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Income Tax Appellate Tribunal, BENCH- A, BANGALORE
Before: SMT. ASHA VIJAYARAGHAVANSHRI S JAYARAMAN
PER ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER:
This appeal by the assessee is directed against the order of Commissioner of Income-tax –(Appeals) – IV, Bangalore dated 12/11/2014 and it pertains to the assessment year 2010-11.
CO No.81/Bang/2015
2. The assessee has raised the following grounds of appeal.
Ground on comparables retained/confirmed by the TPO and CIT(A)
The learned TPO and the learned CIT(A), Bangalore has erred in selecting/confirming the selection of comparables viz., ICRA Techno Analytics Ltd (seg.) and Kals Information Systems Ltd (seg.) for the computation of arms length price. On facts and circumstances of the case and law applicable, the aforesaid companies should be excluded from the lists of comparables.
2. The learned TPO has erred in treating foreign exchange gain or loss as non - operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. On facts and in the circumstances of the case and law applicable, IT(TP)A No.57 & 81/B/15
3 foreign exchange gain or loss should be considered as operating in nature in computing the operating margin of the (i) comparables and (ii) assessee.
Ground on working capital adjustment
3. The learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, working capital adjustment is to be properly computed and allowed in computing the adjusted margin of comparables.
Ground on risk adjustment
4. The learned TPO and CIT(A) has erred in not allowing risk adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, risk adjustment is to be properly computed and allowed in computing the adjusted margin of comparables.
Ground on inappropriate computation of operating margin of comparables and the assessee IT(TP)A No.57 & 81/B/15
4 5. The learned TPO has erred in not properly computing the operating margin of the comparables and the assessee. On facts and in the circumstances of the case and law applicable, the operating margin of the comparables and the assessee is to be properly computed.
Marketing Support Services Segment
Ground of TP adjustment
6. The learned TPO has erred in making the TP adjustment in respect of marketing support segment amounting to Rs. 27,76,160/- and the learned CIT(A) has erred in confirming the said TP adjustment remaining after allowing working capital adjustment. Ground on comparables selected/confirmed 7. The learned TPO has erred in selecting the companies viz., Asian business Exhibition & Conferences Ltd., HCCA Business Services Ltd., Hindustan Housing Co. Ltd., Killick Agencies and Mktg. Ltd and Priya International Ltd for the computation of arms length price. On facts and circumstances of the case and law applicable, the aforesaid companies should be excluded from the list of comparables.
IT(TP)A No.57 & 81/B/15
5 Ground on treating foreign exchange gain or loss as non-operating in nature
8. The learned TPO has erred in treating foreign exchange gain or loss as non-operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. On facts and in the circumstances of the case and law applicable, foreign exchange gain or loss should be considered as operating in nature in computing the operating margin of the (i) comparables and (ii) assessee. Ground on working capital adjustment 9. The learned TPO and CIT(A) has erred in not properly computing working capital adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, working capital adjustment is to be properly computed and allowed in computing the adjusted margin of comparables. Ground on risk adjustment 10. The learned TPO and CIT(A) has erred in not allowing risk adjustment in computing the adjusted margin of comparables. On facts and circumstances of the case and law applicable, risk adjustment is to be properly computed and allowed in computing the adjusted margin of comparables.
IT(TP)A No.57 & 81/B/15
6 Ground on inappropriate computation of operating margin of comparables and the assessee
11. The learned TPO has erred in not properly computing the operating margin of the comparables and the assessee. On facts and in circumstances of the case and law applicable, the operating margin of the comparables and the assessee is to be properly computed.
Prayer 12. In view of the above and other grounds to be adduced at the time of hearing, the respondent prays that the order of the learned CIT(A) to the extent prejudicial to respondent be quashed or in the alternative the aforesaid grounds of cross objections be accepted and relief be allowed accordingly.
3. M/s Aroba Ltd is a subsidiary of Aroba Wireless Network Incorporated USA. It is engaged in providing software development and support services to its AE.
4. The following are the details from the international transactions of the Assessee.
IT(TP)A No.57 & 81/B/15 7 1) Income from software development services amounting to Rs.15,74,03,549/-. 2) Income from providing marketing services amounting to Rs.2,06,39,290/- 3) Purchase of capital asset amounting to Rs.2,40,16,114/-
5. The assessee adopted TNMM at entity level, whereas the TPO adopted TNMM segment level. The operating costs of the assessee in software services was 14.39% and in marketing services was at 10.00%.
Software Services
6. The operating cost of the comparables for software services was at 22.71%. The comparables selected by the assessee for TP stated is follows.
Sl.No. Name of the Company Operatiang Margin on Cost 1 Axis IT and T Ltd 8.80% 2 Blue Staar Infotech Ltd 10.82% 3 California Software Co. Ltd 9.43% 4 Cambridge Technology -7.32% Enterprises Ltd 5 Goldstone Technologies Ltd 3.76% 6 ICRA Techno Analytics Ltd 24.92% 7 Mindtech (India) Ltd -1.48% 8 Mindtree Wireless Pvt Ltd. 24.39% 9 Nucleus Software Exports Ltd. 18.43% IT(TP)A No.57 & 81/B/15
8 10 RS Software (India) Ltd 7.89% 11 R Systems International Ltd 2.56% 12 Saksoft Ltd 9.38% 13 Sonata Software Ltd. 28.92% 14 Thinksoft Global Services Ltd 16.96% 15 Aditya Birla Minacs IT -5.11% Services Ltd 17 Bristlecone India Ltd -2.12% 18 CG – VAK Softwaare and -16.20% Exports Ltd 19 Sagarsoft (India) Ltd -1.33% 20 Sunderam Infotech Solutions -8.34% Ltd Average of Mean 6.55% Less: Working Capital 4.88% Adjustment Adjusted Average Mean 1.67%
Ground No. 1 of the CO are dealt with hereunder:
7. The comparables selected by the TPO in order u/s 92CA are as follows:
Sl.No. Name of the Operating W.cap Company Margin on adjusted Cost Maragin 1 ICRA Techno 24.94% 23.79% Analytics Ltd. (seg) 2 Infosys Ltd. 44.98% 43.79% 3 Kals Information 34.41% 29.54% Systems Ltd. (seg) 4 Larsen & Toubro 19.33% 18.53% Infotech Ltd. 5 Mindtree Ltd. (seg) 14.83% 11.87% 6 Persistent Systems & 15.38% 14.28% Solutions Ltd. 7 Persistent Systems 30.335% 27.20% Ltd. 8 RS Software (India) 10.29% 9.59% Ltd. 9 Sasken 17.36% 15.52% Communication IT(TP)A No.57 & 81/B/15
9 Technologies 10 Tata Elexi (seg) 20.93% 16.32% 11 Thinksoft Global 17.05% 13.10% Services Ltd. Arithmetic Mean 22.71% 20.32% Computation of arm’s length price by the TPO and the adjustment made: Arm’s length mean margin 22,71% Less: Working capital adjustment 1.98% Adjusted mean margin after working 20.73% capital adjustment Operating Cost (A) 13,75,90,785 Arm’s length price – 120.73% of operating 16,61,13,355 cost (B) Total operating Revenue © 15,74,03,549 Short fall being Adjustment u/s92CA (B- 87,09,806 C)
8. The TPO has computed the working capital adjustment at 2.39%. The TPO has contended that there must be a upper cap for the adjustment to be given. Hence the working capital adjustment is restricted to 1.98% and the adjusted mean margin is computed at 20.73%.
The CIT(A) observations with respect to software development segments is as follow.
IT(TP)A No.57 & 81/B/15
10 CIT(A) Observation (Software Development Segment)
SL. Name of the Company Sales Operating Adjusted CIT(A) Order No (Rs. Margin on Cost Operating . In Margin on crores Cost 1 ICRA Techno 11.89 24.94% 23.79% Accept Analytics Ltd. (seg) 2 Infosys Ltd. 21,14 44.98% 43.79% Reject 0.00 3 Kals Information 2.16 34.41% 29.54% Accept Systems Ltd(seg) 4 Larsen & Toubro 1,776. 19.33% 18.53% Reject Infotech Ltd. 76 5 Mindtree Ltd (seg) 698.0 14.83% 11.87% Reject 2 6 Persistent Systems & 6.67 15.38% 14.28% Accept Solutions Ltd 7 Persistent Systems 504.4 30.35% 27.20% Reject Ltd. 1 8 RS Software (India) 161.8 10.29% 9.59% Accept Ltd 3 9 Sasken 401.5 17.36% 15.52% Reject Communication 0 Technologies 10 Tata Elexi (seg) 336.9 20.93% 16.32% Reject 4 11 Thinksoft Global 74.55 17.05% 13.10% Accept Services Ltd
10. Remaining companies after rejection by the CIT (A) is :
Remaining Companies After CIT(A) Rejection
Sl.No. Name of the Sales(Rs.in Operating Adjusted Company crores Maargin Operating on Csot Maargin on Cost 1 ICRA Techno 11.89 24.94% 23.79% Analytics Ltd.(seg) 2 KalsInformation 2.16 34.41% 29.54% IT(TP)A No.57 & 81/B/15
11 Systems Ltd. (seg) 3 Persistent 6.67 15.38% 14.28% Systems & Solutions Ltd. 4 RS Software 161.83 10.29% 9.59% (India) Ltd. 5 Thinksoft 74.55 17.05% 13.10% Global Services Ltd. Arithmetic 20.41% 18.06% Mean
11. With respect to the comparables numbering 5 by CIT(A), the learned counsel for the assessee requested for ICRA Techno Analytics Ltd., (segment) and KALS Information Systems Ltd., (segment) are to be rejected. The final comparables according to the learned counsel for the assessee would be as follows :
Final Comparables
Sl.No. Name of the Company Operating Working Margin on capital Cost Adj.Margin 1 Persistent Systems & 15.38% 14.28% Solutions Ltd. 2 RS Software (India) 10.29% 9.59% Ltd. 3 Thinksoft Global 17.05% 13.10% Services Ltd. Arm’s length margin 14.24% 12.32% IT(TP)A No.57 & 81/B/15
12 12. We heard both parties.
13. We find that the decision in the case of DCIT Vs M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, is held as follows.
(1) ICRA Techno Analytics Ltd. (seg)
At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- “Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables.”
IT(TP)A No.57 & 81/B/15
We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE.
In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider.
14. Respectfully following the decision of the co-ordinate Bench in the case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from the list of comparables selected by TPO/AO.
15. With respect to KALS Information Systems Ltd., we find that the co-coordinate bench in the case DCIT Vs. M/s Electronics for Imaging India Pvt, Ltd in for the assessment year 2010-2011 has held as follows:
IT(TP)A No.57 & 81/B/15 (3) KALS Information Systems Ltd.
The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company.
The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, dated 23.11.2012, this company was found to be not comparable with that of the assessee.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record.
IT(TP)A No.57 & 81/B/15
15 The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs.60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP.
Respectfully following the decision of the co-ordinate Bench in the case of DCIT Vs. M/s Electronics for Imaging India Pvt. Ltd., in IT(TP) No.212/Bang/2015, we exclude ICRA Techno Analytics Ltd. (seg) from the list of comparables selected by TPO/AO.
17. Hence based on final list of comparable companies 3 in Nos. viz. Persistent Systems, RS Software, Think Soft, the working capital adjustment comes to 1.92% which is lesser than 1.98 adopted by the TPO.
IT(TP)A No.57 & 81/B/15
16 18. The appellant’s margin for software division is as under:-
Particulars Amount(INR) Operating Revenue as per TPO 15,74,03,549 Operating Cost as per TPO 13,75,90,785 Operating Profit 1,98,12,764 OP/OC 14,40%
19. Ground No.2 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain or loss should be considered as operating in nature.
With respect to ground No. 3 working capital adjustment, the CIT(A) has held that the action of the TPO in restricting working capital adjustment to 1.98% is correct. We find that 1.92% which comes out based on final list of comparables is lesser than 1.98% adopted by the TPO. The ld counsel for the assessee requested that working capital adjustment should be given at actual based on final comparables. Reliance was placed on the ITAT decision in ARM Embedded Technologies Pvt. Ltd., Vs. DCIT, TS-466-ITAT- IT(TP)A No.57 & 81/B/15
17 2015(Bang)-TP. Hence, we direct the TPO to rework the working capital adjustment.
With respect to 4, the learned counsel also pointed out that the price margins are without adjustment of risk differentials. The learned counsel submitted that it should be granted adjustment and placed reliance on the decision in the case of M/s Intellinet Technologies India Pvt. Ltd., Vs. ITO in and M/s Bearing Point Business Consulting Pvt. Ltd., in ITA No.1124/Bang/2011.
Ground No.5 is conceptual.
We find that the appellant’s margin is higher than the average margin of the comparables. Thus International Transaction of the appellant relating to software development services should be considered to be at Arm’s Length.
Sales & Marketing Support Services Segment
Ground No.6 is conceptual. Ground No.7 is dealt as below:
IT(TP)A No.57 & 81/B/15
The comparables selected by TPO in order u/s 92CA for Sales Marketing and support services segment.
Comparables selected by the TPO in Order u/s 92CA
Sl.No. Name of the Company Operating Margin on Cost 1 Asian Business Exhibition & 60.13% Conferences Ltd 2 Cyber Media research Ltd. 13.68% 3 HCCA Business Services 19.09% 4 Hindustan Housing Co Ltd 38.12% 5 ICC International Agencies Ltd., 13.72% 6 Killick Agencies & Mktg. Ltd. 17.36% 7 Priya International Ltd 11.47% Arithmetic Mean 24.80%
Computation of arm’s length price by the TPO and the adjustment made:
Aram’s length mean margin 24.80% Operating Cost (A) 1,87,62,380 Arm’s length price – 124.80% of operating 2,34,15,450 cost (B) Total operating Revenue (C) 2,06,39,290 Short fall being Adjustment u/s 92CA (B-C) 27,76,160 IT(TP)A No.57 & 81/B/15
19 28. The Assessee has objected to the comparables selected by TPO in the following Chart.
Margins as Appell- Reasons for rejection per TPO ant’s stand Sl. Name of the Company Operating Functio Other Other Note Margin on nally Reasons Cost dissimil ar 1 Asian Business 60.13% Reject a)Abnor 1 Exhibition & mally Conferences Ltd high margin and Abnorma l financial circumst ances 2 Cyber Media 13.68% Accept 2 Research Ltd.* 3 HCC A Business 19.09% Reject Services 4 Hindustan Housing 38.12% Reject b) Fails Co Ltd RPT filter 5 ICC International 13.72% Accept Agencies Ltd., 6 Killick Agencies & 17.36% Reject c)Fails 3 Mktg. Ltd. RPT filter 7 Priya International Ltd 11.47% Accept 24.80%
The learned counsel for the assessee submitted as follows:-
IT(TP)A No.57 & 81/B/15
20 30. Asian Business Exhibition & Conferences Ltd., should be rejected as it is functionally different from the Appellant for the following reasons: a. As per director report, the company is engaged in the business of organizing exhibitions and conference. b. As per profit and loss account, the company has revenues from exhibitions & events, delegate fees, sponsorships and entry charges. c. As per significant accounting policies, the company has revenues recognition policy for income from exhibitions & events, delegate fees, sponsorships and entry charges.
In view of the ITAT decision in the case of ACIT v RGA Services India Pvt. Ltd TS-580-ITAT-2015(mum)-TP AY 10-11 and DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under:-
However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition & Conference Ltd., a comparable selected by the TPO and retained by the DRP.
IT(TP)A No.57 & 81/B/15 21 9. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the assessee and held that this company received income in the nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to the functions carried out by the assessee.
Before us, the ld. AR of the assessee has submitted that functional comparability of this company has been examined by the Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. vide order dated 20.11.2015 in and submitted that the Mumbai Tribunal has held that the operation of organizing exhibition and events is not comparable with support services provided by the assessee to its AE in respect of reinsurance and actuarial activities. Thus, the ld. AR has submitted that this company cannot be considered as functionally comparable with he assessee’s activity of providing sales and marketing services to its AE.
We have considered the rival submissions and considered the relevant material on record. As it is clear that the assessee is providing sales and IT(TP)A No.57 & 81/B/15
22 marketing services to its AE which includes identifying potential customers by conducting road shows, presentation and the like, the working also includes educating potential users of the benefit and features of the AEs range of products. However, products for which the assessee is providing sales and marketing services is only software/information technology products. Therefore, Asian Business Exhibition & Conference Ltd. which is mainly engaged in the organization of exhibitions and events as well as conducting conferences on behalf of the various clients for their various products and businesses. The functions of this company are entirely different from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- “11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee’s objection with regard to selection of Asian IT(TP)A No.57 & 81/B/15
23 Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc.
Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE’s, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be IT(TP)A No.57 & 81/B/15
24 considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee’s objection with regard to selection of a comparable. At the time of preparing T.P. Study report assessee had selected some comparables by considering multiple year data and information available at the relevant time. However, if subsequently on the basis of information available in public domain it is found on the basis of IT(TP)A No.57 & 81/B/15
25 functionality or some other reason a company is not at all comparable, assessee cannot be precluded from objecting to selection of the company as a comparable. This legal proposition is fairly well settled by the decision in case of DCIT V/s. Quark Systems (P) Ltd. (2010)132TTJ(Chd)(SB)1 as well as decisions relied upon by the counsel for the assessee. In view of the aforesaid, we do not find any infirmity in the directions of DRP in excluding Asian Business Exhibition and Conferences Limited as a comparable. The ground raised is therefore dismissed.”
12. In view of the above facts as well as decision of the Mumbai Bench of the Tribunal, this company cannot be considered as a good comparable with the assessee.
Accordingly, we direct the AO/TPO to re-compute the ALP in marketing support services segment by excluding Asian Business Exhibition & Conference Ltd. from the comparables.
IT(TP)A No.57 & 81/B/15
26 32. The learned counsel submitted that HCCA Business Services is engaged in Payroll processing. Therefore this company is functionally different from the Appellant and should be rejected. Reliance is placed on ITAT decision in the case of DC IT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under:
(1) HCCA Business Services Pvt. Ltd.
The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company’s operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately.
The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to IT(TP)A No.57 & 81/B/15
27 the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in the absence of any contrary fact on record brought before us, we do not find any reason to interfere with the finding of the DRP, when the functions and business activity of this company was found to be different from marketing and sales support services of the assessee. Accordingly, the objection of the Revenue is rejected.
Learned Counsel submitted that Hindustan Housing Co. Ltd. Should be rejected as it has a substantial Related Party Transactions at 26.97% and hence fails RTP filter.
Learned counsel submitted that IT(TP)A No.57 & 81/B/15
28 Killick Agencies & Mktg. Ltd. Should be rejected as it is functionally different from the Appellant for the following reasons: a. Commission/service charges income of the company constitutes 64.66% of the operating revenues, which is less that 75% of the operating revenue. No segmental results are available in the annual report. b. This company is also involved in exports of micro switches, engineering items, acoustics items & head sets. Reliance is placed on ITAT decision in the case of DCIT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11.
Reliance is placed on ITAT decision in the case of DC IT v M/s Electronics for Imaging India Pvt. Ltd. IT(TP)A No.212/Bang/2015-AY 10-11, wherein it is held as under:
(2) Killick Agencies & Marketing Ltd. 16. The assessee objected against this company on the ground that commission/service charges income of this company is Rs.2,19,00,000 out of the operating revenue of Rs.3,39,00,000. Therefore, the IT(TP)A No.57 & 81/B/15
29 commission/ service charges income constitute about 65% of the operating revenue which is less than 75% of the operating revenue filter applied by the TPO. In the absence of segmental results, this company was sought to be excluded from the set of comparables.
The DRP found that this company conducts
business as an agent of the foreign principal and deal in maritime equipments. Further, the receipts are mainly in the nature of commission income and service charges. Therefore, this company was functionally dissimilar to that of assessee.
We have heard the ld. DR as well as ld. AR and considered the relevant material on record.
The ld. DR has submitted that the TPO has considered the relevant information as reported in the annual report of the company and it was found that this company is acting as an agent for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company IT(TP)A No.57 & 81/B/15
30 was found to be in the business of marketing support services which is similar to the assessee.
Also we find that RTP filter is substantial at 16.4% and hence the following decision of 24/7 Customer.Com Pvt. Ltd., (Supra), we direct the TPO to exclude this comparable.
Following the co-ordinate bench decisions stated (Supra) we direct that TPO to exclude Asian Business Exhibition & Conferences Ltd., Cyber Media Research Ltd.,, HCCA Business Services Pvt. Ltd., Hindustan Housing Co. Ltd., and Killick Agencies & Marketing Ltd.
Hence the final comparables in sales and support services segment which are to be retained are as follows.
SN Name of the Operating Margin on Company Cost as per TPO 1 Cyber Media 13.68% Research Ltd. 2 ICC International Agencies 13.72% Ltds., 3 Priya International Agencies 11.47% IT(TP)A No.57 & 81/B/15
31 Ltd., Arm’s length margin 12.96%
We also direct that TPO to grant risk adjustment following decisions of the coordinate bench in the case of M/s Bearing Point Business Consulting Pvt. Ltd., in wherein it has been held as follows:-
IV. Risk adjustment:
5.5 According to the assessee, it is operating in a risk mitigated environment. It was submitted that the risk assumed by it are lesser than those assumed by the companies in an uncontrolled condition, therefore, an adjustment for risk is to be granted. The reasoning for the above submission is that higher the risk, the higher the profit. 5.5.1 In the instant case, TPO in his order has computed the adjustment for risk differential Table at pages 179 and 180 of the order passed u/s 92C of the Act indicate margins were reduced by 0.73% to factor in the risk differentials. The TPO, however, after computing the risk differentials did not give effect to the same on the premise that the single customer IT(TP)A No.57 & 81/B/15
32 risk of the assessee is more to off set the effect of the risk differentials as above. In this connection, the earlier Bench of this Tribunal in the case of M/s Intellinet Technologies India Pvt. Ltd v. ITO in had, on a similar issue, observed as under:
Page 25 of 29 25 "7.1 As seen from the records, the assessee had acquired the business and also earned income out of the said transaction by cost plus basis. Thus, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. As pointed out by the learned counsel for the assessee, the comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would have incurred certain expenditure on marketing services and also to safeguard the technical use by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, the TPO ought to have given the risk adjustment to the net margin of IT(TP)A No.57 & 81/B/15
33 the comparables for bringing them on par with the assessee company..................".
5.5.2 In conformity with the findings of the earlier Bench (supra), we direct the AO/TPO to work out suitable risk adjustment and compute the ALP accordingly.
The particulars for grant of risk differential is as follows:
Particulars Amount (INR) Total Operating Revenue 2,06,39,290 Operating Cost as per TPO 1,87,62,380 Operating Margins 18,76,910 OP/OC 10.00%
Hence, we direct the TPO to grant risk adjustment in light of the decision of Bearing Point (Supra).
Ground No.9 the TPO is directed to provide appropriate working capital adjustment for the sales and marketing segment.
Ground No.8 - relying on the decision in the case of CSR India Pvt. Ltd., Vs ITO in IT(TP) No.119/Bang/2011, foreign exchange gain IT(TP)A No.57 & 81/B/15
34 or loss should be considered as operating in nature for marketing support services.
The Appellant’s margin is within 5% range of the average 44. margin of the comparables. Thus, the international transactions of the Appellant should be considered to be at arm’s length.
With these directions, we set aside the issues to the file of the TPO to rework the ALP.
Ground 11 is conceptual
Ground No.12 is general.
The Revenue has raised the following grounds of appeal:
“1. The order of the CIT(A) is opposed to law and the facts and circumstances of the case.
2. The CIT(A) erred in law as well as on facts in directing the TPO on marketing support segment to IT(TP)A No.57 & 81/B/15
35 grant working capital adjustment under TNM methodology as per prevailing norms without appreciating that the directions issued are beyond the mandate of the provisions of sec. 251(1)(a) of IT Act which does not empower the CIT(A) to set aside the issue.
3. The CIT(A) erred in directing the AO to follow the ratio laid down by the Hon’ble Court in the case of Tata Elxsi Ltd., 349 ITR 98 and exclude the telecommunication expenses and other foreign currency expenses from the total turnover also while computing the deduction u/s 10A of the IT Act, without appreciating the fact that there is no provisions in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover also.
4. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi Ltd., 349 ITR 98 has not been accepted by the department and an appeal has been fixed before the Hon’ble Supreme Court.
IT(TP)A No.57 & 81/B/15
36 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the AO be restored.
6. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.
Ground No.1 is general.
Ground No.2 has already been decided in assessee’s cross objection.
Ground No.3 and 4 are decided against the Revenue in the light of Hon’ble Court’s decision in the case of Tata Elxsi Ltd., 349 ITR 98.
Ground No.5 and 6 are general.
IT(TP)A No.57 & 81/B/15
37 50. In the result, the appeal is allowed for statistical purpose and the Cross-objection is partly allowed.
Order pronounced in the open court on 30th September , 2016.