TMI Blog2022 (4) TMI 1441X X X X Extracts X X X X X X X X Extracts X X X X ..... otal income of the Appellant - Provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of Yokogawa India Ltd., the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. - IT(TP)A No.225/Bang/2021 - - - Dated:- 19-4-2022 - SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. S. PADMAVATHY, ACCOUNTANT MEMBER Assessee by : Shri. K. R. Vasudevan, Advocate Revenue by : Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. O R D E R Per N V Vasudevan, Vice President This appeal by the Assessee is directed against the order dated 30.03.2021 of the Assistant Commissioner of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is reimbursed by the AE along with mark-up. The OP/OC of the Assessee was arrived at 16.05% by the Assessee in its TP study. The operating income was Rs.18,52,49,493/-. The Operating profit (Operating income Operating cost was arrived at 16.05%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm s Length. 4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. He also selected comparable companies from database. The TPO on his own identified some other companies as comparable with the Assessee company and arrived at a set of 13 comparable companies. The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows: 5. The TPO computed the Addition to total income on account of adjustment to ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed before the Tribunal which was argued and which was pressed for adjudication before us was (i) choice of comparable companies by the TPO in disregard of the Assessee s claim that the companies chosen had high turnover and hence should not be considered as comparable with the Assessee. The stand of the TPO was affirmed by the DRP against which the Assessee is in appeal (Ground No.10 and 16) The said ground reads thus: 10. The learned AO/ learned TPO/ Hon'ble DRP erred in not applying an upper limit to the turnover filter. Grounds related to Software Development Segment ( SWD ) 16. The learned AO/ learned TPO/ Hon' ble DRP has grossly erred in not rejecting the following companies: Inteq Software Pvt Ltd. Larsen Toubro Infotech Ltd. Nihilent Ltd. Persistent Systems Ltd. Infosys Ltd. Thirdware Solution Ltd. Infobeans Technologies Ltd. Aspire Systems India Pvt Ltd. Cybage Software Pvt Ltd. Tata Elxsi Ltd. Cigniti Technologies Ltd. (ii) exclusion of R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15%. In this regard, the assessee has raised the following additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 established is then taken into account to arrive at an arm's length price in relation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dology (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. 12. 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 of these companies is more than Rs.200 Crores and the Assessee s turnover is only Rs.18.52 Crores. 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nover is less than 200 Crores, then the margins of these years shall be taken in working out the average profit margin of 3 years. 16. As far as exclusion of this company R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15% is concerned, we find that the admitted position with regard to related party transaction in this case of R.S.Software (India) Ltd., is 17.52%. The DRP in its order proceeded on the basis that the threshold limit for application of the Related Party Transaction filter (RPT filter) would be 25% of the total transaction. The Hon ble Karnataka High Court in its Judgment 28-06-2018 in I.T.A.No.684/2017 I.T.A..No.685/2017 Pr. Commissioner of Income Tax - 7 Anr. Vs. M/s. Yodlee Infotech Pvt Ltd., had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt Ltd? and Whether on the facts and in the circumstances of the case, the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. having 19.89% of RPT. .. 4. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs. 6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed and are dismissed accordingly. 17. We are of the view that the facts of the Assessee s case is similar to the case decided by the Hon ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly. 18. As far as exclusion of Inteq Software Private Limited is concerned, the first objection of the learned counsel for the Assessee was that this company is functionally not comparable because it is engaged in the business of computer programming, consultancy and related activities. The objections of the Assessee in this regard are based on contents in the website of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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 upheld similar argument while deciding on the exclusion of margins of R.S.Software on the ground of application of turnover filter for FY 2013-14 and 2014-15. Those reasons given will equally apply to this comparable company also and accordingly, we direct that the margins of this company for FY 2013-14 should not be taken for working out the average profit margins of this company which is to be included in the dataset. 22. No other grounds except the above were argued before us. The TPO/AO is directed to compute the ALP of the international transaction of rendering of SWD services by the Assessee to AE in the light of the directions given above, after affording Assessee opportunity of being heard. 23. Corporate Tax grounds: The assessee has raised ground No.22 which reads as follows: 22. Additional Ground: Set off and carry forward of business loss while assessing the total income of the Appellant The Learned AO has erred in granting deduction under section 10AA of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression total income of the assessee in section 10A as 'total income of the undertaking'. For ..... X X X X Extracts X X X X X X X X Extracts X X X X
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