have been selected treating the engineering services segment as akin to ITES segment. The arguments and submissions on this ground are identical to the arguments advanced in AY 2007-08. The factual details in this regard are as follows:
The Net margin on cost earned by the Assessee for Engineering Segment was as follows: Particulars EDS Operating Income 1,310,310,457 Operating Expenses* 1,176,105,198 Operating Profit (Op. Income - Op. 134,205,259 Expenses) Operating/Net margin (OP/TC) 11.41%
The Comparable companies selected by the Assessee in the engineering segment and their arithmetic mean was as follows:
S.No Comparable Companies ROTC . 1 Aztecsoft Ltd. 11.70% 2 Geometric Ltd. 16.99% 3 Infotech Enterprises Ltd. 25.04% 4 Larsen & Toubro Infotech Ltd. 15.64% 9.17% 5 Neilsoft Ltd. 6 Quintegra Solutions Ltd. 9.85% 7 Prithvi Information Solutions Ltd. 14.17%
- 8 T V S Infotech Ltd. 12.04% 11.32 Arithmetic Mean %
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The Assessee claimed that the price charged in the international transaction should be regarded as at Arm’s Length after permissible variation to the ALP profit margin of +/- 5% permitted under the provisions of Sec.92C(2) of the Act.
The TPO however combined the ITES and Engineering services segment together and determined ALP and consequent addition to be made to the total income on account of adjustment to ALP.
The submissions made by the Assessee are identical to the submission made in AY 2007-08 which we have extracted in the earlier part of this order and do not wish to repeat the same. The net margin to total cost of the comparable companies for AY 2008-09 is provided in the table below.
Particulars Source Unadjusted Working capital margin adjusted margin (OP/TC) (OP/TC) FY 2007-08 FY 2007-08 UB Engineering Ltd. 6.70% 5.71% CIT(A) order Hi Quality Steels Ltd. 2.15% 2.08% AY 04-05 RJ Shah & Co. Ltd. 49.07% -24.36% 11.46% Raunaq International Ltd. 9.96% DRP order AY TCE Consulting Engineers Ltd. 27.93% 27.69% 06-07 -0.14% 0.86% Lurgi India Co. Ltd. Mahindra Acres Consulting 33.89% 31.88% Engineers Ltd. Average 18.72% 7.69%
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 26 of 38
The learned counsel for the Assessee submitted that the adjusted operating profit to total cost of comparable companies is 7.69%. The Assessee’s margin for the engineering segment is 11.32 which is higher than the aforementioned adjusted margins of the comparable companies. Based on the above submission, he submitted that the engineering service segment is not comparable to ITES, BPO or KPO services and hence it will not be appropriate to aggregate the engineering service segment with the ITES segment.
The learned DR relied on the order of the DRP.
We have already decided similar issue in AY 2007-08 in the earlier part of this order. Facts and circumstances being identical in the present AY, we deem it fit and proper to remand the issue of determination of ALP to the TPO/AO for fresh consideration as per directions given in AY 2007- 08. Gr.No.2 is accordingly treated as allowed for statistical purpose.
As far as Gr.No.3 raised by the Assessee is concerned, the same deals with two segments ITES and SWD services segment. The first segment to be considered is ITES. As far as this segment is concerned, the facts are as follows:
ITeS Segment Net margin on cost earned by the Assessee for the ITeS Segment Particulars Amount (INR) Operating Income 55,994,948 Operating Expenses* 47,873,928 Operating Profit (Op. Income - Op. Expenses) 8,121,021 Operating/Net margin (OP/TC) 16.96%
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 27 of 38
Comparable companies selected by the Assessee and their arithmetic mean
Sr. Company Name Operating Margin No. 1 Cosmic Global Ltd. 11.49 2 Shreejal Info Hubs Ltd. 1.02% 3 Triton Corp Ltd. 28.43% 4 Transworks Information Services Ltd. 4.35% 5 H T M T Global Solutions Ltd. 15.01% 6 Allsec Technologies Ltd. 28.47% 7 Sparsh B P 0 Services Ltd. 4.91% Mean 13.38%
Since the profit margin of the Assessee was higher than the comparable companies, the Assessee claimed that the price received should be regarded as at Arm’s length.
The learned TPO rejected the analysis carried out by the Assessee and imposed an adjustment of Rs. 161,312,284 in the ITeS segment by combining Engineering and ITeS segment, which action was confirmed by the DRP.
Unadjusted Sr. Name of the Company Working No. Capital Adjusted (incorporated from SCN)
1 Accentia Technologies Ltd 41.77% 37.58% 2 Acropetal Technologies Ltd (Seg) 35.30% 13.50% 3 Aditya Birla Minacs Worldwide Ltd -4.00% -4.82% 7.550/0 4 Asit C Mehta Financial Services 9.42% Ltd (Seg) 5 Caliber Point Business Solutions Ltd 10.97% 7.06% 37.60% 6 Coral Hubs Ltd 50.68% 7 Cosmic Global Ltd 23.30% 21.94% 8 Crossdomain Solutions Ltd 27.03% 26.34% 9 Datamatics Financials Services -6.39% 29.11% Ltd (Seg) 10 e4e Healthcare solutions Ltd 16.33% (formerly known as Nittany 18.54% Outsourcing Services Pvt Ltd)
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 28 of 38
11 Eclerx Services Limited 56.48% 58.80% 12 Genesys International 44.14% 47.40% corporation Ltd 13 Infosys BPO Ltd 18.60% 19.66% 14 IServices India Private Limited 9.41% 10.77% 15 Jindal Intellicom Pvt Ltd -11.38% -10.29% 16 Mold Tek Technologies Ltd 90.28% 96.66% 17 R Systems International Ltd 3.32% 4.30% (Seg) 18 Spanco Ltd (Seg) 3.07% 8.81% 19 Wipro Ltd (Seg) 30.05% 30.05% 20 Allsec Technologies Ltd -15.56% -13.29% ARITHMETIC MEAN 19.26% 24.75%
The learned counsel for the Assessee submitted that Without prejudice to the other grounds of appeal, if decisions of this Hon'ble Tribunal in the cases of Flextronics Technologies India Pvt. Ltd. ITA No. 1559/Bang/2012, rendered in the case of an ITES company such as the Assessee for the very same AY, is followed, the following comparable companies would be the Accepted / Rejected.
Sr. Name of the Company Margin Margin Remarks Page No. Unadj. WC Reference in % adjuste the case law d compendiu m 1 Accentia Technologies Ltd. 41.77% 37.58% Reject - Page No. 346 dissimilar function 2 Acropetal Technologies Ltd. 35.30% 13.50% Reject - Page No. 347 dissimilar function
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 29 of 38
3 -4.00% -4.80% Accept Aditya Birla Minacs Worldwide Ltd. 4 9.42% 7.56% Accept Asit C Mehta Financial Services Ltd. 5 10.97% 7.07% Accept Caliber Point Business Solutions Ltd. 6 Coral Hubs Ltd. 50.68% 37.59% Page No.349 Reject - dissimilar function
7 Cosmic Global Ltd. 23.30% 21.94% Accept 8 Crossdomain Solutions Ltd. 27.03% 26.34% Reject - Page No.349 dissimilar function 9 29.11% -6.37% Accept Datamatics Financial Services Ltd. e4e Healthcare Solutions 10 18.54% 16.34% Accept Ltd. 11 Eclerx Services Ltd. 58.80% 56.46% Reject — dissimilar Page No. 350 function Reject — 12 Genesys International 47.70% 44.13% dissimilar Page No. 351 Corporation Ltd. function Reject — 13 Infosys BPO Ltd. 19.66% 18.60% dissimilar Page No. 351 function function 14 Iservices India Pvt. Ltd. 10.77% 9.41% Accept
15 Jindal Intellicom Pvt. Ltd. -10.29% -11.36% Accept No. 352 Reject 16 Mold-Tek Technologies Ltd. 96.66% 90.24% dissimilar function R Systems International 17 4.30% 3.33% Accept Ltd.
18 Spanco Ltd. 8.81% 3.09% Accept Reject - Page No.352, 19 Wipro Ltd. 30.05% 30.05% dissimilar 353 function
20 Allsec Technologies Ltd. -13.29% -15.54% Accept
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 30 of 38
The Computation of arithmetic mean of 11 comparable companies that remain after accept/reject matrix as given in the table is adopted would be as follows:
SI. Name of the Company Unadjust Adjusted No ed OP/TC OP/TC 1 Aditya Birla Minacs Worldwide Ltd. -4.00% -4.80% 2 Asit C Mehta Financial Services Ltd. 9.42% 7.56% 3 Caliber Point Business Solutions Ltd. 10.97% 10.97% 4 Cosmic Global Ltd. 23.30% 21.94% 5 Datamatics Financial Services Ltd. -5.35% -6.37% 6 e4e Healthcare Solutions Ltd. 18.54% 16.34% 'services India Pvt. Ltd. 7 10.77% 9.41% 8 Jindal Intellicom Pvt. Ltd. -10.29% -11.36% 9 R Systems International Ltd. 4.30% 3.33% 10 Spanco Ltd. (Seg) 8.81% 3.09% 11 Allsec Technologies Ltd. -13.46% -15.54% Arithmetic mean 4.82% 3.14%
The working capital adjusted arithmetic mean of the 11 comparable companies would be within the arm’s length range. Therefore, no TP adjustment is required and the TP adjustment made by the TPO is liable to be quashed.
We have already held while deciding Gr.No.2 that the engineering and the ITES segments should be separately considered and not combined. In view of the aforesaid finding, we set aside the order of the DRP/AO on this issue and remand the question of determination of ALP in the ITES segment alone without combining the same with the engineering services segment afresh. The TPO/AO will consider the submissions made by Assessee before us and also afford opportunity of being heard to the Assessee in the set aside proceedings.
As far as the SWD services segment which is also part of Gr.No.3 is concerned, the factual details are as follows:-
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 31 of 38
a. Software Segment
Net Margin on cost earned by the Appellant
Particulars OP/OC Operating Income Rs.371,438,299 Operating Expenses Rs.345,260,313 Operating Profit (Op. Income - Op. Expenses) Rs.26,177,986 Operating/Net margin (OP/TC) 7.58%
Comparable companies selected by the Assessee
S.No. Company Name' Operating Margin 7.10% 1 Aztecsoft Ltd. 2 Larsen & Toubro Infotech Ltd. 15.43% 3 Mindtree Ltd. 14.87% 4 Mphasis Ltd.* 13.73% 5 P S I Data Systems Ltd.* 6.84% 6 Persistent Systems Pvt. Ltd. 19.75% 7 Prithvi Information Solutions Ltd. 13.49% 8 Quintegra Solutions Ltd. 9.85% 9 R S Software (India) Ltd. 13.96% 10 S I P Technologies & Exports Ltd. 13.10% 13.69% 11 Sonata Software Ltd. 12 T V S Infotech Ltd. -12.04% Arithmetic Mean 10.81%
The TPO rejected the analysis carried out by the Assessee and accepted only three comparable companies.
Comparable companies selected by the TPO
Sr. Name of the Company Unadjusted WC margin No. Adjusted margin 1 Avani Cincom Technologies 25.62% 25.62% 2 Bodhtree Consulting Ltd 18.72% 18.12% 3 Celestial Biolabs 87.94% 80.25% 4 E-Zest Solutions Ltd 29.81% 28.17% 5 7.86% 4.17% Flextronics (Aricent) 6 iGate Global Solutions Ltd 13.99% 10.05% 7 Infosys 40.37% 37.18%
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 32 of 38
8 KALS Information System (Seg) 41.94% 27.60% 9 LGS Global Ltd 27.52% 24.06% 10 Mindtree Ltd (Seg) 16.41% 12.35% 11 Persistent Systems Ltd 20.31% 19.11% 12 Quintegra Solutions Ltd 21.74% 13.35% 13 R Systems Intenational (Seg) 15.30% 12.05% 14 RS Software (India) Ltd 7.41% 6.06% 15 Sasken Communication Technologies 5.61% 7.58% Ltd (Seg) 16 18.97% 17,38% Tata Elxsi Ltd (Seg) 17 Thirdware Solutions Ltd 19.35% 15.53% 18 Wipro Ltd (Seg) 28.45% 28.45% 19 Softsol India Ltd 17.89% 14.11% 20 Lucid Software Ltd 16.50% 14.93% ARITHMETIC MEAN 23.65% 20.71%
Computation of arm's length price by TPO and the adjustment made
Arm's Length Mean Margin 23.65 Less: Working Capital Adjustment 2.47 21.18 Adjusted mean margin of the comparable companies 35,63,12,516/- Operating Cost 7,54,66,991/- Arm's Length Margin (21.18% of Operating Cost) 43,17,79,506/- Arm's Length Price (ALP) 121.18% of Operating Cost 38,24,90,503/- Price charged in international transactions* Short fall being adjustment u/s. 92CA 4,92,89,004
The DRP confirmed the order of the TPO. The learned counsel for the Assessee submitted that without prejudice to the other grounds of appeal if the decision of this Hon'ble Tribunal rendered in the cases of Infineon Technologies India Pvt. Ltd. Vs. ACIT- ITA No. 1670/13/12, a company which is also in SWD services and similar to the Assessee company, 13 out of the 20 comparable companies selected by the TPO would stand excluded and in that event the following would be the Accept / Reject matrix:
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 33 of 38
Sr. Name of the Company Margin Margin - Remarks Page No. WC Reference Unadj. adjusted in the 0/0 case law compendium
Reject - dissimilar 1 Avani Cimcon 25.62% 25.62% Page 314function Reject - dissimilar 2 Bodhtree Ltd 18.72% 18.12% Page 336function Reject - dissimilar 3 Celestial Biolabs Ltd 87.94% 80.25% Page 326function Reject - dissimilar 4 E-Zest Solutions Ltd 29.81% 28.17% Page 331function 5 Flextronics Software 7.86% 4.17% Accept
6 Igate Global Solutions Ltd 13.99% 10.05% Accept Reject - dissimilar 7 Infosys Technologies Ltd 40.37% 37.18% Page 329function Reject - dissimilar 8 Kals Info Systems (Seg) 31.29% 27.60% Page 328function 9 LGS Global Ltd ( Lanco) 27.52% 24.06% Accept 10 Lucid Software 16.50% 14.93% Page 333 Reject - dissimilar function
11 Mindtree Consulting (Seg) 16.41% 12.35% Accept Reject - dissimilar 12 Persistent Systems Ltd 20.31% 19.11% Page 334 function Reject - dissimilar 13 Quintegra Solutions Ltd 21.74% 13.35% Page 335 function 14 R S Software (India) Ltd 7.41% 6.06% Accept R Systems International 15 15.30% 12.05% Accept (Seg) Sasken Communications 16 7.58% 5.61% Accept (Seg) Reject - dissimilar 17 Softsol India Ltd 17.89% 14.11% Page 335 function Reject - dissimilar 18 Tata Elxsi Ltd(seg) 18.97% 17.38% Page 331 function Reject – dissimilar 19 Thirdware Solutions 19.35% 15.53% Page 332 function Reject - dissimilar 20 Wipro Limited (Seg) 28.45% 28.45% Page 330 function
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 34 of 38
If the correct working capital adjusted margins are considered, the arithmetic mean of seven accepted comparable companies out of the 20 comparable companies would be as follows:
Computation of arithmetic mean of seven comparable companies
SI. No. Name of the Company Operating margin on cost - WC adjusted 4.170/0 1 Flextronics Software (Seg) 2 iGate Global Solutions Ltd. 10.05% (Seg) 3 LGS Global Ltd. 24.06% 4 Mindtree Consulting (Seg) 12.35% 5 R Systems International 12.05% (Seg) 6 R S Software India Ltd. 6.06% 7 iGate Global Solutions Ltd. 5.61% (Seg) Arithmetic Mean 10.62%
Range Computation 5% Particulars GEMS (IT -5% Segment) Revenue 371,438,299 390,010,214 352,866,384 Cost 345,260,313 345,260,313 345,260,313 Operating 26,177,986 44,749,901 7,606,071 Profit OP/OC 7.58% 12.96% 2.20%
The working capital adjusted arithmetic mean of the seven comparable companies which works out to be 10.62% would be within the range of + / - 5% of the Assessee's net margin. Therefore, no TP adjustment would be required and therefore, the TP adjustment made by the TPO is liable to be quashed.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 35 of 38 56. We have considered the submission of the Assessee. While deciding identical ground in AY 2007-08, We have already set aside this issue to the TPO/AO for fresh consideration with certain directions. Facts and circumstances being identical in the present AY, we deem it fit and proper to remand the issue of determination of ALP to the TPO/AO keeping in mind the submissions made as above, for fresh consideration. This part of Gr.No.3 is accordingly treated as allowed for statistical purpose.
The other corporate issue that arises for consideration is whether expenses incurred in foreign currency should be excluded from both Export turnover and total turnover while computing deduction u/s.10A of the Act.
We have already decided identical ground of appeal in AY 2007-08 in the earlier part of this order. Taking into consideration the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that expenditure incurred in foreign currency should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon’ble Karnataka High Court has been upheld by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 & Ors. dated 24.04.2018. In view of the above, the ground raised in this regard is allowed.
The other ground relating to disallowance u/s.14A of the Act, was not pressed for adjudication and hence dismissed as not pressed.
In the result, this appeal is partly allowed.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 36 of 38 61. In the result, both the appeals by the Assessee are partly allowed.
Pronounced in the open court on this 20th day of September, 2019.
Sd/- Sd/-
( VIKRAM SINGH YADAV ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore, Dated, the 20th September, 2019.
/ Desai Smurthy /
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.
IT(TP)A Nos.1156/Bang/2011 & 1471/Bang/2012 Page 37 of 38 ANNEXURE-I TO ORDER
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