TaxTMI 
TaxTMI 
2020 (11) TMI 471
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....(a) Whether the tax authorities are justified in deducting Satellite link charges from Export turnover while computing deduction u/s 10A of the Act. (b) Transfer pricing adjustment sustained by Ld CIT(A). 4. Facts relating to the case are discussed in brief. The original name of the company was M/s Aztec Software & Technology Services Ltd. It has merged with M/s Mindtree Limited. The assessee is engaged in developing software solutions for its customers in USA. The Transfer Pricing Officer (TPO) noticed that there were contradictions between Transfer pricing report and Audit report given in Form 3CEB with regard to the nature and amount of international transactions pertaining to this year. Ultimately, the TPO rejected the transfer pricing study of the assessee. 5. The TPO noticed that the turnover of the assessee was Rs. 82.34 crores. The TPO adopted Transactional Net Margin Method (TNMM) as most appropriate method. He adopted Operating Profit /Operating Revenue (OP/OR) as the Profit level indicator. The TPO, by making his own search, selected following 17 comparable companies. SI. No. Comparables Selected by TPO Sales (Rs. In Cr.) OP to Total Cost ....
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..... No. Name of Company Turnover (Rs.In crores) (a) Igate Global 406 (b) Fletronics software systems Ltd 457.45 (c) L & T Infotech Ltd 562.45 (d) Satyam Computer Services Ltd 3464.20 (e) Infosys Ltd 6859.70 In this regard, the ld CIT(A) followed the decision rendered by Bangalore bench of Tribunal in the case of Genisys Integrating Systems Vs. DCIT (15 ITR (Trib) 475) and certain other decisions, wherein identical view has been expressed. In the above said cases, it was held that the companies having turnover of less than 200 crores cannot be compared with the companies having more than 200 crores. The turnover of the assessee company is Rs. 82.34 crores and hence it falls under the category of companies having turnover of 1 to 200 crores. The above said five companies are having turnover of more than 200 crores and hence the Ld CIT(A) held that these companies cannot be considered as comparable companies. 9. The assessee also sought exclusion of certain other companies on the ground of functional dissimilarity. The Ld CIT(A), however, rejected the same by following certain case laws. All those case laws had expressed the view ....
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....e Assessee and he excluded the following 5 companies whose turnover was above Rs. 200 Crores from the list of comparable companies, viz., (i) Flextronics Ltd., (ii) L & T Infotech Ltd., (iii) M/s. Infosys Technologies Ltd., (iv) Satyam Computer Services Ltd., (v) iGate Global Solutions Ltd. The CIT(A) in coming to the above conclusion placed reliance on the decision of the ITAT Bangalore in the case of Genisys Integrating Systems (India) (P) Ltd. v. Dy. CIT [2012] 53 SOT 159/20 taxmann.com 715 (Bang.) wherein it was held when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper limit also, as size matters in business. 17.1 The learned DR submitted that high turnover is not a relevant criterion to regard a company as not comparable, so long as the two companies are functionally comparable. If functions by two companies are identical then they have to be regarded as comparable. According to him therefore the CIT(A) was not justified in excluding 5 companies on the ground that their turnover was above Rs. 200 Crores and cannot be compared with the Assessee whose turnover was around Rs. 10.65 Crores. I....
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....of profits and therefore turnover would be irrelevant and have no impact of the profit margins. His further submission was that under Rule 10B(3) of the Income Tax Rules, 1962 (Rules) it is only functions performed, assets employed and the risks assumed that are relevant criteria for comparison and turnover is not a prescribed criterion for the purpose or comparison. He fairly admitted that there are differences of opinion amongst various benches of the Tribunal on the application of turnover filter and that some Benches have held that high turnover was relevant criteria for excluding comparable companies. His prayer in the alternative was for constitution of a special bench to resolve the conflict. 17.3 Per Contra the learned counsel for the Assessee submitted that ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 order dated 13.10.2017, considered the various aspects of application of turnover filter for excluding companies and has noted that the first decision rendered on application of this filter was in the case of Genisys Integrating Systems (I)(P) Ltd. (supra) rendered on 5.8.2011. In the case of Dell ....
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....lso. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assesse....
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....efore the observations of the Hon'ble Delhi High Court in so far as it relates to application of turnover filter are obiter dictum. Obiter dictum though is entitled to a weight cannot be equated with ratio decidendi of a case. In support of his contention as above, he relied on the decision of the Hon'ble Supreme Court in the case of Director of Settlements A.P. v. M.R. Apparao [2002] 4 SCC 638. Countering the submission of the learned DR that the decision of the Hon'ble Bombay High Court rendered in the case of Pentair (supra) is not ratio decidendi as it was merely dismissal of appeal u/s.260A of the Act on the ground that no substantial question of law arose for consideration, learned counsel drew our attention to the decision of the Bombay High Court in the case of Pentair water India (P.) Ltd. (supra) paragraph 9, wherein the Hon'ble Bombay High Court after referring to a decision of the Hon'ble Delhi High Court rendered in the case of CIT v. Agnity India Technologies (P) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi), clearly observed that turnover is obviously a relevant fact to consider the comparability. Our attention was also drawn to paragraph-3....
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....R 1989 SC 1933, Union of India v. S.K. Kapoor [2011] 4 SCC 589 and Sundeep Kumar Bafna v. State of Maharashtra [2014] 16 SCC 623. In the aforesaid decisions the Hon'ble Supreme Court held that in a situation where there are conflicting decisions of High Court on an issue which are irreconcileable and pronounced by judges of co-equal strength, then the earlier view has to be followed as the later decision has to be regarded as per incuriam. The Hon'ble Supreme Court in the case of Sundeep Kumar Bafna (supra) held that a decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench and when High Courts encounter two or more mutually irreconcilable decisions of the Supreme Court cited at the Bar, the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. The following were the relevant observations of the Hon'ble Supreme Court: "19. It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule i....
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....espectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8 In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai ....
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.... The Ld A.R submitted that all the above said four companies were examined by the Bangalore bench of Tribunal in the case of CGI Information Systems & Management Consultants (P) Ltd (IT(TP)A No.612/Bang/2013) on functionality different basis. Accordingly, he prayed for exclusion of above said four companies. 14. On the contrary, the Ld A.R submitted that the Ld CIT(A) has relied upon certain case laws and held that the functionality difference cannot be a criteria to exclude the companies. 15. We have heard rival contentions and perused the record. We notice that the Bangalore bench of Tribunal has excluded above said four companies holding that these are not comparable companies in the case of CGI Information systems & Management Consultants (P) Ltd (supra). The relevant discussions made by the Tribunal in respect of above said four companies are extracted below:- (A) Bodhtree Consulting Ltd:- 15.2. We have perused submissions advanced by both sides in light of records placed before us. We find that Ld.CIT(A) directed their exclusion of these comparables as they are functionally dissimilar to Assessee. Ld. CIT (A) observed that engaged in develop....
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....8. Ground No.7 is against exclusion of Exensys software solutions Ltd and Thirdwere solutions Ltd by Ld.CIT (A) Ld.CIT.DR submitted that these comparables were excluded for having abnormal profits by Ld.CIT (A). Ld.CIT DR referred to and relied upon his arguments advanced while dealing with ground No. 2 on turnover filter considered herein above. 18.1. On the contrary, Ld.AR placed reliance upon decision of this Tribunal in case of ITO vs Net Devices Pvt.Ltd reported in [2015] 63 taxmann.com 94. 18.2. We have perused submissions advanced by both sides in light of records placed before us. Apart from the fact that, profit margins of these companies were abnormally high owing to extraordinary events that happened during the relevant previous year, these two companies have to IT(TP)A No.612/Bang/2013 A. Y : 2005 - 06 be excluded on the ground that these two companies are functionally dissimilar to that of the Assessee which is contract software service provider. As far as Exensys Software Solutions Ltd., is concerned, we have already held that Ld.CIT(A) was justified in excluding this company from the list of comparable companies on the ground that ....