TaxTMI 
TaxTMI 
2022 (6) TMI 1350
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....r bad and doubtful debts. Ground No.7 Rest of the grounds are general, academic or not pressed by the ld AR during the course of hearing. Therefore these grounds do not warrant adjudication and hence dismissed. 2. The assessee is a subsidiary of Wibmo Inc., USA. The Wibmo group is a leader in mobile payments. The assessee is engaged in rendering software development and related support services to its AE. In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services were "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 ....
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....c. On the other hand, the AE, being the entrepreneurial entity, performs the necessary R&D function and owns intangible of products developed. 2.4 A summary of the risks assumed by the taxpayer and its AE under software development services is as under: Risks Taxpayer AE Market risk NO YES Financial Risk NO YES Credit & Collection risk NO YES Technology obsolescence risk NO YES Foreign exchange fluctuation risk YES No Working Capital Risk NO. YES The FAR analysis serves as a foundation to characterize entities for the purpose of intercompany transfer pricing. Based on the analysis of the functions performed, assets employed and risks assumed, it is appropriate to characterize the taxpayer as a captive service provider which assumes minimal risks associated with the business of providing software development services." 5. The assessee has entered into the following international transaction with its AE during the year under consideration Particulars Amount in Rs. Provision of software development services Rs. 20,18,51,846/- Trade advances received Rs. 5,50,19,732/- 6. The assesse....
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....Information Systems Ltd., and CG-Vak Software & Exports Ltd. and rejected the other 28. The TPO applied fresh filters and chose the following companies Sl. No. Name of the Company Mark-up on Total Costs (WC-unadj) (in %) 1. Kals Information Systems Ltd. 8.05 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. Harbinger Systems Pvt. Ltd. 15.06 5. CG-VAK Software & Exports Ltd. 18.50 6. Pure Software Pvt. Ltd. 19.25 7. R S Software (India) Ltd. 20.87 8. Larsen & Toubro Infotech Ltd. 24.83 9. Nihilent Technologies Ltd. 26.36 10. Inteq Software Pvt. Ltd. 28.20 11. Persistent Systems Ltd. 30.89 12. Infobeans Technologies Ltd. 32.42 13. Thirdware Solution Ltd. 36.90 14. Infosys Ltd. 38.61 15. Aspire Systems (India) Pvt. Ltd. 39.28 16. Cybage Software Pvt. Ltd. 66.45 35th Percentile 19.25 Median 25.60 65th Percentile 30.89 8. The TPO accordingly arrived at the TP adjustment as per the below given workings Taxpayers operating revenue Rs. 20,18,51,846/- Taxpayer operating cost Rs. 17,55,30,58....
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....he assessee. The ld AR mainly relied on the decision of coordinate Bench of the Tribunal in the case of Autodesk India (P) Ltd. V. DCIT (2018) 96 taxmann.com 263 (Bang Trib)) in addition to several other decisions of the Hon'ble Tribunal. 12. The ld DR relied on the orders of the lower authorities. 13. We heard the rival submissions and perused the materials on record. In so far as comparability of companies as per the list considered by the TPO is concerned, the admitted factual position is that the turnover of these companies (except R S software (India) Ltd) is more than Rs.200 Crores and the Assessee's turnover is only Rs.20,18,51,846/-. 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 Assessee raised objections before the DRP that while the TPO excluded companies with low turnover, whereas he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The TPO excluded the companies with less than Rs.1 crore turnover is that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reli....
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.... 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 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....
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.... 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 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 fo....
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....nsfer 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. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.4 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies." 15. Respectfully following the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks India Private Limited (supra) we hold that the companies whose turnover in the current year is more than Rs.200 crores needs to be excluded for the purpose of comparable companies. 16. The assessee is seeking exclusion of R S software (India) Ltd vide Ground No.4.12.1. In this regard the ld AR submitted that the company, during the financial years 2013-14 and 2014-15 had realised turnover of Rs. 351.88 crores and 345.51 crores, and profit margin of 24.14% and 32.75%, respectively. However, during the financial year 2015-16, the company realised a turnove....
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....gnored because they fail the test of comparability in those two earlier years by reason of the application of the Rs.200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reli....
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....the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1): Provided further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in subrule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,- (i) the price in respect of such uncontrolled transaction shall be determined by app....
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....s being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ........... 17. Let us apply the above rules to the comparable company R.S.Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to Rule 10CA(2), R.S.Software (India) Ltd., was chosen as a comparable company based on the data relating to the current year and in the earlier two financial years immediately preceding the current financial year. In all the financial years the said company has undertaken similar comparable uncontrolled transaction. Clause (i) to 1st proviso to Sec.10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S.Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to Sec.10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall ....
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.... year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B 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 a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (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 uncontrol....
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....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. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such transactions are likely to materially affect the price or cos....
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.... Operating profit Rs. 8,07,20,627/- Rs. 9,14,94,361/- Rs. 17,22,14,988/- OP/OC 12.69% 17.18% 14.74% The weighted average margin of the company was rightly computed by the TPO 14.74%, however in the final list of comparables in page 50 of the TPO order, the TPO adopted the margin at 15.06%, which is an apparent mistake. We therefore direct the TPO to consider this afresh while recomputing the ALP in the SWD services segment in the light of the directions given in this order. 22. We will now take up the corporate tax issue raised by the assessee with respect to disallowance of provision for Bad Debts. The assessee during the financial year 2015-16, the Assessee debited an amount of Rs. 19,22,610/- under the head 'provision for bad debts' in the profit and loss account. Before the AO the assessee submitted that of the sum of Rs. 19,22,610/-, an amount of Rs. 16,25,897/- represent actual bad debts which were written off, and only an amount of Rs. 2,96,713/- represents the provision. The Assessing Officer proposed a disallowance of the entire sum of Rs. 19,22,610/- as being a mere provision. The DRP upheld the disallowance stating that (i) the Assessee has no....