TaxTMI 
TaxTMI 
2023 (4) TMI 223
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the adjustments proposed by the learned Transfer Pricing Officer (-the learned TPO") in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Resolution Panel ("Honble DRP"). Each of the ground is referred to separately. which may kindly be considered independent of each other. That on the facts and circumstances of the case and in law: GROUNDS OF APPEAL RELATING TO TRANSFER PRICING MATTERS 1. The learned AO/TPO/DRP have erred in making an addition of INR 5.30.28.523 to the total income of the appellant in respect of international transaction pertaining to provision of software development services by the appellant to its associated enterprise ('`AE") (hereinafter referred to as -subject transaction'). 2. The learned AO/TPO/DRP have erred in not accepting the economic analysis undertaken by the appellant in accordance with provisions of the Act and modifying the economic analysis for determination of arm's length price (-ALP") of the subject transaction to hold that the same is not at arm's length. 3. The learned AO/TPO/DRP have erred by incorrectly using "persistent ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s comparable companies in respect of the subject transaction. 10. The learned AO/TPO/DRP have erred in not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparable companies. 11. The learned AO has erred in levying consequential interest under section 234B of the Act." 2. At the time of hearing, assessee pressed only ground Nos.7.1, 7.2, 8 & 9 and other grounds are not pressed. Accordingly, these grounds are dismissed as not pressed. 3. Ground No.7.1: The learned AO/TPO/DRP have erred in excluding certain companies from the final set of comparables viz. Batchmaster Software, DCIS Dot Com Solutions India, Sasken Technologies and Evoke Technologies, even though these companies are comparable to the appellant. 3.1. In this ground assessee pressed only inclusion of following 3 comparables: i. Batchmaster Software ii. DCIS Dot Com Solutions India iii. Evoke Technologies Ltd. 3.2 After haring both the parties, we are of the opinion that these 3 comparables were considered in the case of M/s. Quicklogic Software (India) Pvt. Ltd. in IT(TP)A No.181/Bang/2022 dated 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 comparables: i. L&T Infotech ii. Mindtree iii. R Systems iv. Persistent Systems v. Tata Elxsi vi. Infosys Ltd. vii. Nihilent viii. Cybage software 4.2 After hearing both the parties, we are of the opinion that these comparables were considered in the case of M/s. Quicklogic Software (India) Pvt. Ltd. cited (supra), wherein held as under:- 11. Ground no. 1 - The Ld.AR submitted that following are the turnover of the comparables sought for exclusion in ground no.1. 1. L&T Infotech Ltd. - Rs. 6183 crores 2. Persistent Systems Ltd. - Rs. 1720 crores 3. Tata Elxsi Ltd. - Rs. 1201 crores 4. Infosys Ltd. - Rs. 59,257 crores 5. R Systems Ltd. - Rs. 264 crores 6. Nihilent Technologies Ltd. - Rs. 259 crores 7. Cybage Software Pvt. Ltd. - Rs. 759 crores 11.1 He submitted that these comparables are not at all similar even in functions with that of the assessee as they have product segment without segmental details available. It is the submission of the assessee that these comparables are involved in various research and development activi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rimarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd v. Dy. CIT [2017] 82 taxmann.com 167(Delhi - Trib), 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. 12. 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. v. Dy CIT [2018] 89 taxmann.com 44, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 cases. The decision was rendered as early as 58-2011. 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 (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate 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 hav....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 sub-rule (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 applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; 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 afor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ged 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 section 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 section 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 be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparables of TPO given in paragraph- 4 of this order, the profit margins of the Company R.S. Software (India) Ltd., for the three financial years were 2013-14 to 2015-16 were 24.14%, 32.75% and - 2.09% respectively and the weighted average margin of 24.83% has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0B . (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 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 uncon....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll 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 : (iv) 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:" (v) 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 cost charged or paid in, or the profit arising from, such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that "if such dat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is Rs.45.35 crore. The turnover of for Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited, are far exceeding Rs.200 crore for the relevant assessment year. The TPO/DRP has excluded the companies having turnover of less than Rs.1 crore, however, the TPO / DRP has not put upper limit of the turnover for exclusion of comparables having high turnover. The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd. v DCIT, Circle 11(1), Bangalore (supra) has held as follows:- "17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'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, we....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the 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)." 4.2.1 In view of the judicial pronouncements, cited supra, we direct the AO to exclude Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, we are of the opinion that this issue came for consideration before this Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018 in which it was held as under:- "17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is at page 173 & 192 of the assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of Rule 10B(1) (e)(iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the ....