TaxTMI 
TaxTMI 
2026 (6) TMI 1166
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....ng study documentation furnished by the assessee. We note that the issues raised in these grounds are interconnected with the other transfer pricing grounds adjudicated herein below. The contentions raised therein have been examined and dealt with while deciding the respective substantive grounds. Accordingly, no separate adjudication is called for under this ground of appeal. 5. The issues raised by the assessee in Grounds Nos. 3 to 10 are interconnected and pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables by the TPO and by the Ld. DRP for computing the ALP of the international transactions carried out by the assessee with the AE. 6. At the outset, we note that the assessee has only pressed ground No. 8 out of ground Nos. 3 to 10, and the remaining grounds are either left open or not pressed or are general in nature. Accordingly, no separate adjudication is called for under these grounds of appeal. 7. The brief facts of the case are that the assessee, a private limited company, is engaged in the business of software development services. It also offers design, development and integration services in advanced embedd....
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....y of software companies. The Ld. DRP relied on various judicial precedents wherein it was held that when a company is functionally comparable to that of assessee, the same cannot be excluded merely because its turnover was at a higher or a lower level. 11. Aggrieved by the order of the AO/ direction of the ld. DRP, the assessee preferred an appeal before us. 12. The Ld. AR before us has filed an appeal set running from page 01 to 225 containing the grounds of appeal, orders of lower authorities and submissions made before them. The assessee also submitted 4 pages chart containing details of comparable ought to be deleted on turnover filter. 12.1 The ld. AR for the assessee regarding turnover filter submitted that the TPO has considered companies having high turnover in selecting the comparable companies, thus failed to apply the turnover filter used by the assessee in its TP Study Document to exclude companies having turnover more than the limit i.e. 10 times and those with less than 1/10th of the turnover of the tested party. The assessee placed reliance on various judicial precedents in this regard. 13. The Ld. DR, on the contrary, strongly supported the order o....
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....n of a 1,000 crores company cannot be compared with that of a 10 crores company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 14.2 Further paragraph 15.4 of the ICAI Guidance Note on Transfer Pricing emphasizes significant differences in company size and turnover, such as comparing Rs. 1,000 crore entity to a Rs. 10 crore entity materially affects profitability and comparability under Rule 10B(2) of Income Tax Rule. 14.3 In the present case, the assessee's turnover from software development services is Rs. 72.39 crores, whereas several of the comparables selected by the TPO have substantially higher turnover. In such circumstances, the application of an upper turnover filter becomes necessary to ensure a fair comparison. The Tribunal has taken a consistent view that large or medium scale companies with substantially higher turnover cannot be compared. For the ready reference, the view taken by the coordinate bench of this Tribunal in Autodesk India (P) Ltd. v. DCIT reported in (2018) 96 taxmann.com 263 reads as under: "17.7. We have considered the rival submissions. The substa....
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....bai Benches cited by the Ld. DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the Ld. counsel for the Assessee supports the plea of the Ld. counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (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 Ld. DR before us cannot be the basis to hold that high turnover is not relevant criteria for....
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....s with turnover exceeding Rs. 200 crores. The relevant question raised by the Revenue and finding of the bench reads as under: (2) Whether on the facts and in the circumstances of the case the Tribunal is right in law in accepting the claim of assessee to adopt turnover filter of Rs. 200 Crores following the decision of Co-ordinate Bench in the case of M/s. Genisys Pvt. Ltd v. DCIT reported in 64 DTR page 225 even when said decision has not reached finality and without appreciating that the turnover is not a relevant filter in the software industry, as the size of the turnover and margins are not linked and the Economics of scale are relevant factor only in capital intensive companies which have substantive fixed assets in the form of plant and machinery? Regarding substantial question of law No. 2: "20. We have to hold that assessee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L & T Infotech and M/s I....
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....rovide for the turnover filter. He submitted that as rightly pointed out by the TPO in the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew out attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 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 are 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 counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits....
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....e is partly allowed. 15. Ground Nos. 11 and 12 are interconnected and pertains to notional interest on delayed trade receivables. 16. The relevant facts of the case are that the TPO treated the delay in realization of trade receivables from the AEs as unsecured loans advanced to the AEs and, accordingly, computed notional interest for the period of such delay during the year under consideration. In doing so, the Ld. TPO placed reliance on the provisions of section 92B of the Act, wherein the definition of "international transaction" was retrospectively amended to include capital financing transactions arising in the course of business. 16.1 The Ld. TPO computed notional interest on the average receivables of the assessee for the captioned AY by applying the SBI PLR applicable for the captioned Assessment year at the rate of 12.27% after allowing a credit period of 60 days and, on such basis, determined the total notional interest adjustment at Rs. 3,28,481/- only. 17. Aggrieved assessee filed objections before the Ld. DRP. 18. Before the Ld. DRP, the assessee submitted that the interest on delayed receivables should not be considered a separate international tr....
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....yed receivables is required. 20.2 The assessee further submitted that the TPO/AO erred in computing notional interest on outstanding receivables without considering the corresponding payables to AEs. It was contended that the assessee is both a debtor and a creditor in its dealings with AEs, and therefore, the transactions cannot be viewed in isolation. The delay in realization of receivables is effectively offset by the credit period enjoyed on payables, and hence a netting off approach ought to be adopted. 20.3 Without prejudice, the assessee submitted that if at all interest is to be computed, the same should be done by applying LIBOR plus 200 basis points, as held in several judicial precedents. Accordingly, the assessee requested the Bench to direct the TPO to recompute the interest on trade receivables by applying LIBOR plus 200 basis points. 21. On the other hand, the Ld. DR before us submitted that the TPO has rightly treated the outstanding receivables from AEs as a separate international transaction in view of the Explanation inserted to section 92B of the Act, which specifically includes deferred payments or receivables arising during the course of b....
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....med in the working capital adjustment cannot be fully accepted. 22.3 With regard to the contention of assessee regarding net off, we take a note that the approach adopted by the TPO is not entirely justified. Where the assessee has both receivables and payables with the same AE, the impact of delay cannot be examined in isolation. If the assessee is also enjoying credit from the same AE, the real benefit, if any, has to be determined on a net basis. Ignoring the payables would result in an artificial and inflated adjustment which does not reflect the true economic substance of the transaction. 22.4 With regard to the contention of assessee regarding net off, we take a note that the approach adopted by the TPO is not entirely justified. Where the assessee has both receivables and payables with the same AE, the impact of delay cannot be examined in isolation. If the assessee is also enjoying credit from the same AE, the real benefit, if any, has to be determined on a net basis. Ignoring the payables would result in an artificial and inflated adjustment which does not reflect the true economic substance of the transaction. The above view finds strong support from the....