TaxTMI 
TaxTMI 
2022 (9) TMI 1675
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.... Act, the transaction of providing SWD Services 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....
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....9% 9. Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 10. Thirdware Solution Ltd. 23.89% 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% 35^th Percentile 24.83% Median 28.20% 65^th 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.) Taxpa....
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..... TPO/ Ld. Panel, while applying the turnover filter rejected companies having turnovers less than INR 1 crore, however, erred in not applying an appropriate upper limit to reject high turnover companies and thereby, erred in accepting companies without considering the turnover and size of the Appellant and comparables. 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 foll....
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....ned, 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. 27,33,52,756/-. 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 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 ....
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....ation 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, 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 a....
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....nal 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 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 comparab....
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....essee 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." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-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 ....
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.... (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. 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). 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 Assess....
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....efore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly." 16. Following the same, we hold that R.S. Software (India) Pvt.Ltd., 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. 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 ....
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....us Rejection of Transfer Pricing Documentation learned TPO - Akshay Software qualifies all other filters proposed by learned TPO in the show cause notice • Qualifies ail other filters proposed by the ld. TPO & 2.25 Ground of objection No. 25 Objection No. 25.1: Evoke Technologies Private Limited ('Evoke Technologies') shoulc e accepted as a comparable to the Assessee. • Functionally comparable • Inconsistent approach to comparability analysis undertaken by learned TPO • Qualifies all other filters proposed by the ld. TPO in the show cause notice & 2.26 Ground of objection No. 26: Objection No. 26.1: Sasken Technologies Ltd. ('Sasken Technologies') should be accepted as a comparable company to the assessee. • 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 docum....
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....deration. 20. The next grievance of the Assessee is with regard to incorrect computation of profit margins of CG VAK Software and Exports Ltd. As far as the grievance of the Assessee is concerned, the DRP gave the following directions to the AO: "2.27 Ground of objection No. 27: CG-VAK Software Exports Limited should be accepted with rectified margin Objection No. 27.1: For CG VAK Exports Software Limited 'CG JAW), revised margin should be considered. • Erroneous margin computation 2.27.1 On the plea of error in margin computation, the issue was referred to TPO to comment on the objection with regard to the error in the computation of margins in the above listed companies. The TPO vide letter dated 03.02.2020 has replied and the relevant part of the reply is extracted as under: "6 The source of the data 'for these financial analytical 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 assesse....
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....e ITAT, Pune Bench, in the case of Optiva India Technologies Pvt. Ltd., Vs. ACIT ITA No.194/PUN/20212 for Assessment Year 2016-17, order dated 21.07.2022 and the decision of the ITAT, Mumbai Bench, in the case of Red Hat India Pvt. Ltd., Vs. ACIT ITA No.379/Mum/2021 for Assessment Year 2016-17, order dated 25.02.2022 and the decision of the Hyderabad Bench of ITAT rendered in the case of Infor India Pvt. Ltd., Vs. DCIT IT(TP)A no.198/Hyd/2021 for Assessment Year 2016-17, order dated 06.10.2021. In all the aforesaid 3 decisions rendered in the case of software development companies, the Tribunal took the view that Infobeans Technologies Ltd., is not functionally company and the decisions relied on by the learned counsel for the assessee were decisions rendered by the ITAT, Pune Bench, Mumbai Bench in the case of Redhat India Pvt. Ltd., (supra) has been followed and it has been held that Infobeans Technologies Ltd., 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 I....
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....ing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 25. The learned counsel for the Assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the 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....
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....time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 26. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribun....