TaxTMI 
TaxTMI 
TaxTMI 
2022 (9) TMI 1675
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....es was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in ....
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....44.39% 44.68% 36.90% 11. Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 12. Aspire Systems (India) Pvt. Ltd. 34.26% 47.56% 38.04% 39.28% 13. Cybage Software Pvt. Ltd. 62.90% 68.68% 68.82% 66.45% 35th Percentile 24.83% Median 28.20% 65th Percentile 32.42% 5. The TPO did not give working capital adjustment to the margin of the comparable companies as claimed by the Assessee. TPO computed the Addition to total income on account of adjustment to ALP as follows: "21.4. Computation of Arm's Length Price: 21.4.1 The median of the weighted average Profit Level indicators is taken as the arm's length margin. Please see Annexure A for details of computation of PLI of the comparables. Based on this, the arm's length price. of the services rendered by the taxpayer to its AE(s) is computed as under: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 27,33,52,757 Taxpayers operating cost OC 25,60,44,142 Taxpayers operating profit OP 1,73,08,615 Taxpayers PLI PLI=OP/OC 6.76% 35th Percentile Margin of comaparable set....
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....parables. The Appellant submits that should an upper limit be applied, the following companies would be rejected: Sl.No Company Turnover FY 2013-14 FY 2014-15 FY 2015-16 1 R S Software (India) Ltd. 351.88 345.51 - 2 Persistent Systems Ltd. 1,184.12 1,242.50 1,447.14 3 Thirdware Solution Ltd. 206.76 230.08 - 4 Larsen & Toubro Infotech Ltd. 4,643.94 4,744.40 5,569.52 5 Infosys Ltd. 44,341.00 47,300.00 53.983.00 6 Nihilent Ltd. 242.00 267.00 7 Aspire Systems (India) Pvt Ltd 156.53 - 8 Cybage Software Pvt. Ltd. 544.27 622.26 722.25 In this ground, the assessee has prayed for exclusion of some companies by applying the turnover filter; (ii) Inclusion of certain companies set out in Ground No.5, which reads as follows: 5. Erroneous rejection of comparable companies The Ld. ITO/ Ld. TPO erred in rejecting certain comparable companies like Akshay Software Technologies Ltd., Evoke Technologies Pvt. Ltd. and Sasken Technologies Ltd. despite these companies being functionally similar to the Appellant and the Ld. Panel grossly erred in not adjudicating their exclusion by cursorily mentioning that the companies do not feature....
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....s 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 relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), 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, 4.1 to 4.3 before the Tribunal challenging the aforesaid view of the DRP. 9. On the issue of application of turnover filter, we have heard the rival submissions. The relev....
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.... 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, 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. 10. A reading of Rule 10B(1)(e)(iii) ....
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....d 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 issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. 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 co....
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....e 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-jurisdictional 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 ....
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....old 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). 14. In view of the aforesaid decision, we hold that 7 companies listed in Grd.No.4.3 other than R.S.Software (india) Ltd., raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 15. As far as the company R.S. Software (India) Pvt.Ltd., listed at Sl.No.1 in Ground No.4.3 is concerned, the said company has admittedly a turnover of above Rs.200 crores in FY 2013-14 & 2014-15 and hence is not a comparable company in those two Financial Years and therefore while computing the average profit margin of three financial years, the profit margins of these two Financial years 2013-14 & 2014-15 should be excluded and only margins for FY 16-17 should be taken for working out the average profit margin of this company. In....
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.... working out the average profit margin of this company. 17. The next plea of the Assessee is for exclusion of profit margins of Inteq Software Pvt.Ltd. for FY 2013-14 because in this financial year, the related Party transaction of this company was more than 15% i.e., 17.62% and hence this company will not be regarded as comparable company for that year and therefore while computing the average profit margin of three financial years, the profit margins of the Financial years 2013-14 should be excluded and only margins for FY 2014-15 & 2016-17 should be taken for working out the average profit margin of this company. In the case of M/S.BORQS Software Solutions Pvt.Ltd. Vs. ACIT IT(TP) A.No.310/Bang/2021 for AY 2016-17, the ITAT Bangalore Bench in it's order dated 25.10.2021 has taken the view as canvassed by the Assessee. The following were the relevant observations of the Tribunal in this regard on the comparable company Inteq Software Pvt.Ltd.: "26. The next argument is that by applying RPT filter this company cannot be regarded as comparable for FY 2013-14 and therefore while working the margin of this company the margin for FY 2013-14 should not be considered. We have already....
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....ssessee. * Functionally comparable * Qualifies all other filters proposed by the ld. TPO * Inconsistent approach to comparability analysis undertaken by learned TPO 2.26.1 Having considered the submissions, it is seen that the above companies do not figure in the search matrix or the TPO. We have already upheld the rejection of TP document of the assessee which in turn means that a fresh search has to be conducted by the TPO. Based on the fresh search, the TPO has identified the comparables. The assessee can only ask those companies out of the TPO's search matrix which have been wrongly rejected by the TPO"As these companies do not figure in the TPO's search matrix, we opine that the functionality is not required to be seen at all, as it amounts to cherry picking. Accordingly, the plea for inclusion of these companies is rejected." 19. It can be seen from the directions of the DRP that they have rejected the plea of the Assessee only on the basis that these companies do not figure in the search matrix of the TPO. On identical facts and directions of the DRP, this tribunal in the case of M/S.Prism Network Pvt.Ltyd. Vs. ACIT IT(TP) A.No.349/Bang/2021 order dated 11.2.202....
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.... companies such as prowess or capital line is ministry of corporate affairs. Hence, the data. obtained from these data bases, which is in public domain, is very much valid as there is no data pilferage. 7. Not withstanding anything contained in the preceding paragraphs, if the assessee assumes that there is a difference between the figures from the data bases and the annual reports of the comparable companies, the assessee should have moved a rectification application u/s. 154 of the Income tax Act, 1961 before the TPO, with necessary documentary proof thereof." 2.27.2 Considering the above, the TPO is directed to verify the computation of margins as provided by the assessee and if the assessee with necessary documentary proves the computation the same may be rectified. Otherwise, the TPO should adopt correct m rains as per the information available with regard to these companies." 21. The TPO in the order giving effect to the directions of the DRP has however not considered the plea of the Assessee as directed by the DRP. Hence, we deem it fit and appropriate to set aside the order of the AO on this aspect and direct the TPO/AO to verify the profit margin of this company and ....
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...., is not a comparable company. In the decision rendered by the ITAT, Hyderabad Bench, the issue was remanded to the TPO for verification of the diversified activities of Infobeans Technologies Ltd. In the decision rendered by the ITAT, Mumbai Bench, in the case of Red Hat India Pvt. Ltd., the finding in para 50 of the aforesaid order is that Infobeans Technologies Pvt. Ltd., is into diversified services and no segmental information is available. In the case of the assessee in this appeal, a specific objection was raised regarding lack of segmental information. This has been dealt with by the DRP in para 2.16.2 of its directions and the plea has been rejected on the ground that it is based on information available in the website which is conclusive. The Bengaluru Bench of the Tribunal in the case of Prism Networks Pvt. Ltd., (supra) as well as BORQS Software Solutions Pvt. Ltd., (supra) has upheld the inclusion of Infobeans Technologies Ltd. In the given facts and circumstances of the case, we are of the view that it would be just and appropriate to set aside the issue with regard to comparability of Infobeans Technologies Ltd., to the TPO/AO for fresh consideration to verify the cl....
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....he international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. The tribunal referred to Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annexure to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. The Tribunal referred to Paragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credi....