TaxTMI 
TaxTMI 
2019 (6) TMI 1673
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.... Act, 1961 (Act), income arising from such international transaction has to be determined having regard to Arm's Length Price (ALP). 3. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs. 15,70,68,882/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction is at Arm's Length, the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs. 15,70,68,882. The Operating cost of the Assessee was Rs. 13,65,81,636/-. The operating profit was thus Rs. 2,04,87,246 and thus OP/OC was 15%. The Assessee in its TP Study had chosen 42 companies as comparable companies. The average arithmetic mean of the profit margin of the companies so selected....
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..../s. 144C of the Act. 7. Before DRP, the Assessee raised a specific objection wherein, the Assessee contended that the TPO has excluded companies whose turnover was less than Rs. 1 crore. The TPO by the same logic should have excluded turnover of companies whose turnover was huge (above Rs. 200 crores) compared to the turnover of the Assessee which was only Rs. 15.71 Crores. The DRP did not agree with the above submission of the Assessee on the ground that when a company is functionally comparable, large turnover would not be a criteria to say that the company is not comparable. 8. Finally the DRP gave some directions to the TPO in its directions dated 27.8.2018. Consequent to the DRP's direction the TPO determined the addition to the made to the total income on account of adjustment in ALP at a sum of Rs. 1,51,19,586/- by his order dated 4.9.2018. 9. Aggrieved by the order of the DRP in not excluding the following six companies Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., and Thirdware Solutions Limited, by applying turnover filter, the Assessee has preferred the present appeal before the Tribunal. It is undisputed that the turnover of....
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.... exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) agreed with the submission of the 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. Vs. DCIT (2012) 53 SOT 159 (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. Th....
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.... hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus margin 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....
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....elevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessed 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 are 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, w....
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.... huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not "materially affect the price ................ or cost". Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore 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. and others Vs. M.R. Apparao and another (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 (....
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....ow a binding decision. If they do so, the decisions so rendered have to be regarded as per incuriam. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon'ble Supreme Court in the case of Union of India Vs. Raghubir Singh AIR 1989 SC 1933, Union of India Vs. S.K. Kapoor (2011) 4 SCC 589 and Sundeep Kumar Bafna Vs. State of Maharashtra and another (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 irreconcilable 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 Vs. State of Maharashtra & another (2014) 16 SCC 623 (at page-642 (Para-19) 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 ....
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....y High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 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 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 (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....