TaxTMI 
TaxTMI 
2021 (12) TMI 1421
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....ising 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 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 profit level indicator (PLI) chosen for the purpose of comparison of the assessee's margin with that of the comparable companies was Operating Profit /Operating Revenue (OP/OR). The assessee selected Atmecs US as tested party and selected 7 comparable companies engaged in the same industry vertical as that of the Assessee in North America and arrived at the Summary of margins of comparable companies in North America engaged in software distribution Comparable Companies OM PLI Summary Comparable Companies OM PLI Summary Sl. No. Company Name 2016 2015 2014 2014-2016 Weighted....
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....ed as at Arm's Length. 4. The Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred by the AO u/s.92C of the Act, issued a show cause notice dated 24/9/2019 wherein he proposed to reject TP study as the taxpayer had chosen its parent company as a foreign tested party and had benchmarked the international transaction relating to software company by applying TNMM. In response to this notice, the taxpayer has given a detailed reply dated 11/10/2019 stating that the assessee objects to the TPOs proposed rejection of choice of foreign AE as tested party by citing various reasons supported by several case laws. 5. The TPO rejected the TP study of the assessee choosing foreign AE as tested party. According to the TPO, the OECD transfer pricing guidelines and the UN transfer pricing manual provide guidance on selection of tested party. The tested party is the party to the transaction which is least complex and for which reliable data is available without requiring significant adjustments. The taxpayer is engaged in providing information technology consultation service, software development and testing services. The assessee is an offshore resource p....
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....een the international 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: (i) 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) (ii) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. According to the TPO a cursory look at the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such an international transaction is required to be determined at ALP: thirdly, the ALP in respect of such an international transaction should be determined by one of the prescribed methods, which also includes the TNMM. The term 'enterprise' under the TNM method, and for that matter all other methods, has been used to indicate the assessee in whose hands the benchmarking of the international transaction is d....
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....ed by the foreign/AE for the purpose of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign/ AE. He held that profit realized by the foreign/AE cannot be relevant, when the profit of the Indian enterprise is sought to be ensured at ALP. He therefore rejected the TP study of the assessee holding that the foreign/AE cannot be considered as a tested party for determining the ALP of the international transaction, as it has no statutory sanction. He also drew support for his conclusions as above from the decisions of ITAT Mumbai Bench of the Tribunal in Onward Technology Ltd. Vs. DCIT (2013) 36 CCH 46 (Mumbai) holding that Foreign/ Associated Enterprise cannot be a tested party. Similar view has been taken in Aurionpro Solutions Ltd. Vs. ACIT (TS-75-I TA T- 2013 (Mum)-TP) - (2013) 27 ITR (Trib) 276 (Mumbai). In the light of the foregoing discussion, the TPO rejected the foreign/Associated Enterprises as a tested parties. 6. The TPO also referred to Rule 10B 2(d) which specifies that the comparability of an inter....
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....434 Finance cost 2042322 Depreciation and Amortisation expense 5213634 Other expenses 40700940 Profit before taxes 6338492 OP/OC 2.75% 8. The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows: "10. The final list of comparables along-with year wise OP/OC margins are as follows: Sl. No. Company Name Financial Year wise OP/OC (%) 2015- 16 201415 2013-14 Average 1 Kals Information Systems Pvt. Ltd. 4.33 5.77 16.94 8.73 2 Rheal Software Pvt. Ltd. 3.29 3.02 36.38 14.54 3 CG-V A K Software & Exports Ltd. 20.16 19.87 13.81 18.05 4 Inteq Software Pvt. Ltd. 7.64 32.95 45.36 20.47 5 Tata Elxsi Ltd. 26.69 20.55 13.16 20.60 6 R S Software (India) Ltd. -1.96 32.66 24.14 20.87 7 Larsen & Toubro Infotech Ltd. 21.12 24.24 23.07 22.69 8 Nihilent Ltd. 15.94 29.19 33.12 25.64 9 Cigniti Technologies Ltd. 27.27 4.99 27.59 27.34 10 Persistent Systems Ltd. 23.95 30.40 35.10 29.2....
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.... The DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the assessee did not get relief from the DRP, the assessee has preferred appeal before the Tribunal. The following are the grounds of appeal raised by the Assessee in its appeal: 1. The Learned (Ld) Assessing Officer (AO)/Ld Dispute Resolution Panel (DRP) are erroneous in law and on the facts of the case. 2. The Ld. DRP/AO failed to understand and appreciate the operating vertical of the assessee company and further erred in classifying the services of the Assessee as "software development" and not "contract staffing"; 3. The Ld DRP/AO erred in not considering ATMECS USA as a foreign tested party in the process of benchmarking the transactions between the Assessee and ATMECS USA. 4. The Ld DRP/AO erred in rejecting the transfer pricing study maintained by the Assessee, thereby rejecting ATEMCS USA, our AE as tested party at the threshold. 5. The Ld DRP/AO erred in not appreciating the fact that selection of foreign AE as a tested party is in line with the OECD TP guidelines and UN TP Manual. 6. The Ld ....
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....td (d) Aspire Systems (India) Pvt Ltd (e) Thirdware Solution Ltd. (f) Cybage Software Pvt Ltd. (g) Nihilent Ltd. (h) Tata Elxsi Ltd. (i) R.S. Software (India) Ltd. In Grds.6, 7, 9 and 11, the Assessee has challenged inclusion of comparable companies by the TPO. Besides, the above, the learned counsel for the Assessee prayed for adjudication of ground with regard to not allowing risk adjustment, working capital adjustment projected in Grd.No.8 of the grounds of appeal. The other grounds that calls for adjudication is Grds.3 to 5 with regard to the grievance of the Assessee in not accepting the TP study of the Assessee choosing the foreign AE as a tested party. 14. We shall first take up for consideration Grds.10, with regard to the choice of comparable companies. As far as exclusion of companies chosen by the TPO and confirmed by DRP is concerned, 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 t....
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....plicitly 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 comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 15. 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 ....
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....rom the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt. Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP. 18. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on 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 Soft....
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....ent ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee 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 corr....
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.... the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions 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 incurium. These thre....
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....ndia Private Limited Vs. DCIT in IT(TP)A No.229/Bang/2021 and this Tribunal following the decision of the ITAT Bengaluru Bench in the case of Huawei Technologies India Pvt. Ltd., Vs. JCIT (2019) 101 taxmann.com 313 held that working capital adjustment has to be allowed to the assessee and directed the TPO/AO to examine the claim of the assessee in the light of the details of working capital adjustment furnished by the assessee which is given as annexure to this order. We hold and direct accordingly. 22A. As far as grant of risk adjustment is concerned, though the assessee has given a general note with regard to assessee's right to claim risk adjustment while computing ALP, no specific details have been given with regard to allowing risk adjustment. In this scenario, we are of the view that it would be just and appropriate to remand the issue to AO/TPO with a direction to the assessee to furnish computation of risk adjustment and the basis of claim for deduction on account of risk adjustment. The TPO will consider the same after affording the assessee opportunity of being heard and allow adjustment on account of risk, in accordance with law. In this regard, we find that the DRP h....
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....city utilization adjustment would not bring out the correct result. He therefore submitted that in determining the arm's length price for the international transaction entered into by the assessee, the difference for the risks borne, capacity utilized by the assessee vis-à-vis the comparable companies needs to be factored into. Reference was made by him to the following decisions in support of the contention that adjustment on account of under utilization of capacity has to be allowed. i) M/s SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) ii) M/s Meritor LVS India Pvt. Ltd. [ 2015] 64 taxmann.com 136 (Bangalore - Trib.) iii) M/s. Symantec Software Solutions Pvt. Ltd. Vs ACIT (2011) 46 SOT 48 (Mumbai). 24. The Learned DR relied on the order of the DRP and submitted that the Assessee has not given any calculation of capacity utilization details nor has he requested the TPO for obtaining such details from the comparable companies chosen by the TPO. 25. We have considered the rival submissions. We find that the DRP has made the following observations while rejecting the claim of the assessee in this regard. "2.5.2.2 It is ....
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....d compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. On the question of the data and method of computation of under utilization capacity adjustment, the tribunal held that the claim depends on acceptability of such adjustments being concerted, being reasonably accurate in mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. The tribunal held that once it is accepted that the assessee has underutilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the....
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....uidelines, have been provided below for your Honour's reference and UN TP Manual: (i) Para 3.18 of the OECD Guidelines, which states the following: 3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. Further, the OECD Guidelines indicate that, the tested party ought to be the enterprise that offers a higher degree of comparability, with uncontrolled companies. Consequently, the enterprise that requires the least amount of adjustments as compared to potentially comparable companies should be the tested party. Accordingly, the tested party should be the participant in a transaction which woul....
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....9. He submitted that the assessee in the present case satisfies all the parameters and was right in law to have chosen foreign AE ATMECS US as a tested party in its Transfer Pricing Analysis. * ATMECS US is engaged in provision of software development support and other services. The operations of ATMECS US are divided into two segments i.e., onsite and offshore. While onsite services are being handled by ATMECS US, ATMECS India is responsible for the management of the off-shore projects relating to software development services undertaken by it. * With regard to the offshore segment of ATMECS US, the role of ATMECS US is limited to acting as a distributor of the services of ATMECS India in the US region. ATMECS US undertakes lead generation of services to be distributed and once agreed, it contracts with the third-party customers. There ends the role of ATMECS US in the supply chain of services. Hence, with respect to the offshore services, ATMECS India undertakes the end-to-end delivery of the project to the customers as primary instructions are received from customers. * In relation to the services sub-contracted/ distributed by ATMECS US, the clients p....
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....m all tasks and duties assigned by the Customer Stakeholder and shall be managed by the "Contractor Manager - Project Management" on a day-to-day basis. Hence, once a contract is signed, ATMECS US shall have no further role to play in delivery of the project. 30. The learned counsel for the Assessee submitted that the term 'Enterprise' and 'associated enterprise' under TNMM and all other methods, in absence of any specific legal provision, restrictive interpretation of the term 'Enterprise' and 'associated enterprise' is uncalled for. The Indian TP regulation postulate/envisage construing both Indian Assessee as well as overseas AE as a tested party as may be suitable in fact and circumstances of the case. Sub rules (2) and (3) of Rule 10B of the Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. As per Rule 10B(2), the factors prescribed for inclusion or exclusion of comparables to determine the ALP are based on the comparison of the Assessee with the chosen entities. It was submitted t....
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....earch for external comparables, the TPO himself had not attached any sanctity to TP documentation as submitted by assessee, he could not foreclose assessee from canvassing issue that subsidiaries were least complex entities which should be taken note of and matter was remanded back to TPO. 32. The learned DR while relying on the decision of the Hon'ble Pune Tribunal in the case of Eaton Industrial Systems Pvt. Ltd., Vs. DCIT (2020) 113 taxmann.com 267 (Pune Tribunal) submitted that the ratio laid down in the aforesaid decision that foreign AE cannot be chosen as a tested party and the profit earned by the foreign parties cannot be compared with the price charged by the the Assessee and ALP determined by the Indian tax authorities. He placed reliance on the orders of the lower authorities. 33. We have carefully considered the rival contentions. We find that the Hon'ble Madras High Court in the case of Virtusa Consulting Services Pvt. Ltd., (supra) considered the issue whether foreign AE can be considered as a tested party and has held as follows: "24. Before doing so, we may point out the following. The assessee in ground Nos.6 to 8 before the Tribunal had contested t....
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....f the Ahemdabad Tribunal in the case of General Motors India (P.) Ltd., which had taken note of the decision of the Mumbai Tribunal in Aurionpro Solutions'. Ltd. and noted the facts of the said case and held that the said decision cannot be applied as the main issue in Aurionpro Solutions Limited was the percentage of interest to be calculated on the loan advanced by the assessee to its AE. Thus, on facts the decision in Aurionpro Solutions Ltd. could not have been applied to the facts of the assessee's case before us. As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to....