20th Floor, Tower 10C, Circle 22(2), Cyber City, DLF Phase II, New Delhi. Gurgaon. PAN: AACCC1382J (Appellant) (Respondent) Assessee By : Shri Manoj Pardwani, CA Department By : Shri Amrendra Kumar, CIT, DR Date of Hearing : 02.02.2016 Date of Pronouncement : 05.02.2016 ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the final assessment order dated 26.10.2015 passed by the Assessing Officer (AO) under sections 143(3) read with section 144C of the Incometax Act, 1961 (hereinafter also called `the Act') in relation to the assessment year 201112. 2. The only assail in this appeal is to the addition on account of transfer pricing adjustment amounting to Rs. 7,76,66,682/. 2 3. Succinctly, the assessee company, earlier called Saxo IT India Private Ltd., is a part of Initto Group which teamed up with Saxo Bank. It is engaged in the business of design and development of customized software applications. Apart from that, it also provided technical support services during the relevant year to some unrelated enterprises in India. The assessee reported four international transactions including "Provision of Software Development" with transacted value of Rs. 20,72,25,235/, which is disputed in the instant appeal. There is no quarrel on the other three international transactions. The assessee applied the Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that the international transaction of Provision of Software development was at Arm's Length Price (ALP). The assessee's profit margin from this transaction was shown at 22.63% as against the mean margin of five comparables chosen by the assessee at 17.91%. On a reference made by the Assessing Officer for determining the ALP of the international transactions, the Transfer Pricing Officer (TPO) observed that the overall Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC) as per the assessee's 3 Profit and loss account was () 15.34%, whereas it had shown profit margin from the international transaction at 22.63%. The Transfer Pricing Officer noticed from the Transfer pricing study report that the comparability adjustment was carried out to arrive at such PLI at 22.63%. On perusal of the details filed by the assessee, it was seen that the expenditure on Personnel cost was allocated on the basis of mandays utilized visàvis the man days available. Similarly, adjustments were found to have been carried out by the assessee in respect of other operating expenses including depreciation. The TPO noticed that the assessee claimed capacity utilization adjustment by considering full bench capacity at 300, whereas actually utilized bench capacity was only 115. He observed that the number of employees actually working ranged from 59 in April, 2010 to 213 in March, 2011. The TPO did not concur with the assessee's calculation of profit at 22.83% by holding that full bench capacity could not be considered at 300 for the entire year as was claimed by the assessee. He further required the assessee to show that the comparables were operating at 100% capacity utilization level, as was its basis for calculating capacity utilization adjustment in its profit margin. In response, the 4 assessee made general submissions that the comparables were incorporated long ago and were well established visàvis the assessee. However, no specific details of the capacity utilization of comparables were given by the assessee. In this backdrop of facts, the Transfer Pricing Officer refused to allow any comparability adjustment as claimed by the assessee. He computed PLI of software export segment, being the international transaction in question, as under: Particulars Amount Software exports 207225235 Add: Misc. Income 102495 Operating Income 207327730 Expenditure Personnel Cost 156849561 Add: Operating expenditure 78341959 Depreciation 2158188 Operating Expenditure