TaxTMI 
TaxTMI 
2023 (3) TMI 1086
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....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, 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 ITeS to the AE. 3. As far as the provision of ITeS 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 Me....
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....8 13 Access Healthcare Services Pvt. Ltd 37.37 41.27 Fails RPT filter 39.03 14 Inteq B P 0 Services Pvt. Ltd. 31.68 36.64 48.47 39.15 15 Motif India lnfotech Pvt. Ltd. 47.89 48.99 38.8 45.72 16 Eclerx Services Limited 39.94 49.55 55.38 46.85 17 MPS Ltd 56.89 62.2 66.53 61.83 35th 20.95 Median 26.34 65th 33.28 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: "23.4 Computation of Arm's Length Price: 23.4.1 The median of the weighted average Profit Level Indicators is taken as the Arm's Length margin. Please see Annexure A for details of computation of PLI of the comparables. Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its AE(s) is computed as under: ITeS SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 9,26,39,213 Taxpayers Operating Cost OC 8,42,17,467 Taxpayers Operating Profit OP 84,21,746 Taxpayers PLI PLI=OP....
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....) Infosys B P M Services Pvt. Ltd. 3) Vitae International Accounting Services Pvt Ltd 4) Motif India Infotech Pvt. Ltd. 5) Eclerx Services Limited 6) MPS Ltd. At the time of hearing the learned counsel for the Assessee filed a note in which he has mentioned the following companies as the companies that have to be excluded from the list of comparable companies by applying the turnover filter of more than Rs.200 Crores as mentioned in ground No.4.5. Microland Ltd., ii. Infosys B P M Services Pvt. Ltd., iii. Motif India Infotech Pvt. Ltd., iv. Eclerx Services Ltd., v. MPS Ltd., vi. Tech Mahindra Business Services Ltd., vii. A G S Health Pvt. Ltd., 8. The Assessee in grounds 4.1 and 4.2 has projected its grievance that the TPO rejected the following 12 comparable companies chosen by the Assessee in its TP study on the ground that the data base in respect of these 12 companies was not available. Sl. No. Name of Comparable Companies 1 Excel Callnet Pvt Ltd 2 IServices India Pvt Ltd 3 Sureprep (India) Pvt Ltd. 4 iSN Global Solutions Pvt Ltd 5 RProces....
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....tunity of being heard to the Assessee. 13. The next aspect which requires consideration is ground No.4.3 with regard to inclusion of Wizard E Marketing Pvt. Ltd. As far as this company is concerned, the TPO rejected this company as a comparable company on the ground that the said company failed export turnover filter. The Assessee had in its letter dated 21.07.2021 specifically pointed out that as per Note 16 to the Financial Statements, the export turnover of this company is 97.65% of the total turnover and therefore this company passes the export turnover filter and should be regarded as a comparable company. This submission of the Assessee was however not considered by the TPO. In objection II, ground 1.4, Assessee has specifically raised this issue before the DRP that the export turnover of this company was 97.65% of the total sales. This submission was however not considered by the DRP. We are of the view that inclusion of this company to the TPO/AO for fresh consideration as the plea of the Assessee has neither been considered by the TPO nor by the DRP. The TPO/AO will afford opportunity of being heard to the Assessee in the set aside proceedings. 14. The next issue tha....
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....at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly 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 co....
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....rnover is only Rs. 40,39,51,067/-. 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 of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from 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....
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....ntion 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 benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different 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....
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....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 the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of 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 ca....