TaxTMI 
TaxTMI 
2025 (9) TMI 572
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.... the Id. CIT (A) erred in law as well as on facts in seeking exact comparability under TNMM and whether the objection to the selection of comparable is legally sustainable? 2. Whether the ld. CIT (A) erred in law as well as on facts in ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication? 3. Whether the ld. CIT (A) erred in law as well as on facts in holding that M/s ICRA Techno Analytics Limited, M/s Larsen Toubro lnfotech Limited, M/s Persistent Systems Limited, & M/s Tech Mahindra Limited cannot be taken as comparable? 4. Whether the ld. CIT(A) was right in fact and in law in removing M/s. Mindtree Ltd. as a comparable on by imposing turnover filter? 5. Whether the ld. CIT(A), Bangalore, was right in not following the decision of Hon'ble ITAT in the case of M/s Societe Generale Global Solution Centre Pvt Ltd. in IT (TP) A No. 1188/BANG/2011 and M/s. Vmoksha Technologies Pvt. Ltd. in IT (TP) A No. 595/BANG/2013 dated 26.08.2016 for AY 2005-06 where the Tribunal has held that turnover is not a relevant criterion for deci....
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....ation of ALP of such international transactions to the Transfer Pricing Officer, DCIT - Circle - 2(1)(1), Bangalore (learned TPO). 6. The learned TPO verified the functional analysis of the assessee. He recorded that that assessee company is a 100% export-oriented unit at Bangalore since 12.05.2003 and rendering software development related services and customer support services to Kodiak, US, in terms of service agreement. Assessee carried out software development services and completes the work as required including user and technical documentation and delivers the same through internet to US. It also provides customer support services which are IT enabled services such as preparation of brochures, pamphlets and presentations, making presentations to prospective clients, handling customer calls, customer logs, remote installation and resolving customer queries. 7. Assessee's international transactions were of nature of software development services and related services amounting to Rs. 38.55 Crores and customer service was Rs. 2.99 Crores. Assessee has also submitted the segmental information for both these above activities. The operating profit ratio over operating cost (O....
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....tware and Exports Ltd., he directed to recompute margin by treating the provision for bad and doubtful debts as part of the operating cost. Before the learned CIT (A), the assessee raised another ground for inclusion of certain comparable. This ground was not adjudicated vide paragraph No.5.8 of the Order. Assessee raised further contention that negative working capital adjustment should not be made to the arm's length price of international transaction relying on the decision of M/s. Dell International Services Pvt. Ltd., Vs. Add. CIT dated 07.08.2023 for Assessment Year 2013-14 wherein paragraph No.15 this issue was dealt with. Learned CIT(A) held that since the assessee is engaged in the software development services and IT enabled services to its holding company, as assessee company is a captive service provider and accordingly decision of the ITAT is applicable and AO is directed not to make negative working capital adjustment. Accordingly, appeal of the assessee was partly allowed. 12. Against this, the learned AO is in appeal before us. 13. The learned DR submitted that the exclusion of the comparable by the learned CIT(A) was based on judicial precedence in some other....
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....tics and BPO services. He submitted that company also failed the related party turnover filter as it has related party transaction of 25.35%. Accordingly, he submitted that all the exclusions made by the learned CIT(A) are also otherwise correct. 15. With respect to the margin computation of C G Wak Software Exports Ltd., directing the learned TPO to include bad and doubtful debts as part of operating cost is correct, He submits that debts have been arising out of the sale consideration and therefore they are directly related to the operations of the company and hence it is rightly included as part of the operating cost. He further relied upon several judicial precedence stating that bad and doubtful debts provision is always part of the operating cost. He submits that the learned TPO has not given any reason to exclude the provisions for bad and doubtful debts from the operating cost. 16. With respect to the negative working capital adjustment, he submits that the learned TPO has erred in making negative working capital adjustment and thereby enhanced the average margin of the comparable. The respondent is a captive service provider and is entirely funded by the AE and compe....
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....son that above company should be included in the comparability analysis. With respect to the additional companies proposed by the respondent during the transfer pricing proceedings, she referred to the Order of the TPO and submitted that these are functionally dissimilar. On the issue of disallowance of Rs. 2,18,00,257/- she submitted that the AO may be directed to verify the same whether it leads to double disallowance or not. 20. We have carefully considered the rival contention and perused the Orders of the lower authorities. In appeal of ld. AO, only dispute is with respect to the comparability analysis of the ALP determination of the software development segment. There is no dispute regarding the MAM and the profit level indicator of OP/OC. The assessee has classified its international transaction into software development services and marketing support services segment. However, the comparability analysis has been done using software development as a primary function. The assessee reached 6 comparable companies for bench marking analysis. The learned TPO rejected certain filters adopted by the assessee and therefore the determination of the ALP as per TPSR was also reje....
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....ores. We find that the small segment of the assessee of Rs. 38.55 Crores should not have been compared with large turnover segment of comparable companies. The turnover of the company impacts profitability for several reasons. 22. Therefore, we do not find any reason that such a small segment of ALP can be comparable with such giant companies who have the brand also. Accordingly, though CIT(A) has excluded them relying on certain judicial precedence, however we find the Order of the learned CIT(A) sustainable because such high turnover companies could not have been held to be comparable with the assessment segment of Rs. 35.55 Crores. Thus, the exclusion of the above 4 companies by the learned CIT (A) cannot be found fault with and accordingly this ground of appeal is dismissed. 23. The second issue involved is with respect to the ICRA Technologies included by the learned TPO. The assessee has challenged inclusion of the same stating that its related party transactions are more than filter adopted by the learned TPO of 25% and it is functionally dissimilar. The learned TPO rejected this argument and held that the company has related party transaction of only 24.77% which is b....
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.... of bad and doubtful debts as part of operating cost. 25. The last ground of appeal of the learned AO is with respect to the direction of the learned CIT(A) to not to make negative working capital adjustment. The learned TPO dealt with this issue in paragraph No.12 of his Order. He held that working capital adjustment is computed as per formula given in Annexure to OCD guidelines. In this case, the average prime lending rate (PLR) adopted by SBI for short term working loan was considered. The average PLR of 48.15% was adopted and such working capital was shown at Annexure A. 26. In paragraph No.5.9 of the appellate Order, the learned CIT(A) stated that assessee has contended that negative working adjustments should not be made placing reliance on the decision of the Co-ordinate Bench in the case of Dell International Vs. Addl. CIT (supra) wherein ground No.4 in paragraph No.13 was with respect to working capital adjustments. 27. During the course of hearing, learned AR also submitted that the decision of the Co-ordinate Bench in the case of E4E Business Solutions India Pvt. Ltd., and referred to paragraph No.7 wherein another decision of the Co-ordinate Bench in the case o....