TaxTMI 
TaxTMI 
2023 (4) TMI 674
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.... In terms of Sec.92B(1) of 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 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. The Finance Act. 2001 had introduced a legislation with respect to transfer pricing by substituting the erstwhile section 92 of the Act with a new and separate code or sections, namely sections 92 to 92F, with effect from 1st April. 2002. i.e. the assessment year 2002- 2003. The salient features of the legislation with respect to transfer pricing, to the extent material for the purpose of deciding the question referr....
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.... actually been under taken shall be deemed to be the ALP. The AO passes a draft order of assessment against which, the Assessee has a right to file objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. 3. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001, was as follows. "The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, t....
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.....3 40.17 6.75 20.19 8 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.62 9 Mindtree Ltd. 26.11 20.12 18.41 21.21 10 Aptus Software Labs Pvt. Ltd. 27.67 24.83 15.16 22,70 11 AcewinAgriteck Ltd. 26.54 23.23 22.73 24.51 12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 13 Wipro Ltd. 27.27 26.38 27.03 26.83 14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 15 lnfobeans Technologies Ltd. 34.98 23.89 27.82 28.52 16 Nihilent Ltd. 24.46 30.8 35.11 30.17 17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18 Three sixty Logica Testing Services Pvt. Ltd. 48.46 36.63 26.2 36.58 19 Infosys Ltd. 38.29 38.79 35.27 37.38 20 Cybage Software Pvt. Ltd. 62.04 61.40 47.78 56.81 35th percentile 20.19 Median 23.60 65th percentile 26.83 7. The TPO computed the Addition to total income on account of adjustment to ALP as follows: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR....
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.... 6.75 20.19 14 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.62 15 Mindtree Ltd. 26.1 20.12 18.41 21.21 16 Sagar Soft India Ltd 10.6 8.68 34.43 21.92 17 Aptus Software Labs Pvt.-Ltd. 27.7 24.83 15.16 22.7 18 AcewinAgriteck Ltd. . 26.5 23.23 22.73 24.51 19 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 20 Wipro Ltd. 27.3 26.38 27.03 26.83 21 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 22 Infobeans Technologies Ltd. 35 23.89 27.82 28.52 23 Nihilent Ltd, 24.5 30.2 35.11 30.17 24 Three sixty Logica Testing Services Pvt. Ltd. 48.5 36.63 26.2 36.58 25 Infosys Ltd. 38.3 38.79 35.27 37.38 26 Cybage Software Pvt. Ltd. 62 61.4 47.78 56.81 35th percentile 18.57 Median 20.41 65th percentile 22.7 10. The learned counsel for the Assessee prayed for exclusion of the following 9 companies out of the final list of 26 comparable companies that remain after DRP directions and in this regard raised ground No.10.5....
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....-clause (iii); (v) 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 [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 o....
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....he admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee's turnover is only Rs.106,29,01,011/-. In this regard we have to mention that the Assessee's operating revenue was only Rs.106,29,01,011/-. The TPO computed operating revenue of Rs.203,65,04,020/-. In this regard, it is seen that the Assessee had revenues from transactions with AE as well as non- AE. The break-up of the Revenue from operations between AE and Non-AE is as under as given by the Assessee in its submission dated 29.06.2021, before the TPO: Particulars AE Non-AE Total Sale of Software Products 95,53,63,296 95,53,63,296 Software and other related services [SWD] 106,29,01,011 6,88,88,808 113,17,89,819 ITES Services [ITES] 6,72,49,222 - 6,72,49,222 Sale of hardware 76,62,758 76,62,75 Training Services 6,56,667 6,56,6678 Total 113,01,50,233 103,25,71,529 216,27,21,762 The said figures were furnished the TPO vide submissions dated 29.06.2021 in response to notice under section 92CA(2) dated 01.03.2021. The TPO did not doubted the correctnes....
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.... however proceeded to allocate entire P&L expenditure to just SWD AE and ITES AE on the basis of operative revenue. This has the following material flaws: a) The expenses relating to non AE segments were also allocated between SWD AE and ITES AE b) The expenses relating to SWD AE and ITES AE segments were allocated on the basis of operating revenue irrespective of whether they are direct or indirect. c) The operating revenue which is taken as the allocation key itself is incorrectly as stated in paragraph 10.2.5 [supra] As a result of the above material flaws, the OP/ OC is worked at 11.32% for both SWD AE and ITES AE thus giving absurd result. Further, the operating costs as worked out above are artificially inflated by more than 100% thus resulting in applying the TPO's ALP margin on such artificially enhanced operating cost. This has translated into huge artificial addition. The aforesaid actions of the TPO are against the mandate of the provisions of Chapter X. As we have already seen the transactions with the AE has to be compared with identical transaction between unrelated parties to arrive at Arm's length price. The TPO has erred in recompu....
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....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. 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.co....
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....nover, 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 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 nonjurisdictional 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....
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....ting (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 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 de....
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....tion is totally skewed. The RPT if the revenue is considered on both numerator and denominator the percentage comes to 20.33% (Rs. 5.57 cr. / Rs. 27.41 cr.). On the other hand, the expenses are taken which comes to 12.65% (Rs. 2.76 cr. / Rs. 21.85 cr.) (page 190 of the annual report). Thus, the company satisfies the RPT filter adopted by the TPO. Thus, we do not find merit in the plea raised and accordingly rejected." 22. In this regard the factual aspect to be noticed that there are other transactions between the comparable company and its AE on the expense side besides revenue side. The table given below will show the true picture in this regard. The combined RPT filter of both sub-expenses and revenue was computed by the Assessee at 25.87%, as follows: Sl.No. Company Sub- contract expenses (RPT expenses) (RE) (in millions) Total Cost (excluding finance, cost) (TC) (in RE/TC[A] Services to Related Parties (RPT) (in millions) Revenue from operation (ROP) (in millions) RPT/ ROP [B] % RPT [A] + [B] 1 Three sixty Logica Testing Services Pvt. 1.8 mil 218.54 mil 8.23% 55.74 mil 274.1 mil 20.34 % - 28.57% 23. In the following d....
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.... by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO on his own identified 17 companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows: Sl. No. Name of the Comparable 2017-18 2016-17 2015-16 Wt.Avg 1 Jindal Intellicom Ltd. -5.35 8.66 2.78 , 7.41 2 Microland Ltd. 9.83 5.85 10.17 8.58 3 Datamatics Business Solutions Ltd. 3.19 8.88 34.85. 13.41 4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 5 Tech Mahindra Business Services Ltd. -18.95 18.51 19.09 18.85 6 Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95 7 CES Ltd. (seg) 12.50 26.48 31.90 21.77 8 Manipal Digital Systems Pvt. Ltd. 20.93 28.91 21.04 23.54 9 Domex E Data Pvt Ltd 35.61 35.97 13.77 26.34 10 Vitae International Accounting Services Pvt Ltd 26.35 26.63 28.75 27.35 11 A G S Health Pvt. Ltd. 30.19 36.06 14.7 27.64 ....
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....crores that resulted in wrongful selection of following 7 companies selected by the TPO: 1) Microland Ltd.; 2) Tech Mahindra Business Services Ltd; 3) Infosys B P M Services Pvt. Ltd; 4) Access Healthcare Services Pvt. Ltd 5) Motif India Infotech Pvt. Ltd; 6) Eclerx Services Limited; 7) MPS Ltd." 31. We have already seen that the Assessee's turnover in the ITeS was only Rs. 12,88,48,604 after adjustment of revenue by the TPO. We have also seen while deciding the application of turnover filter in SWD services Segment that companies with turnover of Rs.200 crores or more cannot be compared with companies having turnover of less than Rs.200 crores. For the reasons stated therein, we direct exclusion of the companies listed in ground No.11.5.2 whose turnover is admitted above Rs.200 crores from the list of comparable companies. 32. Learned Counsel for the assessee submitted that out of the remaining 4 comparable companies Manipal Digital Systems Pvt. Ltd., and Domex E Data Pvt. Ltd., should be excluded for the reason that these 2 companies are functionally different and cannot be compared to an ITeS company such as th....