AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 1447
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.... USA. In terms of the provisions of Sec. 92-A of the Act, the Assessee and its wholly owned holding company and its subsidiary were Associated Enterprises ("AEs"). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 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 first dispute is with regard to determination of Arms' Length....
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....s AE(s) is computed as under: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 97,81,14,574 Taxpayers Operating Cost OC 84,72,03,052 Taxpayers Operating Profit OP 13,09,11,522 Taxpayers PLI PLI=OP/OC 15.45% 35th Percentile Margin of comaparable set 20.87% Adjustment Required (if PLI< 35^th Percentile) Yes Median Margin of comparable set M 27.28% Arm's Length Price ALP=(1+M)*OC 107,83,20,045 Price Received OR 97,81,14,574 Shortfall being adjustment ALP-OR 10,02,05,471 21.4.2 The above shortfall of Rs. 10,02,05,471/- is treated as Transfer Pricing adjustment u/s. 92CA in respect of software development segment of the Taxpayer's International Transactions." Thus a sum of Rs. 10,02,05,471/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed 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 ....
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.... (a) to (d)...... (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises enteri....
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....sactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 9. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 10. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the ....
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....the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No. 18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in th....
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....see was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs. 200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7 of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations: 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 ....
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....s ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incuriam. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the 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 th....
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.... Systems (supra). The argument that the Assessee himself chose 10 times turnover as criteria in its TP study is no ground to reject the plea of the Assessee, as it is well settled that tax liability has to be determined in accordance with law and not on admission of parties. There is no principle of estoppel that applies in determining tax liability. Therefore, we are of the view that the argument of the learned DR that the criteria of 10 times the turnover of the Assessee has to be applied in the present case, cannot be accepted. 17. The TPO/AO is directed to compute the ALP of the international transaction of rendering of SWD services by the Assessee to AE in the light of the directions given above, after affording Assessee opportunity of being heard. 18. The next issue to be dealt with in this appeal is Ground No. 5 to 8 of the concise grounds of appeal with regard to determination of ALP by construing the delayed realization of receivable by the Assessee from its AE as a separate international transaction and determining ALP of such delayed receivables. These grounds read as follows: 5. The TPO, AO and DRP have erred in law and on facts in computing ....
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.... 467958464 Interest Rate 4.985% Period of delay (days) 185 Interest Amount 1,18,23,644 *Period of delay is 365 - allowed period of 180 days. Thus, arm's length interest amount to be charged works out to be Rs. 1,18,23,644. The same is treated as adjustment u/s. 92CA for interest on delayed receivables. 20. The DRP firstly held that realizing receivables beyond the agreed credit period was a separate international transaction and the ALP of such transaction has to be determined separately. Thereafter the DRP held that the TPO should have applied SBI Short term deposit rate of interest and not LIBOR and doing so resulted in an enhancement of the addition made by the TPO. The observations of the DRP in this regard were as follows: "2.9.18 As regards adoption of ALP interest rate, the approach of the TPO in adopting LIBOR rate is incorrect. In the facts of the case, we consider that, it is pertinent to look into the opportunity costs i.e. the income that the assessee would have earned, had the assessee received the amounts in time. This has to be determined taking into account the Indian market condition....
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....he submission made before the TPO consequent to DRP order is as follows: 1. The entire Debtors both opening balance as at 01.04.2015 as well as closing balance as at 31.03.2016 were received within the stipulated time. Hence computation of notional interest does not arise 2. A tabulation of the debtors as at the Opening date 01.04.2015 and closing date 31.03.2016 with date, invoice wise details of receipt of payment, which reveal that the entire debtors were realized within a period of 180 days except for the opening debtors amounting to Rs. 3.97 Crores which were realized within a period of 200 days i.e., delay of about 20 days. (average) was also given, which is as follows: It was submitted that since the debtors were realized within the allowed credit period, computation of notional interest on the outstanding does not arise. 22. The learned counsel also invited our attention to the master service agreement, para 5.2 (in page 5 of the agreement under the heading 'Invoicing and Payments') wherein the credit period allowed to the holding company is 180 days or such other time as may be prescribed by the R....
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....d in the open court on the date mentioned on the caption page. ============= Document 1 Sl. No. Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Average 1 & Kals Information 3.97% 5.77% 16.94% 8.60% 2 Systems Pvt. Ltd. E-Zest Solutions Ltd. 7.65% 11.80% 14.88% 10.87% 3. Rheal Software Pvt. 3.20% 2.76% 36.64% 14.50% Ltd. 4. C G-V A K Software & 19.60% 19.87% 13.81% 18.50% Document 2 Exports Ltd. 5 R S Software (India) -2.09% 32.75% 24.14% 20.87% Ltd. 6. Larsen & Toubro 26.29% 24.22% 23.54% 24.83% Infotech Ltd. 7 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 8 Inteq Software Pvt. Ltd. 7.53% 32.14% 45.00% - 28.20% 9 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 10. Infobeans Technologies 34.98% 20.78% 41.95% 32.42% Ltd. 11. Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 12 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 13 Aspire Systems (India) 34.26% 47.56% 38.04% 39.28% Pvt. Ltd. 14. Cy....