TaxTMI 
TaxTMI 
TaxTMI 
2023 (1) TMI 1417
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....t 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 comparables which had median of 9.95% and thus concluded the transaction....
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.... 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 Aggrieved by the final assessment order, the assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that assessee wish to argue the applicability of turnover filter as a criteria raised in ground no. 5.2(b), ground no. 5.2(f) wherein certain comparables were rejected by applying persis....
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....lly 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 analysis is outlined below: Strategic management functions Strategic management functions such as corporate strategy, treasury etc., involves decision making on business strategy, selecting lines of business, choosing organization structure, operating procedures, analysing and undertaking acquisitions and disinvestments, responding to competitors and to market forces. These functions are ma....
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....s 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 registered legacy products which are end-to-end mortgage platforms. The main customers for these products are banks, financial institutions, valuators etc. ISGN US also undertake customisation of these products according to customers' specifications. ISGN India is responsible for providing custom development services to customers using such products. The maintenance consists of trouble shooting activities and product enhancements. The trouble shooting activity consists of the follo....
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....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 fixtures 1 3.45% Total 29 100.00% Computer Software 2 100.00% Total 2 100.00% From the above, it can be concluded that ISGN India does not own any nonroutine valuable tangible / intangible assets. ISGN US owns all the Intellectual Properties on the products and the same are reviewed by them periodically. Risks Borne The following sections provide an overview of the significant risks borne by ISGN India vis-à-vis it's AE for the transactions discussed above Table: Risk Profile Risk Category and Description Exposure of ISGN US and ISGN India Market Risk: The market risk ....
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....ge 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 does not bear any risk in relation to foreign exchange fluctuation between the Indian Rupee and USD. ISGN US bears the direct foreign exchange risk as any loss incurred by IGSN India on account of exchange rate fluctuation forms part of cost base for billing to AE. Table: Summary of risks Risks undertaken ISGN India AE Market risk No Yes Foreign exchange risk No Yes Service liability risk No Yes Credit and collection risk Yes Yes Characterisation Based on the results of the functional, risk and asset analysis, ISGN India could be characterized as a limited risk service provider, bearing insignificant risks as compared to the risks typically borne by ....
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....ein 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 there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No. 1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issu....
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....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 turnover. The following were the relevant observations: "17.7. We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdicti....
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....f 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. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT (A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)." 20. In view of the aforesaid decision, we hold that companies listed in Ground No. 10.5.1 of the original grounds of appeal whose turnover in the current year is admittedly more than Rs. 200 Crores should be excluded from the list of comparable companies." 10. Based on the above observations, we are of the view that the companies listed hereinabove that h....
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....lobal 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 substance, all the above cases is that the company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordi....
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....mpanies 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 considering the submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose." Following the above ratio laid down in Affinity Express India Pvt. Ltd. (supra), we hold that companies should not be excluded for the purpose of comparability and computation of ALP, merely because there is loss in two out of three preceding A.Ys. The Ld.AO should verify whether such companies were consistent loss making companies. The Ld.AO is therefore directed to reconsider the comparable afresh that were rejected by applying the "persistent loss making" filter in the light of these above referred decision by Hon'ble Pune Tribunal. Accordingly, this ground raised by the assessee stands allowed for statistical purposes. 12. Ground no. 5.3 - wherein assessee is seeking inclusion ....