TaxTMI 
TaxTMI 
2023 (1) TMI 1417
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....gth price of the international transaction that assessee had with its associated enterprise. The Ld.TPO on receipt of the reference, called upon assessee to file the economic details in Form 3CED. The Ld.TPO from the details filed by assessee observed that assessee is providing software support services relating to SWD segment catering mainly to the mortgage lending industry in USA. It was observed that assessee also operated as an offshore hub along with the affiliates in USA, assessee delivers solutions and services to the customer based consisting primarily of mortgage banks and financial institutions. 2.2 The Ld.TPO observed that following were the international transactions that assessee had during the year with its associated enterprises. Particulars Amount (in INR) Provisions of software development services 359,727,122 Provision for unbilled revenue receivable 696,354,391 Provision for trade receivable 2,485,341 Provision for other receivable 5,873,441 2.3 The Ld.TPO observed that assessee computed its margin by using OP/OC as the PLI at 15% and applied TNMM as the most appropriate method. 2.4 The Ld.TPO noted that assessee had used 5 ....
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..... 56.81% 35th Percentile 20.19% Median 23.61% 65th Percentile 26.83% 2.6 The Ld.TPO also recomputed assessee's margin at 11.16%. Thereafter, the margin median applied by the Ld.TPO of the comparables was 23.61%. The Ld.TPO thus proposed an adjustment of Rs. 4,03,00,000/- to be the shortfall as an adjustment. On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order by incorporating the adjustment proposed by the Ld.TPO and computed a proposed addition of Rs. 10,16,03,730/- in the hands of the assessee. Against the draft assessment order, the assessee preferred objections before the DRP. Assessee had raised various challenges in respect of the comparables that was selected by the Ld.TPO. The DRP in its direction rejected the contentions of assessee with respect to inclusion / exclusion of most of the comparables however, accepted the CG-VAK Software and Exports Ltd. to be a good comparable from the TP study. DRP also excluded Tech Mahindra and Thirdware Solutions Ltd. from the set of comparables. On receipt of the DRP directions, the Ld.AO in the final assessment order, reduced the adjustment to Rs. 3,39,60,000/-. 2.7 Ag....
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.... object for the additional grounds being admitted. 4.4 We note that the additional ground is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the assessee is a legal issue that does not require investigation of any facts. 4.5 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the application filed under Rule 11 for admission of additional ground by assessee stands admitted. 5. The primary contention of the assessee in ground no. 5.2 is applicability of turnover filter in respect of the comparables sought for exclusion. 6. Before we analyse the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by the assessee. Functions performed Pertaining to the international transaction of provision of software support services, the FAR analys....
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.... requirement analysis relate to design, development and mapping of the processes capable of outsourcing. ISGN US prepares the operational procedures and processes for the services based on interactions with customers and market assessment. The specification of the services is arrived at taking into consideration factors such as customer requirements, mortgage laws in the US. ISGN India plays a very limited role in the functional specifications and confirms its understanding of the operational procedures and processes to be followed before commencing the work. The work done by ISGN India is monitored by ISGN US periodically and necessary QA checks done by ISGN US. Servicing The end users for most of the mortgage processing support services are banks and financial institutions. It is generally the customers who make a decision with respect to whether a particular service can be offshored, owing to strict mortgage and privacy laws in the US. While the critical portion of the service is delivered to the customer by ISGN US directly, only the custom development of the products are carried out by ISGN India. * Software support services ISGN US has some....
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....s for the product development and software support services provided by ISGN India. ISGN India is required to adhere to the quality standards set by ISGN US while performing such services. ISGN India is responsible for ensuring that the requisite quality/ performance standards are met, the output is free of error and conforms to specifications provided/ agreed upon. Assets Utilized Any business requires assets (tangible or intangible) without which it cannot carry out its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by ISGN India provides an insight into the resources deployed by it and its contribution to the business processes/economic activities. ISGN India does not own any non-routine valuable tangible / intangible assets. Table: Assets owned by ISGN India as on 31 March 2018 Tangible Assets Net Block as on March 31, 2018 (Amount in Lakhs) Percentage (%) Computers & accessories (owned) 14 48.28% Office equipment 7 24.14% Leasehold improvements 7 24.14% Furniture and fixtur....
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.... actions. ISGN US bills to the third party customers and bears the credit risk for non-payment of dues. Since the software support services are provided to the AEs hence ISGN India bears limited risk due to intercompany receivables. Service Liability Risk - Service liability risk arises when the services rendered fails to perform at accepted or advertised standards. ISGN India does not bear any service liability risk for the services provided by them is to the AE. However, the AE bears the risk of any indirect or consequential loss or damage, arising in connection with the services rendered by ISGN India. Foreign Exchange Risk: The foreign exchange risk becomes relevant if the sourcing of, e.g., materials, resources and services or if sales is performed in a currency different from the tested party's functional currency. The risk could be mitigated by hedging. ISGN India raises invoices in USD while its operational currency is Indian Rupee. Any loss incurred by ISGN India on account of foreign exchange fluctuation between the Indian Rupee (operational currency) and USD (invoicing currency) forms part of its cost base for mark-up. Hence, ISGN India....
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....dated 09.01.2023 for A.Y. 2018-19, identical companies have been excluded by applying the turnover filter by placing reliance on the decisions referred to by the Ld.AR. This Tribunal observed and held as under: "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.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt. Ltd., Tax Appeal No. 18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that ther....
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....ver 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 comparable companies is held to correct and such action does not call for any interference." 19. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low tu....
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....rnover 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 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. Theref....
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....ited Vs. DCIT (supra) has held as under: "5.4 Further, we find in the case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai 'IC Bench, wherein the TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. The Tribunal looked into the business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / operative cost at 27.25%. Since the nature of services rendered by comparable were exactly on similar lines as that of the assessee, though, during the year, it was in the loss could not be disqualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT, Mumbai 'K' Bench in the case of Temasek Holdings Advisors vs. DCIT. In sum and s....
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....sistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s. 92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed." 16. Thus, in view of the fact that the comparables F 1 Sofex Limited and Fortune Informatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after consideri....
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.... Operating Profit 361 446 OP/OC 11.16% 14.15% ** Forex Loss (gain) erroneously added to the losses 13.2 The Ld.DR submitted that the above issue may be remanded to the Ld.AO/TPO for verification. 13.3 We have considered the submissions advanced by both sides. 13.4 In our view this needs to be verified by the Ld.AO/TPO. In the event, the forex loss has already been considered while computing the total expenses, the same deserves to be excluded. The Ld.AO/TPO shall verify the computation and consider the claim in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 14. Apart from the above grounds and selected comparables in ground no. 5.3, no other issue has been argued by the assessee. any issue that may arise are left academic and open to be argued in an appropriate circumstances. In the result, the appeal filed by assessee stands partly allowed. Order pronounced in the open court on 20th January, 2023. ============= Document 1 Based on the facts and circumstances of the case and in law, ISG Novasoft Technologies Limited (hereinafter referred to as "ISGN" or "the Appellant" or "t....
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....d holding that the Appellant's impugned international transactions are not at arm's length. 5.2 The Ld. AO/ TPO pursuant to the directions of the Hon'ble DRP erred, in law and in facts, by incorrectly applying the following quantitative and qualitative filters: CLIN- Ne Law. NP 5.3 a) b) c) d) e) Applying different accounting year filter as a comparability criterion (i.e., rejecting companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months) Applying only the lower turnover filter of less than INR 1 crore as a comparability criterion and not applying a higher threshold limit for tumover filter. Rejecting certain comparable companies using employee cost greater than 25 percent of the turnover as a comparability criterion. Rejecting certain comparable companies using export sales less than 75 percent of total sales as a comparability criterion. Applying incorrect modified related party transaction (RPT) filter to reject companies, which included application of the filter in two separate legs as provided below: An RPT filter for the revenu....