TaxTMI 
TaxTMI 
2021 (11) TMI 1138
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....f 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 nonresidents, 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 dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pri....
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....m's length price of the services rendered by the taxpayer to its AE(s) is computed as under: SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 20.90% Less: Working Capital Adjustment -8.89% (As per Annex. B) Adjusted margin 29.79% Operating Cost 2469,47,032 Arm's Length Price(ALP) 32,05,12,553 129.97% of Operating Cost) Price Received 28,55,69,003 Variation in Price 3,49,43,550 3% of price received 85,67,070 Shortfall being adjustment 3,49,43,550 15.4.2 The above shortfall of Rs. 3,49,43,550/- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions." 6. The assessee filed objections before the Dispute Resolution Panel (DRP) against the draft Assessment Order of the AO incorporating the additions suggested by the TPO in his order to the extent the DRP did not agree with the submissions of the assessee. The assessee is in appeal before the Tribunal. At the time of hearing, learned Counsel for the assessee prayed for adjudication of ground No.4a, 5, 6, 7a and 7b and 8. In addition ....
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.... 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 entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin th....
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....ain 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 conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 12. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention ....
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.... consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant 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 .ire (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 assessee 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 benefi....
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....jected 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 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 th....
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....ication of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 15. In view of the aforesaid decision, we hold that companies listed in paragraph 8 of this order, whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies." 16. The next ground to be adjudicated is ground No.6. This ground relates to exclusion of Akshay Software Technologies Ltd. The assessee brought to our notice decision of the Tribunal rendered in the case of Aptean India Pvt. Ltd., Vs. DCIT ITA 2679/Bang/2017 order dated 06.11.2020. In the aforesaid decision which relates to Assessment Year 2013-14 in the case of a software development service provider such as the assessee this Tribunal considered the comparability of Akshay Software Technologies Ltd. This company was excluded from the list of comparable companies by the DRP. The assessee sought its inclusion before the Tribunal. On the plea for inclusion of this company, the Tribunal remanded the issue to the TPO for fresh consideration with the following observations: "35. It has been submitted that Ld.TPO re....
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....mparable company perform similar functions. Before us, the Ld A.R placed her reliance on the decision rendered by coordinate bench in order to contend that this company is comparable. However, TPO has issued notice u/s 133(6) of the Act to the above said company and collected the details of functions performed by it, wherein the nature of activities performed by this company is stated as "providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services". It is pertinent to note that the above said information was given by M/s Akshay Software Technologies Ltd. However, we find that they are general description of the functions performed. Specific functional details have not been furnished. What is required to be found out is whether functions fall under the category of "Software development services", as in the case of the assessee company. Accordingly, we are of the view that this company may also be restored to the file of AO/TPO, so that the assessee would get an opportunity to show that the functions performed by this company and the assessee are similar. Accordingly, we restore this company also to the file of the....
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....ch the assessee sought exclusion of this company as a comparable by the TPO was that it was functionally different in the sense that it was engaged in software product development and absence of segmental data. The TPO & DRP took the view that product development was part of software development services. 10. The ld. counsel for the assessee brought to our notice a decision of ITAT Bangalore in the case of NXP India (P.) Ltd. v. Dy. CIT [2020] 116 taxmann.com 421 (Bang - Trib.) wherein in the case of an assessee for AY 2013-14 engaged in Software development services such as the assessee it was held that CG Vak Software Exports Ltd. was not a good comparable. The following were the relevant observations of the Tribunal:- 'III. C G Vax Software & Exports Limited 24. The learned AR submitted that this company should be excluded for the reason that C G VAX Software & Exports Limited is engaged in software development and sale of products which involves high degree of R & D expenditure and to demonstrate the same, he drew our attention to the paper book page Nos.1018 and 1034 and submitted that the nature of the business of software development involves i....
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....ts Limited is not only engaged in the business of computer software development, but also engaged in product manufacturing process, whereas the present assessee is not in product manufacture activity. M/s. CG VAK Software & Exports Ltd. owns huge intangible assets and also engaged in outsourced product development. In view of the foregoing reasons, we hold that the said company cannot be considered for inclusion in the list of comparables. We, therefore, direct the TPO to exclude the said company from the list of comparables.' 11. Following the aforesaid decision, we direct the exclusion of CG Vak Software Exports Ltd. from the list of comparable companies." 23. Respectfully following the same, we direct exclusion of CG Vak software exports Ltd from the final list of comparable companies. 24. The next ground to be adjudicated is ground No.4(a) and this ground is with regard to inclusion of ICRA Techno Analytics Ltd., as a comparable company. As far as comparability of this company is concerned, this Tribunal in assessee's own case in Assessment Year 2010-11 in the decision reported in (2016) 72 taxmann.com 187 (Bang.-Trib.) remanded the question of comparability ....
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....mmunication India (P.) Ltd. (supra) wherein the Tribunal has considered the functional comparability of this company with that of software development services provider in para 10 as under:- "10. We have perused the orders and heard the rival contentions. Notes to accounts of ICRA Techno Analytics Ltd forming a part of its audited financial statement of accounts and annual report for year ended 31.03.2010 mentions as under: Significant accounting policies and Notes to Accounts (Page 169 of the Annual Report) Background: The company was incorporated on July 27, 1992 as Computer Exchange Private Limited and subsequently become wholly subsidiary of ICRA limited on August 25, 2005 and was renamed as ICRA Techno Analytics Ltd. The company is engaged in the software development & consultancy, engineering services, web development & hoisting and subsequently diversified itself into the domain of business analytics and business process outsourcing. In the note detailing of the revenue recognition which also form a part of its annual report it has been stated that its revenue stream consisted of software development consultancy, engineering services, web ....
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....a (SBI) and the detailed working is given in Annexure B to the order. No reasons have been given by the TPO as to why he is adopting negative working capital adjustment. The Assessee did not raise any grounds regarding making negative working capital adjustment before the DRP. We are therefore of the view that issue requires re examination by the TPO/AO. Working capital adjustment is made for the time value of money lost when credit time is given to the customers. It is the plea of the Assessee that it does not bear any risk and has no working capital contingencies and that it has not incurred any expenses for meeting the working capital requirement. It is claimed that the Assessee is running the business without any working capital risk as compared to the comparables. The Assessee does not bear any market risk as the services are provided only to the AE. Therefore, requirement for adjustment of negative working capital does not arise. The Ld.AR placed reliance on decision of coordinate bench of this Tribunal reported in (2020) 120 com 122 and Lam Research India (P.) Ltd. v. Dy. CIT in [IT Appeal Nos. 1473 & 1385 (Beng.) of 2014, dated 30-4-2015], Tivo Tech (P.) Ltd. v. Dy. CIT [20....