TaxTMI 
TaxTMI 
2025 (7) TMI 1419
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.... Bangalore [ the ld. TPO] u/s. 92CA (3) of the Act dated 8.2.2023 was reduced to software development adjustment of Rs. 5,77,56,579 and interest on delayed receivable of Rs. 6,93,925 respectively was retained as revised TP adjustment totaling to Rs. 8,84,50,801/-, resulting into returned income of Rs. 5,00,90,640/- against assessed income of Rs. 13,85,41,441/-. 2. Assessee is aggrieved and has raised the following grounds of appeal: - "1. The Learned (Ld) Assessing Officer (AO)/Ld Dispute Resolution Panel (DR P) are erroneous in law and on the facts of the case. 2. The Ld. DRP/AO have erred in rejecting the transfer pricing study of the Company and Further erred in conducting a separate benchmarking exercise without appreciating the facts and circumstances of the Assesses company. 3. The Ld. DRP/AO are not legally justified in rejecting the transfer pricing study of the assessee company and the reasons recorded for rejection arc factually incorrect. 4. The Ld. DRP/AO are not justified in law in considering wrong comparables and consequently arriving at a high operating profit margin of 23.9% as a ratio of OP/OC. 5. The Ld. DRP/AO are ....
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.... technically develop business and team composition, while supporting them through variety of team project models ranging from contract staffing to project based staffing. 4. Assessee company filed its return of income on 5.2.2021 at a total income of Rs. 5,00,90,640/-. Return of income was selected for scrutiny where one of the reason was large value of international transaction in services based on TP risk parameter. 5. Assessee has entered several international transactions including provision of software development services amounting to Rs. 95,57,55,355/-. The assessee has computed its margin of Operating Profit / Operating Cost [OP/OC] at 13.54% which was recomputed by the ld. TPO at 14.53%. For benchmarking of the international transactions, assessee adopted Transactional Net Margin Method [TNMM] as the most appropriate method [MAM] selecting the assessee as tested party adopting Profit Level Indicator [PLI] of OP/OC, selecting One comparable company where the margin of the comparable was stated to be at arm's length, as the margin of the assessee was stated to be 13.54% and average margin of comparable company was 9.36%, Per Transfer pricing study report [TPSR] assesse....
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....ition on account of arm's-length price of provision of software development services. He also submitted a written note. He arguing on ground number 4 - 7 of the appeal submitted that the learned transfer pricing officer has erred in not applying an upper turnover filter, thereby including comparable having huge turnover. He submits that the learned TPO has accepted the application of lower turnover filter by rejecting the companies having turnover of less than Rs. 1 crore. However he did not apply any upper turnover filter. He submits that many research studies establishes that there is clearly a difference between the large firms with huge turnover in operating efficiencies compared with small medium-sized entities. He further submitted that in the software industry, the size of a company affects its operations and thereby its profit margin. Therefore he submitted that in addition to setting up a lower turnover filter, there should also be an upper turnover filter on revenues for the better comparability analysis. He further referred to the OECD transfer pricing guidelines 2017, the ICAI transfer pricing guidance note, several judicial precedents as well the decision in assess....
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....hereby making an adjustment of Rs. 693,923/-. Assessee has also objected that it is a closely linked transaction of provision of software development services and therefore it cannot be treated as a separate international transaction and then benchmark for imputing interest thereon. 15. The learned authorised representative referred to the details of those four invoices which are placed at page number 50 of the order of the learned transfer officer. It was stated that in one case the bill is due for payment on 31st of March 2020 whereas the receipt of sale consideration was received on 8/4/2020. Therefore, no adjustment on that account could have been made in this year. He further referred to another two invoices where due date of receipt of the consideration is 30 May 2020 and 29 April 2020. As the due date of payment itself is falling into next year and no adjustment could have been made in this year. 16. The learned CIT DR vehemently supported the orders of the learned lower authorities and submitted that upper turnover filter should not be applied in case of the software development industry because the turnover change in the company does not result in to change in profit....
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....ontentions while considering each of the comparable company wherein high turnover of comparable company was demonstrated by the assessee. Thus, the companies which have many folds turnover compared to the assessee were retained in comparability analysis and adjustment was made to the arm's-length price. 19. Thus the question is that whether higher turnover companies are comparable with companies having relatively small turnover. It is undisputed that lower turnover filter of Rs 1 Crore is accepted by assessee as well as the learned transfer pricing officer to remove insignificant companies from comparability analysis. Therefore turnover filter should be applied for comparability analysis or not. If higher and lower turnover filter is applied, it truncates large number of comparables, by eliminating comparables which have fairly large turnover compared to the tested entity. Naturally, large turnover companies have economies of scale compared to lower turnover entity. 20. Para number 3.43 in OECD Guidelines on Transfer Pricing (2022) says that in practice, both quantitative and qualitative criteria are used to include or reject potential comparables. Examples of qualitative....
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....A No.187/Bangalore/2021 for assessment year 2016-17 dated 20/12/2021 as per paragraph number 20 the upper turnover filter was accepted of Rs. 200 crores and those comparable which did not qualify, were directed to be excluded. In case before us, out of 17 comparable, 9 comparable i.e., Mindtree Limited, Great Software Laboratory Limited, Larsen & Toubro Infotech Limited, Wipro Limited, Nihilient Limited, Tata Elxis Limited, Infosys Limited, Tata Consultancy Services Limited and Cybage Software Limited does not pass the filter of upper turnover of Rs. 200 crores. Therefore, respectfully following the decision of the coordinate bench in assessee's own case in earlier year, we direct the learned transfer pricing officer to remove all these nine companies from comparability analysis. Though assessee has also argued that most of the above nine companies are also functionally dissimilar, but as those are being excluded based on turnover filter, we do not deal with the issue of functional dissimilarity of those comparable. 22. Coming to the contest of inclusion of Conciliant technologies Private Limited, we have carefully considered the issue and find that in case of the comparable....