TaxTMI 
TaxTMI 
TaxTMI 
2021 (8) TMI 1334
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....ansaction" and in terms of Sec. 92(1) of the Act, any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the aforesaid two international transaction of (i) rendering SWD services to the AE and (ii) ITeS to the AE. We shall deal each of the international transactions separately. 3. As far as the provision of Software Development services are concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the assessee was arrived at 11.81% by the assessee in its TP study. The operating income was Rs. 2,82,25,47,733/-. The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified 16 companies whose average arithmetic mean of prof....
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....ent the TPO's order was modified, the Revenue has preferred appeal before the Tribunal. 8. We shall take up for consideration assessee's appeal first. Though the assessee has raised many grounds in its appeal, at the time of hearing, the learned Counsel for the assessee submitted that the assessee wishes to press for adjudication only ground Nos. 9, 11 and 13. These grounds read as follows: "9. The Ld. CIT(A) erred in law and on facts by including Infosys Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas the scale of operations of this comparable is significantly larger than that of the Appellant, it earns significant brand profits and owns significant intangible assets, it has income from sale of software products, it incurs high sales and marketing expenses and that it has significant research & development expenditure. 11. The Ld. CIT(A) erred in law and on facts by including Persistent Systems Ltd. as a comparable to the Appellant on the ground that it is functionally comparable, whereas this comparable should have been excluded on the grounds that there exists extra-ordinary events d....
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....ether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:- "17.7. We have considered the rival submissions. The substantial 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 CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judg....
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....e case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not 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)." 12. In view of the aforesaid decision of the Tribunal, we are of the view that the CIT(A) ought to have excluded Infosys Ltd., as a comparable company by applying the turnover filter. We direct that this company should be excluded as a comparable company. 13. The next grievance of the Assessee is regarding not excluding Persistent Systems Ltd. As far as exclusion of this company is concerned, the ld. counsel for the assessee drew our attention to a decision of this Tribunal rendered in the case....
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....l adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 15. The learned counsel for the Assessee brought to our notice the decision of the Tribunal in Assessee's own case for AY 2012-13 wherein on an identical issue, the Tribunal held that working capital adjustment cannot be denied to the Assessee, in IT (TP) A.No. 1939/Bang/2017 Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). "10. The next grievance projected by the Assessee in its appeal is with regard to the action of the CIT(A) in not allowing any adjustment towards working capital differences. On this issue we have heard the rival submissions. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or....
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....; (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comp....
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....t has been explained as follows "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an elemen....
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....tion given by the Assessee. The CIT(A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding thi....
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....ased on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT(A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT(A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at page 173 & 192 of the Asse....
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....rned, the first two grounds of appeal of the Revenue reads thus:- "1. The ld. CIT(A) erred in following the ratio laid down by the Hon'ble High Court in the case of M/s. Tata Elxsi Ltd. (ITA No. 70/2009). 2. The ld. CIT(A) erred in holding that the expenses reduced from the Export Turnover must also be reduced from the Total Turnover since there is no provision under Sec. 10A for exclusion of such expenses from Total Turnover." 19. We have considered the rival submissions. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Karn), we are of the view that whatever is excluded from export turnover should also be excluded from total turnover while computing deduction u/s. 10A of the Act. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon'ble Karnataka High Court has been upheld by the Hon'ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No. 8489-98490 of 2013 & Ors. dated 24.04.2018....
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....nt Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec. 92-A of the Act, the assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services was "international transaction" and in terms of Sec. 92(1) of the Act, the Any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 25. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 19.14% by the Assessee in its TP study. The Assessee chos....
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....e assessee did not file objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The AO passed the final Order of Assessment against which the assessee filed appeal before CIT(A). To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 29. At the time of hearing the learned counsel for the assessee prayed for limited relief of exclusion of 3 companies chosen by the TPO and retained by the DRP, viz., CG Vak Software & Exports Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd. He also prayed for inclusion of 1 company rejected by the TPO and CIT(A) viz., Spry Resources India Private Limited. All other grounds with regard to determination of ALP as raised in the grounds of appeal before Tribunal were not pressed except Ground No. 14 with regard to Working Capital adjustment. 30. The learned counsel for the assessee submitted that in the case of M/s. Hewlett Packard (I) Software Operation Pvt. Ltd., Vs. ACIT in IT(TP)A No. 2866/Bang/2017 : Asst.Y....
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....see in the appeal was chosen as comparable by the TPO. On inclusion of the company Spry Resources India Pvt. Ltd., (supra) the Tribunal held as follows: "(c) Spy Resources India Pvt. Ltd., 39. This comparable was excluded by Ld. TPO by observing that this company has reported trade receivables at Rs. 7.49 crores for year under consideration whereas, in immediately preceding year, total turnover was Rs. 3.45 crores only. Ld. AR submitted that, there is no objection raised by Ld. TPO regarding its functional similarities. He further submitted that merely because trade receivables for year under consideration are more than what was in the preceding year, exclusion of this comparable is not appropriate. 40. Ld. CIT DR placed reliance upon orders passed by authorities below. 41. We have perused submissions advanced by both sides in light of records placed before us. 42. We are of opinion that this comparable needs to be relooked into by Ld.AO/TPO, as this has not been raised before DRP and nothing has been filed before DRP in respect of this comparable. Ld.CIT DR did not object for consid....
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....quest for exclusion of Larsen & Toubro Infotech Ltd. for software development services segment, it is the submission of the learned AR of the assessee that this issue is covered in favour of the assessee by the Tribunal order rendered in the case of Pitney Bowes Software India (P.) Ltd. (supra) for the same Assessment Year. As per Para No. 3 of this Tribunal order, the TP adjustment was made in respect of provision of software development services to the AE. In the present case also, the issue in dispute is regarding exclusion or inclusion of this comparable i.e. Larsen & Toubro Infotech Ltd. in respect of the software development services segment of the assessee company. Hence it is seen that this Tribunal order is relevant in the present case. We also find that in respect of both these comparables i.e. Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd., the Tribunal order rendered in the case of Advice America Software Development Center (P.) Ltd. (supra) is against the assessee. Copy of this Tribunal order is made available before us. Paras 14 to 21 of this Tribunal order are relevant for decision in respect of exclusion of Larsen & Toubro Infotech Ltd. and Persistent Sys....
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....e for specific needs of a customer. No product is sold off the shelf by the company. Hence the objection of the Assessee that this company is a Software Product company was rightly held by the TPO/DRP to be not valid. 18. The objection with regard to absence of segmental information has been met by the TPO by pointing out that the whole segment of SWD services was considered for comparability. The objection of the Assessee in this regard is not specific and is vague and is on an assumption that this company operates in three segments. The TPO has pointed out that there is only one segment and hence this objection in our view was rightly disregarded by the revenue authorities. 19. As far as the objections regarding presence of intangibles, it is seen from the order of the TPO that the intangibles are nothing but Operating systems, office tools, development tools, testing tools etc., that are used in the process of rendering SWD services by the Assessee and therefore cannot be the basis to hold that this company is functionally not comparable with the Assessee. As far as the objection regarding pr....
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....d, the plea of the Assessee for exclusion of this company on the ground that it is a software product company is held to be without any basis and is rejected. No other arguments were advanced for exclusion of this company. Hence, we uphold the orders of the revenue authorities including this company in the list of comparable companies." 9. In respect of the applicability of this Tribunal order for exclusion of Larsen & Toubro Infotech Ltd., this has been submitted by ld. AR of assessee in the chart submitted before us that on page No. 698 of Annual Report paper book, this company has debited an amount of Rs. 27,10,89,274/- as cost of bought-out items for resale. But this fact was not brought to the notice of the Tribunal in the case of Advice America Software Development Center (P.) Ltd. (supra). It has also been submitted that on page No. 706 of Annual Report paper book, this has been reported that this company is engaged in sale of services to its related parties and this fact was also not brought to the notice of Tribunal in case of Advice America Software Development Center (P.) Ltd. (supra). When we examine paras 14 to 20 of this Tribunal order where there ....
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....hat as per the remaining three Tribunal orders rendered in the case of Microsoft Research Lab India (P.) Ltd. (supra), WM Global Technology Services (India) (P.) Ltd. (supra) and in the case of Tecnotree Convergence Pvt. Ltd. (supra), the matter was remanded back to the TPO for fresh decision and therefore, in our considered opinion and in the facts of present case, we feel that this issue should also be restored back to the file of TPO for fresh decision in the light of all these four Tribunal orders after providing adequate opportunity of being heard to the assessee. We order accordingly. 11. In respect of software development services segment, we restore the matter back to the AO/TPO for fresh decision regarding the assessee's claim for exclusion of Larsen & Toubro Infotech Ltd. and Persistent Systems Ltd. after providing adequate opportunity of being heard to the assessee and the issue should be decided after considering all available Tribunal orders for Assessment Year 2013-14 in respect of exclusion of these two companies. Accordingly ground Nos. 9 and 10 are allowed for statistical purposes. 34. Following the aforesaid decision we remand the issue of....