TaxTMI 
TaxTMI 
2020 (5) TMI 355
X X X X Extracts X X X X
X X X X Extracts X X X X
....The Hon'ble DRP and the Learned AO erred in confirming the order of the Learned TPO which has not considered the following companies as functionally not comparable: a. With respect to software development services: (a) ICRA Techno Analytics Limited; (b) KALS Information Systems Limited; (c) Persistent Systems & Solutions Limited. b. With respect to IT-enabled services: (a) Accentia Technologies Limited; (b) ICRA Online Limited. 3. The Hon'ble DRP and the Learned AO erred in confirming the order of the Learned TPO which arbitrarily restricted the working capital adjustment at 1.98% to the software development services and at 0.23% to the IT- enabled services segment. 4. The Hon'ble DRP and Learned AO erred in not allowing the set-off of the brought forward loss pertaining to AY 2009-10 of Rs. 1,58,84,554/- (which was claimed by the Appellant in its income-tax return). On the above and such other grounds as may be urged at the time of hearing your appellant prays your Honour to consider the facts and circumstances of the case and render justice. Grounds raised by revenue in its appeal are as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ceipt of reference, Ld.TPO called for economic details of the international transaction in Form 3CEB. From details filed by assessee, Ld.TPO observed that, assessee had following international transactions: S. No Type of transaction Amount (Rs) 1. Software Development Services 32,04,99,033/- 2. ITES 7,82,60,272/- 4. Ld.TPO observed that assessee used TNMM as most appropriate method and OP/OC as PLI to determine arm's length margin of both segments, being software development service segment and IT enabled service segment. 5. Assessee computed its margin at 15% under both segments by using 16 comparables under software development service segment and 15 comparables under IT enabled service segment. On the basis of average margin determined by assessee, transactions were held to be at arms length as it was within +/- 5% range. 6. Ld.TPO applied various filters to the comparables enlisted by assessee in the TP study for both segments and shortlisted a set of 11 comparables with an average margin of 22.71% and set of 10 comparables with an average margin of 26.86%. The details of comparables finally selected by Ld.TPO for both segments are as unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t turnover for purposes of computing deduction under section 10 A of the act thereby reducing the deduction eligible to assessee at Rs. 5,59,89,229/- as against Rs. 5,72,71 573/-. 11. Aggrieved by final assessment order, both assessee and revenue are in appeal before us now. Revenue's Appeal: 12. In appeal filed by revenue, challenge is against exclusion of certain comparables not fulfilling turnover criteria prescribed in Rule 10 B of the Income tax Rules, 1962. 11.1. Revenue is also aggrieved by direction of DRP to grant ad hoc 1% risk adjustment without any basis. 11.2. It is also been submitted that decision of Hon'ble Karnataka High Court in case of CIT vs M/s.Tata Elxsi Ltd (supra) has not been accepted by Department and further appeal is pending before Hon'ble Supreme Court, revenue is aggrieved by deduction granted to assessee under section 10A of the Act. 12. Ground No.2-3 Ld.CIT DR argued that revenue seeks exclusion of Infosys Ltd., Larson & Tubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Technologies Ltd., Infosys Ltd., and TATA Elxsi Ltd. by applying turnover filter. 12.1. Ld.CIT.DR submitted that when companies functionally ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non- jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Water India (P.) Ltd. (supra) has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....easons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). Based upon above discussions we are of opinion that objection raised by revenue cannot withstand the test of law. Accordingly, we do not find any infirmity in excluding Infosys Ltd., Larson & Tubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Technologies Ltd., Infosys Ltd., and TATA Elxsi Ltd., for having high turnover as compared to a captive service provider like assessee. 13. Ground no.4 Ld.CIT DR submitted that DRP provided risk adjustment at 1% on ad hoc basis without having a scientific approach. He submitted that there are various factors that needs to be considered for providing risk adjustment which assessee has to establish in its case having regards to comparables finally selected. 13.1. We have perused submissions advanced by both sides in light of records placed before us. We have perused orders passed by authorities below on the basis of records placed before us. It is noted that risk adjustment has been provided at risk....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egarding alleged comparables included by Ld.TPO under SWD Segment and ITES, which are as under: A. SWD Segment: Seeks exclusion of KALS Information Systems Ltd., ICRA Techno Analytics Ltd., Persistant Systems & Solutions Ltd. B. ITES Segment: Accentia Technologies Ltd., ICRA Online Ltd. Before we undertake comparability analysis, it is sine qua non to understand functions performed, assets owned and risks assumed by assessee under both these segments. As per TP documentation assessee is engaged in the business of providing IT and ITES services to Marlabs US. It has been recorded that assessee at the request of Marlabs US in accordance with performance standards and rules as specified by Marlabs US provides services to Marlabs US. Ld.TPO has analysed functions performed by is assessee under both segments as under: "As per the Service Agreement: "Exhibit A: Services description of services: provider shall, at customers request and in accordance with such performance standards and rules as customer makes available to provide from time to time provide services to customers. These services include but are not limited to providing support services f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1022 of paper book index to annual reports volume 1. We find that this company earned income from sale of software services and products and no segmental details are available in respect of the same. It is also observed that income generated under both these segments cumulatively amounts to tune of Rs. 6.67 crores and in schedule 11, entire revenue has been shown under one segment. It is also observed that this company is rendering software development services and licensing, and earns royalty of software products. Therefore in our considered opinion, in the absence of segmental details we cannot appreciate the view taken by authorities below. Accordingly we direct Ld.TPO to exclude this company from the final list. b) ICRA techno analytics Ltd: Ld.AR submitted that this company is functionally not comparable as the service segment comprises of software development, software consultancy, engineering services, web development, web hosting etc for which no segmental information is available. Ld.CIT DR placed reliance upon the orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. It is observed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ring field experts. Ld.AR submitted that segmental details of various activities carried out by this company is not available and also has significant intangibles. In support of his contentions he placed reliance on decision of coordinate bench of this Tribunal in case of Swiss Re Shared services (India) Pvt.Ltd vs ACIT reported in (2016) 76 Taxmann.com 22. On the contrary, Ld. CIT DR placed reliance upon the orders of authorities below. We have perused submissions advanced by both sides in light of records placed before us it is observed that though this company was into medical transcription and other services it can neither be held to be a very high-end activities nor can be held to be low- end services. However it is observed that this company had undergone acquisition which is an extraordinary event and can impact the profits for the year under consideration. Under such circumstances we are of the opinion that this company cannot be considered to be comparable with that of assessee for the year under consideration. Accordingly direct this company to be deleted from the finalist. b) ICRA Online Ltd Assessee objected for inclusion of this comparable. Ld.AR submitt....