TaxTMI 
TaxTMI 
2022 (10) TMI 1225
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....ransfer Pricing Officer (TPO) for determination of arm's length transactions of the assessee with its Associated Enterprises [AE]. The TPO determined a TP adjustment of Rs. 14,23,45,600. The AO passed draft assessment order incorporating the TP adjustment. The AO also made an addition u/s. 28(iv) with regard to the assets received by the assessee from its AE free of cost/loan basis for an amount of Rs. 71,55,525. 3. Aggrieved, the assessee filed its objections before the DRP and the DRP gave marginal relief to the assessee whereby the TP adjustment was reduced to Rs. 11,44,36,603 and the addition made by the AO towards assets received free of cost/loan basis was confirmed by the DRP. The assessee is in appeal before the Tribunal against the final assessment order passed by the AO pursuant to the directions of the DRP. 4. During the course of hearing, the Ld. AR pressed for only the following grounds:- "Ground No. 8: Turnover filter should have an upper limit 8. The learned DRP/AO/TPO has erred in not excluding uncontrolled comparables having turnover more than Rs. 200 crores despite several rulings of this Hon'ble Tribunal, have upheld the applicatio....
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....ase of assets 4100583 4100583 Provision of software development of services 1092854334 1092854334 Reimbursement of expenses 1224043 1224043 Reimbursement of RSU & ESOP related 25424944 25424944 ESSP contribution remittance 39150370 39150370 Free of cost goods (assessable value) 4910810 4910810 7. The assessee has applied Transactional Net Margin Method [TNMM] as the most appropriate method. The Operating Profit to Operating Cost ratio has been taken as the Profit Level Indicator. The financials of the taxpayer as per TP study are given below:- Particulars Amount in Rs Income Export of Software 1092854334 Foreign Exchange Gain (Net) 7726297 Total Operating Income 1100580631 Expenses Employee costs 522643046 Other Expenses 361081986 Depreciation 92114044 Total Operating.Expenses 975839076 Total Operating Profit 124741555 OP/OC 12.78% OP/OR 11.33% 8. The assessee h....
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....nbsp; 17.44 24.82 9 Infobeans Technologies Ltd. 20.70 41.95 29.22 29.91 10 Persistent Systems Ltd. 31.11 35.44 28.20 31.69 11 Nihilent Technologies Ltd. 29.19 35.72 No data in Public Domain 32.21 12 Aspire Systems (India) Pvt. Ltd. 30.98 38.04 No data in Public Domain 34.18 13 Integ Software Pvt. Ltd. 31.16 45.00 Fails Employee cost 37.90 14 Infosys Ltd. 40.29 36.28 39.25 38.59 15 Thirdware Solution Ltd. 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82  ....
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.... Technologies Ltd. 267.80 5. Aspire Systems (India) Pvt. Ltd. 230.81 6. Infosys Ltd. 47,300 7. Thirdware Solutions Ltd. 230.08 8. Cybage Software Pvt. Ltd. 622.26 9. R S Software (India) Ltd. 345.51 10. Larsen & Toubro Infotech Ltd. 4,744.40 15. The Ld. DR submitted that the application of upper turnover filter has been consistently held by the Tribunals and therefore Ld. DR did not raise any objection in this regard. We have heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case BORQS Software Solutions Pvt. Ltd., IT(TP)A No. 310/Bang/2021 dated 25.10.2021 has considered the issue of TPO failing to apply upper turnover filter and has excluded the following comparable companies on this ground. The relevant observation of the Hon'ble ITAT is as under:- "8. As far as Ground No. 8.7 is concerned, the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: 10B. Dete....
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....ormal 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 competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if-- (i) none of the differences, if any, between the transactions being 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 (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 9. A reading of rule 10B(1)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows ....
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....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 (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167 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. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) o....
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....s 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 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 follo....
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....ion 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 incuriam 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) w....
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....expenditure. The DRP while rejecting the inclusion of Akshay Software has held that the company is engaged in professional services and procurement implementation and support of ERP products which involves personnel from professional domain and technology or software domain. Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation of ERP. The company has described that it had rendered professional charges in Dubai indicate that it pertains to non-software services or it is also possible that it may be a mix of software services and professional services. As the segmental information is not available for the same, the DRP held that this company is not functionally comparable to the assessee and rejected the claim of the assessee for inclusion. 19. The Ld. AR submitted that the company is engaged in professional IT services and therefore comparable with the assessee. The Ld. AR also submitted that there is no rationale for assuming a different model on account of incurring foreign branch expenditure to hold that the company is not functionally comparable. 20. In this regard the Ld. AR relie....
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....fference if at all, would not have any impact on the profitability of the company. Reliance was placed on the decision of this Hon'ble Tribunal in EMC Software and Services India Pvt. Ltd. v. JCIT [2020] 115 taxmann.com 293 (Bangalore --Trib). (iii) We have considered the submissions and we find that in the decision cited by the learned Counsel for the assessee, after noticing the same submissions as detailed above, the Tribunal remanded the question of comparability of this company to AO/TPO for fresh examination. Following the said order, we remand the issue to the AO/TPO to consider the comparability of this company afresh as directed by the Tribunal in the said decision. 23. Respectfully following the above decision of the Tribunal we remit the issue of to the AO/TPO to consider the comparability of this company afresh while recomputing the ALP. 24. With regard to inclusion of I2T2 the TPO rejected the company by stating that no RPT information is available in the annual report of the company and therefore quantitative filters cannot be applied. The DRP upheld the decision of the TPO by stating that the annual report of the company do not disclose RPT which i....
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....exceeding 14.5 lakhs in respect of any party who is covered under section 301 of the Act during the financial year." Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the above said company might not have had related party transactions during the year under consideration. Accordingly we do not agree with the reasoning given by Ld. DRP for excluding this company as a comparable. Accordingly we direct the AO/TPO to include this company." 20. Following the said decision, we direct inclusion of this company in the list of comparable companies.****** " 27. Respectfully following the above decision of the Tribunal we direct the AO to include I2T2 India Limited as a comparable while re-computing the ALP. 28. The TPO rejected the inclusion of Evoke Technologies Ltd. on the basis that the financials of the company has also included the financials of the financial branch which is un-audited and therefore the data is unreliable. The DRP confirmed the decision of the TPO by stating that as per the geographical segment information, revenue from India was given to be 4783.42 lakhs and that the revenue from US was giv....
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....d third parties in relation to project assignment for testing, analyzing and validating the software developed at the premises of the company. These products are used to carry out the process of testing the software and are returned to the Group Affiliates and third parties upon the completion of the respective project. The company had received tangible assets amounting to INR 1,603,519 free of cost and INR 5,552,006 on loan basis during the AY 2015-16 towards testing, analyzing and validating of software. Further, where some of these assets become unusable at the end of the testing, the same will be discarded and not returned back. We have attached copy of invoices, import/customs documents, STPI documents and re-export documents which demonstrate that these assets have been sent back to the Group Affiliates and the third parties. .............. Notwithstanding and without prejudice to our aforementioned grounds, we humbly submit that the assets being capital in nature cannot be taxed under section 28(iv) of the Act." 32. The AO rejected the submissions of the assessee and proceeded to make addition by holding that- "4.3 The submission of the....
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....ord to show that such assets have been returned back to the so-called lender. In the absence of documentation, we are unable to accept any of the pleas raised by the assessee. Hence, we concur with the reasoning of the AO that these are perquisites/benefits arising to the assessee arising the course of its business u/s. 28(i)(iv) of the IT Act. The assessee raised a plea that as these assets are capital in nature, and it is not taxable u/s. 28(i)(iv). We are unable to accept such a plea, as there is nothing on record to take a view that these assets were held as capital. A plain reading of Section 28(i)(iv) read with section 2(24) would show that there is no bar in receiving benefit/perquisite in the form of an asset. The requirement of the section 28(i)(iv) is that it should be a benefit or perquisite, whether convertible into money or not, which requirement is satisfied in the facts of the case. We also note that the ratio laid down by the Apex court decision in the case of CIT vs. TV Sundaram Iyengar & Sons (222 ITR 344) and the High Court's decisions in Solid Containers Ltd. vs. DCIT (308 ITR 417), Logitronics Private Limited vs. CIT (333 ITR 386), would squarely apply to t....
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.... * tax cannot be levied on hypothetical/notional income. 5.1 Ld. Counsel thus submitted that for section 28(iv) to be applicable income should accrue to assessee. He submitted that in the present facts of the case, machines were taken on loan only for purposes of carrying out testing analysing and validating of the software. On the contrary Ld. CIT DR submitted that in the activity pertaining to the business without any cost to the benefit. Therefore section 28(iv) has been rightly applied by the Ld. AO. He further brought attention to the assessment order wherein apart from assets being taken on loan from its sister concern, tangible asset has been received from another company called Rohde & Schwaez Gmbh & Co. KG Germany. It has been submitted by Ld. CIT DR that value of the tangible asset taken on loan from this company was valued at Rs. 70,22,257/-. Further Ld. CIT DR submitted that certain equipment have been re-exported by assessee for which details have been submitted whereas for some others no details are available to establish that these equipments were re-exported. 5.2 We have perused the submissions advanced by both sides in the light of the....