TMI Blog2023 (1) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with law. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. - IT(TP)A No. 587/Bang/2022 - - - Dated:- 27-9-2022 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Appellant : Shri Narendra Kumar Jain, Advocate For the Respondent : Shri Praveen Karanth, CIT-DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the assessment order dated 29/06/2022 passed by the Ld.ACIT, Circle-1(1)(1), Bangalore for A.Y. 2018-19 on following grounds of appeal: GENERAL GROUND 1. The Orders passed by learned Assistant Commissioner of Income Tax, Circle -1(1)(1), Bangalore (hereinafter referred as AO for brevity), learned Deputy Commissioner of Income Tax (Transfer Pricing Officer) - 1(1)(1), Bangalore (hereinafter referred as TPO for brevity) and the Honourable DRP-1, Bengaluru ( AO , TPO and DRP collectively referred as lower authorities for brevity) are bad in law and liable to be quashed. GROUNDS RELATING TO TP ADJUSTMENT IN SOFTWARE DEVELOPMENT SEGMENT 2. The lower authorities have erred in: (i) Adopting inappropr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly. 2. Brief facts of the case are as under: 2.1 The assessee is engaged in the business of rendering software development services and sales and marketing support services to its associated enterprises. The services are provided on cost plus basis. The assessee is also engaged in software distribution activity. A reference was made to the Ld.TPO for determining the ALP of international transactions entered into by the assessee. 2.2 The Ld.TPO vide order dated 31.07.2021 u/s 92CA of the Act proposed the following TP adjustments: Name of the Segment Average margin TP Adjustment Software development segment 26 comparables with median of 22.27%. Rs.37,982,383/- Notional Interest on Trade Receivables Interest at 6.57% p.a Rs. 87,613/- Total Rs. 3,80,69,996/- 2.3 The Ld.AO passed the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Turnover more than 200 Crores 3.1 In the final set comparables, the learned TPO has retained companies with high turnover. In this regard, the assessee submits that a captive service provider cannot be compared with large software companies. The turnover of the assesee in the software development segment is Rs.38,86,80,909/-. The criteria of size in terms of turnover is an important factor to be considered while selecting comparables. In this regard, the assessee relies on the decision of the Coordinate Bench in assessee s own case vide IT(TP)A No.106/Bang/2022 for AY 2017-18, wherein companies having turnover exceeding 200 crores were excluded. Therefore, the assessee seeks exclusion of the following companies having turnover greater than Rs.200 crores: SL No: Name of the Company Turnover (in crores) 1 Exilant Technologies Private Limited 332.10 2 Larsen Toubro Infotech Ltd 6,906.4 3 Mindtree Ltd 5,325 4 Persistent Systems Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 263. For the sake of convenience, we reproduce the relevant observation by Coordinate Bench of this Tribunal in case of Barracuda Networks India (P.) Ltd. vs. DCIT reported in [2021] 131 taxmann.com 337 are as follows: 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 of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 17,77,11,711/-. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e requires that the Tribunal should follow the decision of a nonjurisdiction High Court, even though the said decision is of a nonjurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India (P.) 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 Bangalor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparable companies. 15. As far as company listed at Sl .No.(h) of Grd.No.4 and Grd.No.5 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 earlier two years its turnover was more than Rs. 200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to: whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than Rs. 200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs. 200 Crore turnover filter. 16. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfer pricing cases. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... namely:- (i) Where the prices have been determined using the method referred to in clause (b) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; (ii) where the prices have been determined using the method referred to in clause (c) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ** 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgin of the financial year 2015-16 alone should be taken. If one looks at Rule 10CA(2) in isolation, we have to reject this argument because the 1st and 2nd proviso to Rule 10CA(2) of the Rules refers to only R.S. Software (India) Ltd., (i.e., where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction ) undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S. Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-18 in an identical situation in respect of the alleged comparables observed as under: 4. By raising ground 6(iii), the assessee is seeking to exclude seven comparables on the grounds that the turnover of the said companies far exceeds Rs.200 crore, and therefore, the said companies cannot be compared with that of the assessee, where the turnover under the software development segment is only Rs.45.35 crore. In this context, the learned AR relied on the following judicial pronouncements:- (i) Autodesk India (P) Ltd. v. DCIT, Circle 11(1), Bangalore (2018) 96 taxmann.com 263 (Bangalore Trib.) (ii) Cenduit (India) Services Pvt. Ltd. v. DCIT, Circle 2(1)(1), Banglaore (TS-19-ITAT-2022 Bang-TP). (iii) M/s.Software Paradigms Infotech Pvt. Ltd. v. ACIT, Circle 1(1), Mysuru (TS-676-ITAT-2021 Bang-TP) 4.1 The learned Departmental Representative was duly heard. 4.2 We have heard rival submissions and perused the material on record. Admittedly, the assessee's turnover in the software development segment is Rs.45.35 crore. The turnover of for Larsen Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned 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 decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tata Elxsi Ltd., Infosys Ltd., Nihilent Technologies Ltd., Cybage Software Pvt. Ltd. from the final list of comparables. 3.7 The Ld.AR has submitted that Wipro has a turnover of Rs.43063.8 Crores, Sasken Technologies Ltd. has turnover of Rs.421.40 crores, Exilant Technologies Pvt. Ltd. has turnover of Rs.332.10 crores. These comparables are also to be excluded based on the same principles as observed by Coordinate Bench of this Tribunal in the above referred cases. Respectfully following the view taken hereinabove, we direct these comparables to be excluded from the final list for failing the turnover filter. Accordingly, ground no. 2(ii) raised by assessee stands allowed. 4. Ground No.3 - Incorrect computation of certain comparables: 4.1 With respect to this ground, the assessee submitted that the Ld.TPO computed incorrect margin of following comparables. The Ld.AR submitted the corrected margins of the comparables as under: SLNo. Name of the Company Margins as per TP Order Corrected Margins 1 Harbinger Systems Private Limited 9.68% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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