TaxTMI 
TaxTMI 
2022 (6) TMI 1541
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....s17,32,49,904. The assessee had earned operating margin of 15.07 percent on operating cost. The assessee in its TP study had selected Transaction Net Margin Method ("TNMM") as the Most Appropriate Method ("MAM") and carried out the search for uncontrolled comparables using Prowess and Capitaline Database The search of the databases yielded a set of 8 (eight) comparable companies with median of 12.67 percent, with 35th and 65th percentile being 7.04 percent and 20.61 percent respectively (Refer page 82 and 83 of Paper book-Vol I). Hence, the margin of the assessee at 15.07 percent on operating cost was treated at arm's length in the software development segment. 3. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued. During the course of assessment proceedings, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO). The TPO agreed with the assessee that TNMM was to be applied as the MAM. The TP Officer however opined that the data used for determining the Arm's Length Price ("ALP") by the assessee in the TP study was unreliable and hence the TP Officer rejected the TP documentation maintained by the assessee. The TP Of....
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....rections dated 02.03.20921 directing rectification of the margins of certain companies in the software development segment. Subsequently, a rectification application was filed before the DRP dated 16.03.2021 to restrict the TP adjustment to the value of international transaction. The DRP dismissed the application vide order dated 05.04. 2021. The AO passed the final assessment order dated 19.04.2021 giving effect to the directions of the DRP wherein the TP adjustment of Rs 2,10,57,970/- proposed in the DAO was enhanced to Rs 2,16,61,068/- in the final assessment order. 7. Aggrieved by the final assessment order, the assessee has filed the present appeal before the ITAT. The assessee has raised several grounds and sub-grounds (Ground 7 and its sub-grounds). However, the learned AR during the course of hearing had only pressed ground 4.9. Ground 4.9 reads as follows:- "4.9. The ld.AO/TPO erred in not applying the turnover filter at the upper limit so as to reject high turnover companies. The ld.AO/TPO, while applying the said turnover filter in the lower limit so as to reject companies having turnovers less than INR 1 crore erred in not applying the said filter at the upp....
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....rve that, out of the 13 companies selected by the TPO and confirmed by the DRP, following seven companies would be excluded by applying the aforesaid turnover filter: 1. Larsen & Toubro Ltd 2. Persistent Limited 3. Infosys Limited 4. Cybage Software Limited 5. Nihilent Analytics 6. Thirdware Solutions Limited 7. Aspire Systems India Private Limited 10.2 The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd [2018] 96 taxmann.com 263, after considering the gamut of decisions on the subject, has concluded that companies having turnover more than 200 Crores cannot be considered as comparable to a small company. This decision has been subsequently followed in a number of decisions including the Bangalore Tribunal decision in the case of Arista Networks India (P.) Ltd.[2021] 133 taxmann.com 204 (Bangalore-Trib.). The recent decisions of Bangalore Tribunal in the case of Aurigo Software Technologies Private Limited [2022] 137 Taxmann.com 201 (Bangalore-Trib), has excluded the above seven comparable companies on application of turnover filter. Further, Tribunal excluded the margin of R S Software for FY 2....
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....net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus es....
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....PG") 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 Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover ....
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.... 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 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 limi....
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....rable 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-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 ca....
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.... 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 companies listed in Sl.No.(a) to (g) of Grd.No.13 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." 10.3 As regards exclusion of margin of R S Software India Limited for the financial year 2013-2014 and 2015-2016, the observation of the Tribunal in the case of Aurigo Software Technologies Private Limited (supra) are as follows:- "15. As far as company listed at Sl.No.(h) of Grd.No.13 i.e., R.S.Software (India) Ltd., is concerned, the turnover of this company in the current year is less than Rs.200 Crores but in the earli....