AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2021 (9) TMI 499
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....ormation Systems Ltd.; and (e) Tata Elxsi Ltd. 2.10. Computing the working capital adjustment and in limiting the working capital adjustment while determining the arm's length price. Additional Ground: On the facts and in the circumstances of the case and in law and without prejudice to the grounds of appeal already filed by the appellant: 5. The Hon'ble Commissioner of Income Tax (Appeals) [CIT(A)] in pursuance of the order of the learned Assessing Officer (AO) and learned Transfer Pricing Officer (TPO) erred in law and facts in including Larsen & Toubro Infotech Limited in the set of comparables determined by the learned TPO whereas the same should have been excluded for the reason that it is functionally dissimilar. The Appellant craves leave to add, alter, amend or withdraw all or any of the Ground of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Further, this ground of appeal is independent of the grounds of appeal already filed by the Appellant." 2.1. In the additional ground, the assessee is seeking to exclude Larsen & Toubro Infotech Limited on account of multiple reason....
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....ting Expenses : Rs. 14,30,86,997 Operating (Profit/Loss) : Rs. 1,28,24,884 Op profit on cost % : 8.96% 4.1. The assessee had entered into international transaction with its AEs for the relevant assessment year as under:- Sl. No. Type of transaction Amount (Rs.) 1. Revenue from IT services and development 15,59,11,881 2. Revenue from Backend support (ITES) 57,90,782 Total 16,17,02,663 4.2. The Arm's Length Price (ALP) adjustment was made only in respect of SWD segment. The ALP adjustment made by the TPO are as follows:- Arm's length mean margin on cost 22.71% Less : Working capital adjustment (as per annexure C) 1.47% Adjustment margin 21.24% Operating cost Rs. 14,30,86,997 Arms Length Price (ALP) (121.24% of Operating cost) Rs. 17,34,78,675 Price Received Rs. 15,59,11,881 Shortfall being adjustment u/s 92CA Rs. 1,75,66,794 4.3. The assessee in its TP study had taken 21 companies as comparables. The TPO rejected the TP study and undertook fresh selection of comparables. The final list of comparables selected by the TPO are as under:- Sl. No. Name of companies - SWD segment Markup on Total Cost 1. ICRA Techno Analytics Ltd. (S....
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.... that ICRA Techno Analytics Limited is not functionally comparable to an assessee which is captive service provider for its AEs and into software development. The relevant finding of the Tribunal in the case of Cisco Systems (India) (P.) Ltd. (supra) reads as follow:- 7.1.1 We have heard rival submissions and perused the material on record. We find that this issue was considered by the Co-ordinate Bench of the Tribunal in the case of DCIT v. M/s. Electronics for Imaging India Pvt. Ltd. In IT(TP)A No. 212/Bang/2015 for assessment year 2010-2011, vide order dated 24.02.2016, wherein the Tribunal held as under:- "14. 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 contentions, 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 d....
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....roducts. The relevant finding of the Tribunal in the case of Cisco Systems (India) (P.) Ltd. (supra) reads as follow:- "7.2.2 After hearing both the parties and perusing the relevant material on record, we find that this issue also considered by the Co-ordinate Bench of the Tribunal in case of DCIT v. M/s. Electronics for Imaging India Pvt. Ltd. in IT(TP)A No. 212/Bang/2015 (supra), wherein the Tribunal held as under:- "19. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (2015) 58 taxmann.com 167 (Delhi-Trib.), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span ....
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....rable, by holding as under:- "23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. 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. ITA No. 1054/Bang/2011 dated 23.11.2012. 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." 7.2. In view of the aforesaid order of the Co-ordinate Bench of the Bangalore Tribunal, we direct the AO/TPO to exclude KALS Information Systems Limited from the final list of comparable companies. (d) Larsen & Toubro Infotech Limited 8. The assessee is seeking to exclude Larsen & Toubro Infotech Limited from the list of comparable companies as the said company is functionally different from that of the assessee. According to the assessee, Larsen & Toubro Infotech Limited h....
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....ntial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. 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 ....
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....t relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons 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." 8.3. In view of the aforesaid order of the Co-ordinate Bench of the Bangalore Tribunal, in the case of Marlabs Innovations (P.) Ltd. v. ACIT (supra) and also for the reason that Larsen & Toubro Infotech Limited's financials does not bifurcate between revenue earned from software products and software development services, and also it owns intangible assets, we direct the AO/TPO to exclude Larsen & Toubro Infotech Limited fro....
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....vation design engineering and visual computing labs. Thus, it is prayed that the above company may be excluded from the final list of comparables. The assessee has also relied on the order of the Bangalore Bench of the Tribunal in the case of Cisco Systems (India) (P.) Ltd. (supra). 10.1. The learned Departmental Representative supported the orders of the AO/TPO. 10.2. We have heard both parties. We find that the Bangalore Bench of the Tribunal in the case of Cisco Systems (India) (P.) Ltd.(supra) had held that Tata Elxsi Limited is not functionally comparable to the assessee. The relevant finding of the Tribunal, reads as follow:- "7.5.2 After hearing both the parties and perusing the material on record, we find that Tata Elxsi Limited has been excluded from the list of comparables by the Tribunal in the case of CGI Information Systems and Management Consultants Private Limited v. ACIT in IT(TP)A No. 586/Bang/2015 & 183/Bang/2017 for assessment years 2010-2011 and 2012-2013 (order dated 11.04.2018) for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margin. Therefore, in view of the order of the Co-ordinate B....