TMI Blog2015 (7) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... Gate Global Solutions Ltd.,Mindtree Ltd.,Persistent Systems Ltd.,Sasken Communication Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd. and Infosys Technologies Ltd.from the list of comparable companies on the basis of turnover and size. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. - Decided against revenue. - IT(TP)A No. 192/Bang/2015 - - - Dated:- 29-6-2015 - Shri N.V. Vasudevan and Shri Abraham P. George, JJ. For the Petitioner : Shri T.S.N. Murthy, CIT-III(DR) For the Respondent : None ORDER Per N.V. Vasudevan, Judicial Member This appeal by the Revenue is against the order dated 30.1.2015 of the DCIT, Circle 5(1)(1), Bangalore passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [ the Act ] for the assessment year 2009-10. 2. The sole ground of appeal by the Revenue reads as follows:- Turnover filter : The learned DRP erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s. Infosys Technologies Ltd. 3. The assessee is a company engaged in the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jections to the proposals of the TPO before the DRP. Amongst other objections, the principal objection of the assessee was that out of 11 comparable companies chosen by the TPO, the turnover of Infosys Ltd., L T, Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies, Tata Elxsi were beyond ₹ 200 crores and therefore they cannot be compared with a company like the assessee, whose operating margin was only ₹ 18.47 crores. The assessee relied on the decision of ITAT Bangalore Bench in the case of Genesis Integrating Systems (supra). 8. The DRP accepted the aforesaid objection of the assessee with the following observations:- 10.65 Turnover Filter: The TPO had applied the turnover filter with ₹ 1 crore at the lower end but with no cap at the upper end. The assessee submitted that companies having varied turnovers cannot be compared to each other as the difference in their size and scale of operations have a direct impact on their profitability. In this regard, the concept of Economies of Scale was explained before the Panel, wherein, an increase in the size and scale of operations lead to a decrease in the long run average cost of each un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued accordingly. 9. Aggrieved by the aforesaid direction of the DRP, the Revenue has preferred the present appeal before the Tribunal. 10. We have heard the submissions of the ld. DR, who reiterated the stand of the Revenue as contained in the ground of appeal. We are of the view that the objections raised by the Revenue in this appeal are not sustainable. 11. The ld. counsel for the assessee brought to our notice the observations of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra) (ITA No.1338/Bang/2010) for assessment year 08-09, on the application of turnover filter and how the said filter is a valid filter in choosing comparables. It was therefore argued that the learned CIT(A) was fully justified in applying the aforesaid filter and excluding comparable companies chosen by the TPO which did not pass the test as laid down in the aforesaid decision. The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal of the revenue. 12. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a ₹ 1,000 crore company cannot be compared with the transaction entered into by a ₹ 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. 13. It was further submitted that the TPO s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of ₹ 13,149 crores as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1171/Bang/2010). It was finally submitted that companies having turnover more than ₹ 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than ₹ 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92-B provides that international transaction means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm s length price under section 92C:- 10B. (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) . to (d) .. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared, 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 shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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