TaxTMI 
TaxTMI 
2024 (2) TMI 273
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.....2017. During the course of assessment proceedings, it was noticed that assessee had entered into international transaction with its Associate Enterprises (AE) amounting to Rs. 131,11,86,107/-. The case was referred by the AO to the TPO to determine the Arm's Length Price (ALP) of international transaction undertaken by assessee with its AEs. The TPO passed an order under section 92CA of the Act on 30.10.2019 proposing Transfer Pricing (TP) adjustment of Rs. 12,21,83,641/- with reference to software development segment of the international transaction entered into by the assessee with its AE during the previous year. Consequent to the TPO's Order, a Draft Assessment Order was passed under section 144C of the Act on 21.12.2019. 3. Aggrieved, assessee filed objections before the Dispute Resolution Panel (DRP) (objections dated 20.01.2020). The DRP, vide its directions dated 2025.03.2021, dismissed the objections raised by the assessee and confirmed the TPO adjustment proposed by the TPO. Pursuant to the DRP's directions, the impugned Final Assessment Order was passed incorporating TP adjustment in the software development segment amounting to Rs. 12,21,83,641/-. 4. Aggrieved by the....
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....ee submits that the turnover of the assessee is only Rs. 124 Crores during the relevant previous year, hence, companies having turnover of more than Rs. 200 Crores needs to be excluded from the comparable list while calculating the ALP of the said international transaction. We find that identical issue was considered by the Tribunal in assessee's own case for Assessment Year 2015-16 (supra). The relevant narration of facts, the contentions raised and the findings of the Tribunal for Assessment Year 2015- 16 reads as follows: "14. Ground No.8 relates to application of turnover filter by the TPO. The ld AR submitted that the TPO has applied the lower turnover filter while choosing the fresh comparable companies but failed to apply the upper turnover filter. The ld AR submitted that the turnover of assessee for the year under consideration is Rs. 108 crores and that by applying the upper turnover filter Rs. 200 crores, the following companies need to be excluded. In this regard, the ld. AR presented a table with the turnover details of the comparable companies :- Sl. No. Company name Turnover In INR Crores 1. Tata Elxsi Ltd. 781.85 2. Mindtree Ltd. 3,547.40 3. ....
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....led transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-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....
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.... accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 24,71,71,242/-. 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 rel....
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....issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparable companies. This shows that there is a limit for the lower end for identifying the comparable companies. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention 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 comparable companies, 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 Indi....
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....risdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this 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 Mumba....