TaxTMI 
TaxTMI 
2022 (12) TMI 1258
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.... Income-tax Rules, 1962 read with section 92D of the Income-tax Act, 1961 and ought to have considered the merit of comparables irrespective of whether they figured in the TPO's search database. 3. The learned Authorities Below erred in their computation of the profit-level indicators of the comparables. (Additional Ground 2) 4. The learned Authorities Below erred in not following rule 10B(1)(e)(ii) of the Income-tax Rules 1962 in computing the Arm's Length Price. 5. The learned Authorities Below adopted the wrong turnover filter. 6. The learned Authorities Below adopted the wrong related party transactions filter. (Additional Ground 1) 7. The learned Authorities Below erred in rejecting the following comparables: 7.1. Akshay Software Technologies Ltd., 7.2. ASM Technologies Ltd., 7.3. Benchmark IT Solutions India Pvt. Ltd., 7.4. Evoke Technologies Pvt. Ltd., 7.5. E-Zest Solutions Ltd., 7.6. Globant India Pvt. Ltd., 7.7. Harbinger Systems Pvt. Ltd., 7.8. Infomile Technologies Ltd., 7.9. Inteq Software Pvt. Ltd., 7.10. ITC Infotech India Ltd.....
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....n as the Operating Profit / Operating Cost. The assessee's PLI as per the TP study is computed at 10.92% as per Table below:- Particulars Amount Total Revenue 2,84,83,31,417 Employee Benefits 2,23,98,04,589 Project Cost 15,19,23,277 Depreciation and amortization 2,00,79,599 Other expenses 17,00,48,037 Less: Net loss on foreign currency transactions andtranslation (12,309,888) Less: Loss on sale of assets (1,724,020) Less: Prior period expenses (17,435) Less: Interest on TDS Delayed Payments (2,513) Total Expenses 2,567,801,646 Operating Profit 280,529,711 OP/OC 10.92% 6. The assessee chose the following comparables in the TP study. Determination of Arm's Length Range Sl.No. Company Database Operating Margin 1 Akshay Software Technologies Ltd. Prowess -3.29% 2 Rheal Software Pvt. Ltd. Prowess -1.81% 3 Evoke Technologies Pvt. Ltd. Prowess 4.92% 4 Sasken Technologies Ltd. ACE TP 6.18% 5 Harbinger Systems Pvt. Ltd. Prowess 7.86% 6 K M G Infotech Ltd. Prowess 7.93% 7 Inteq Softw....
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.....88 26.47 67.57 29.93 16 Cygnet Infotech Pvt. Ltd. 25.24 30.45 36.61 30.19 17 Infosys Ltd. 38.79 38.30 41.40 39.50 18 Threesixty Logica Testing Services Pvt. Ltd. 36.63 48.46 42.02 41.94 19 Cybage Software Pvt. Ltd. 41.89 62.90 68.68 57.52 20 Consilient Technologies Pvt. Ltd 54.85 71.82 69.51 65.14 35th Percentile 21.24 Median 26.18 65th Percentile 26.46 8. Based on the same, the TPO worked out a TP adjustment of Rs.38,26,58,668 as computed below:- SWD SEGMENT Particulars Formula Amount (In Rs.) Taxpayers Operating Revenue OR 2,84,83,76.417 Taxpayers Operating Cost OC 2,56,06,55,481 Taxpayers Operating Profit OP 28,77,20,936 Tax Payers PLI PLI=OP/OC 11.24% 35th Percentile Margin of comparable Set 21.24% Adjustment Required (if PLI < 35^TH Percentile Yes Median Margin of comparable set M 26.18% Arm's Length Price ALP = 1+M)*OC 3,23,10,35,085 ....
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....'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 nonjurisdiction High Court, even though the said decision is of a nonjurisdictional 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 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 res....
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....he 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). 14. Respectfully following the above decision, we exclude the companies whose turnover is not within the range of Rs.200 crores to 2000 crores. 15. The ld. AR further prayed for exclusion of the following 5 comparables. Cybage Software Pvt.Ltd. 16. The ld. AR submitted that Cybage Software P. Ltd. is not a captive service provider like the assessee and hence not functionally comparable to the assessee. The risk profile is not comparable and this company has geographical presence in Australia, Ireland, Canada, UK, USA & Singapore. Therefore, the same cannot be compared with assessee who has operations only in India and UAE. The ld. AR further submitted that the Hyderabad Bench of the ITAT in the case of Infor India Pvt. Ltd. V. ACIT (ITA No.1689/HYD/2019 dated 19.10.2020) has held that Cybage Software P.Ltd. is to be excluded on the basis it has abnormally high margin. The ld. AR relied on other decision....
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....e Software Pvt. Ltd. as comparable, therefore we direct the TPO / AO to exclude Cybage." 19. Respectfully following the above decision, we exclude this company from the comparables list. Persistent Systems Ltd. 20. The ld. AR submitted that the TPO has adopted a 25% related party transaction [RPT] filter. The ld. AR submitted that the coordinate Bench of ITAT in the case of ANSR Global Corporation (P.) Ltd vs ACIT (2022) 139 taxmann.com 283 has held that RPT filter has to be applied adopting threshold limit of 15 per cent when good number of comparables are available. The ld. AR submitted that if 15% RPT filter is applied, then Persistent Systems Ltd. will fail the filter as RPT percentage of Persistent Systems Ltd. as per the financials (page 1568 of PB-IV & pg. 1528 of PB-IV). 21. We have heard the ld. DR As far as exclusion of this company Persistent Systems Ltd., on the ground that the related party transaction is more than 15% is concerned, we find that the admitted position with regard to related party transaction in this case of Persistent Systems Ltd., is 39.15%. The DRP in its order proceeded on the basis that the threshold limit for application of the Related ....
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....upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 17 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of com....
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....nd the suggested substantial questions of law do not meet the requirements of section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs." 6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed ....
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....ally comparable to the assessee and the decision of the Mumbai Tribunal in the case Red Hat Pvt.Ltd. (supra), we hold that Nihilent Ltd. should be excluded. Tata Elxsi Ltd. 26. The ld. AR submitted that Tata Elxsi Ltd. is not a pure software development company like the assessee and provides product design & engineering services to consumer electronics, communication, transportation industry, system integration and support services for enterprise customers. Tata Elxsi Ltd. also provides wide range of other services and therefore not functionally comparable with that of the assessee. In this regard, our attention was drawn to the decision of the coordinate Bench of the Tribunal in the case of Infinera India Pvt.Ltd. v. ITO [2016] 72 taxmann.com 68 (Bang.Trib.). 3. M/s Tata Elxsi Ltd., For exclusion of this company also, reliance has been placed on the same Tribunal order rendered in the case of M/s Cisco Systems (Ind.) Pvt.Ltd.,(Supra) and our attention was drawn to para26.4 to 26.5 of the order available on pages 103 to 105 of the case law compendium. For the sake of ready reference these paras are reproduced hereunder; "26.4 Tata Elxsi Ltd.:- As far as this....
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.... that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the other tw....
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.... years can be considered where quarterly results are available and the margins for the financial year ended 31st March can be extrapolated from the quarterly results. The ld. AR submitted additional evidence with quarterly results of R Systems International Ltd. and prayed for the admission of the same. The ld. AR further submitted that with the additional evidence containing the quarterly results of R Systems International Ltd. can be extrapolated and compared with that of the assessee. 29. The ld. DR objected to the admission of additional evidence and submitted that the assessee in the TP study has already included R Systems International Ltd. and therefore cannot now ask for recomputation of margin of the comparable. 30. We have heard the rival submissions and perused the material on record. We notice that the financial year of R Systems International Ltd. is year ending 31st December and therefore the same cannot be considered as a comparable with the assessee having the year end as on 31st March. We also notice that the coordinate Bench of the Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT [2020] 119 taxmann.com 265 (Bang. Trib.) has held that - "13. ....
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.... exclusion based on functionality. The ld.AR submitted that Sasken. is engaged in providing software services and is functionally similar to the assessee. In this regard, the ld.AR relied on the decision of the coordinate Bench of the Tribunal in the case of Brocade Communication Systems Ltd. v. DCIT [2020] 117 taxmann.com 439 and EMC Software & Services India P. Ltd. v. JCIT [2020] 115 taxmann.com 293 33. We heard the rival submissions and perused the material on record. We notice that the issue of exclusion of Sasken has been considered by the coordinate bench of the Tribunal in the case of Brocade Communication Systems Ltd(supra) where it has been held that 22. This company was selected by the assessee and came to be rejected by the TPO for the reason that the company was functionally dissimilar. The exclusion of the company came to be upheld by the DRP on the grounds that (i) the company fails export turnover filter; (ii) the company earns revenue from licensing, SWD and royalty; and (iii) the company offers R&D consultancy, wireless and software products. 23. In this regard, it was submitted by the Id. AR that the company is functionally similar to the App....