TaxTMI 
TaxTMI 
2023 (5) TMI 1045
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.... Associated Enterprises. 2. The AO/DRP/TPO have erred in rejecting the TP study of the Appellant and conducting fresh search process with additional and/or modified filters for selecting the companies comparable to the Appellant. 3. The AO/DRP/TPO have erred in rejecting companies if the data pertaining to FY 2017-18 are unavailable in the public databases. 4. The AO/DRP/TPO have erred in law in rejecting certain comparable companies merely on the ground that the financial year ending of the Appellant and the comparable company are different. 5. The AO/DRP/TPO have erred in law in rejecting the application of upper turnover filter without appreciating the fact that the lower turnover filter of Rs. 1 Crore have been applied on the comparable companies. 6. The AO/DRP/TPO have erred in law in applying the export earning filter with a threshold limit of 75% in selecting the comparable companies. 7. The AO/DRP/TPO have erred in law in rejecting comparable companies having losses in two (2) out of three (3) years by erroneously application of persistent loss filter. 8. The AO/DRP/TPO have erred in law in computation of Relate....
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.... 10.15. Minvesta Infotech Limited 10.16. Synfosys Business Solutions Limited 11. The AO/DRP/TPO have erred in law and on facts in considering the following companies as comparable to the Appellant in the Trading Segment without appreciating that the said companies are not comparable to the Appellant due to multiple reasons including functionality, lack of segmental data, inadequate financial information etc 11.1. RMD Mediaids Ltd 11.2. Biolitec India Pvt Ltd 12. The AO/DRP/TPO have erred in law and on facts in not including the following companies in the final list of comparable companies in the Trading Segment which are also in the business of trading in medical devices similar to the Appellant 12.1. Hicks Thermometers (India) Limited 12.2. ADS Diagnostics Limited 12.3. Cardiomed India Limited 12.4. Aishwarya Technologies and Telecom Limited 12.5. Kusam Electrical Industries Limited 12.6. Mohan Exim India Limited 12.7. Biomex Instruments Private Limited 13. The AO/DRP/TPO have erred in computing the transfer pricing adjustment for trading segment of the Assessee b....
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....ce to the above grounds, the AO/DRP/TPO have erred in law and on facts in erroneously applying State Bank of India (SBI) short term deposit as against the London Inter-Bank Offered Rate (LIBOR). 24. The AO has erred in short granting of credit of tax deducted at source. Further, the AO has erred in not granting credit of INR 50,56,162 reflecting in PAN AABCT1733D of the entity merged with the Company. 25. The AO has erred in law and on facts in erroneously computing interest under section 234C of the Act on 'assessed income' instead of 'returned income'. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided." 2. Brief facts of the case are as under: 2.1 Assessee is engaged in the business of software development service ("SWD"). The assessee has entered into master service agreement with its holding company and other group companies to provide services at an agreed mar....
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.... 2585387 743540973 Other expense 138594935 157892281 502021 296989237 Depreciation 15530880 33809011 127522 49212369 Finance cost 0 0 0 Operating cost 560007717 785801089 3214930 1349023736 Operating profit 34458728 133285901 -3214930 164529699 OP/OC 6.15% 16.96% OP/OR 5.80% 14.50% 2.4 The Ld.TPO noted that assessee used OP/OC as the PLI for the SWD segment and OP/OR as PLI for trading segment. The Ld.TPO also noted that assessee used 13 comparables with an average margin of 9.54% for SWD segment and thus held the transaction to be at arms length. 2.5 In respect of trading segment, the Ld.TPO observed that assessee had used a set of 4 comparables with mean of 2.97% and thus held the transaction to be at arms length. Dissatisfied with the transfer pricing study, the Ld.TPO shortlisted a set of 26 comparables under software development segment with a median of 22.27%. The details of which are as under: Sl.No. Company Name F.Year wise OP/OC (%) Wt. Average 2015-16 2016-17 2017-18 1. Infomile Technologies Ltd. ....
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....s proposed an adjustment under the software development segment as well as the trading segment being the shortfall which is as under: Sl.No. Description Adjustment u/s 902CA (In Rs.) 1. SWD Segment 5,45,76,108 2. Trading segment 5,52,85,136 The Ld.TPO also did not grant working capital adjustment to the assessee in respect of both the segments. 2.8 The Ld.TPO also considered the trading segment at entity level without restricting its adjustments / analysis only in respect of the international transaction of assessee. The Ld.TPO also computed the notional interest of outstanding receivables by considering SBI short term deposit rate applicable for F.Y. 2017-18 which was computed by using following formula. INTEREST = A*WAIR*Days/36500; (A=Amount, WAIR=Weighted Average Interest Rate, Days=No. of days delayed) 2.9 The Ld.TPO only provided 30 days credit period to assessee beyond which all the outstanding receivables were considered for computing notional interest. He thus proposed an adjustment in respect of interest on trade receivables at Rs.4,93,755/-. 2.10 On receipt of the transfer pricing order u/s. 92CA, the Ld.AO passed the draft....
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....d as small size companies; b. Rs 200 crores to Rs 2000 crores categorized as medium size companies; c. More than Rs 2,000 crores categorized as large size companies. 4.3 The turnover of the assessee for the relevant assessment year in the SWD segment is Rs 91.90 Crores and therefore would fall under the category of small size company having turnover in the range of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within the range ie, companies having turnover less than Rs 1 crore or turnover more than Rs 200 crores deserves to be excluded. On the contrary, the Ld.DR supported the orders of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 4.4 We note that similar comparables have been excluded in the case of M/s. Sprinklr India Pvt. Ltd. vs. DCIT in IT(TP)A No. 250/Bang/2022 by order dated 15.07.2022 by observing as under: "11. We have heard rival submissions and perused the material on record. At the outset, we notice that the TPO/DRP have erred in not applying the upper turnover filter to reject high turnover companies, while on the other hand, he has reje....
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....Acropetal Technologies 494,399,332 389706574 26.86% 3 Cosmic Global Ltd. 62,496,615 5,69,15,360 9.81% 4 e4e Healthcare (capitaline) 613,160,587 54,56,25,872 12.38% 5 ICRA Online Ltd. (seg.) 156,691,000 11,67,49,267 34.21% 6 Jeevan scientific Technology Ltd. 1,721,400,000 1,00,86,52,592 70.66% 7 Infosys B PO Ltd. 11,291,147,909 9,57,73,24,546 17.89% 8 Jindal Intellicom (capitaline) 390,358,799 35,12,69,641 11.13% 9 Mindtree Ltd. (seg.) 5,653,000,000 5,10,39,05,999 10.76% 10 iGate Global Solutions Ltd. 11,845,540,000 9,47,11,65,000 25.07% He submitted that if such criterion is applied, then that would be the proper basis for excluding companies for the purpose of comparability based on turnover. 16. The ld. Counsel for the assessee, on the other hand, submitted that the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) merely dismissed the appeal of assessee on the ground that no substantial question of law arises for consideration. In particular, he drew our attention to the following paragraphs of the jud....
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....n to be taken by the learned Tribunal as last fact finding authority. This view is supported by our judgment dated 25.08.2018 on Softbrands case (supra), which we find it appropriate to quote hereunder to its relevant extent:-" 17. He submitted that the question of law which the assessee sought to raise before the Hon'ble High Court was justification for excluding Mercury Outsourcing Management Ltd. as a comparable company. It is in that context that the aforesaid decision was rendered by the Hon'ble High Court. He pointed out that the Tribunal in excluding Mercury Outsourcing Management Ltd., had taken a view that its turnover was small compared to the assessee's turnover and therefore not comparable, even if the tolerance range of turnover of 10 times on both the sides of assessee's turnover is applied. There is no positive finding by the Tribunal that the company can be excluded for the purpose of comparability on the basis of turnover, only if the turnover is 10 times on both the sides of assessee's turnover. On the conclusions of the Tribunal, the Hon'ble High Court only held that it is reasonable and deserves to be accepted. In para 16, the Hon'ble High Court has cle....
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.... 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 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 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....
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....equipments and rejected the comparables sought for inclusion by the assessee which are also in trading medical equipments. The Ld.AR submitted that there is no parity in the comparables selected by the Ld.TPO under the trading segment. The Ld.AR thus requested for the trading segment to be remanded to the Ld.TPO / TPO for denovo consideration. The Ld.DR did not object for the request adhered by the Ld.AR. Considering the submissions by the Ld.AR, we remand the entire trading segment to the Ld.AO/TPO to carry out denovo search with the direction to include comparables having parity with the trading activities carried on by the assessee. Needless to say that the FAR analysis must be given primary importance for selecting the comparables. Assessee must be granted proper opportunity of being heard for considering this issue. Accordingly, ground nos. 11-12 raised by assessee stands allowed for statistical purposes. 7. Ground no. 14 is in respect of the grievance of the assessee for considering the trading segment at entity level. 7.1 It is submitted that the value of the international transaction of the assessee with respect to traded goods was only 32.22% of the total cost in ....
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.....) Ltd. v. Jt. CIT reported in (2019) 101 taxmann.com 313, wherein it has been held that the working capital has to be granted in actual. 8.3. On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by 8.4. Ld.AR in case of Huawei Technologies India Pvt. Ltd. (supra). A reading of Rule 10B(l)(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 to 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. 8.5. Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transacti....
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.... to collect money from customers - (less) the period granted to pay debts in suppliers" 8.7. The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guideline also indicate factors that needs to considered like; 8.8. The point in time at which the Receivables, Inventory and Payables s....
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.... If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore in, endeavor should be made to bring in comparable companies for the purpose of broad comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra). 8.12. Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly Ground no. 17 raised by assessee stands allowed. Accordingly we remand this issue to the Ld.AO/TPO to consider the claim in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 9. Ground nos. 19-23 raised by assessee are in respect of notional interest computed on ....
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....to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions." 9.4 In view of the above, we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above ....