TMI Blog2018 (4) TMI 1688X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable after verifying all the other filters applied by the TPO/AO. Encore Software - This was excluded by the TPO on the ground that its revenue are continuously declining and its net worth became negative in subsequent year - This comparable was excluded by the TPO because of its revenue continuously declining and its net worth became negative in subsequent year. The CIT(A) rejected the diminishing revenue filter and included this comparable without assigning any reason thereto. The reliance of the co-ordinate bench order by the Ld. DR supports the contentions of the Ld. DR. This comparable is continuously disclosed declining revenue culminating in negative net worth in subsequent year, whereas, the assessee company is having increasing revenue trend. Thus, this comparable company cannot be compared with the assessee. Thus, revenue succeed in this aspect and we set aside the order of the CIT(A) to that extent. Maars Software - excluded by TPO on account of extraordinary event i.e. merger and acquisition during the relevant financial year - Annual Report in which it is clearly stated that the merger was called off. Thus, there was no extraordinary event i.e. merger and ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given hearing by following principles of natural justice. Ground No. 3 is partly allowed for statistical purpose. - IT Appeal No. 5944 (Delhi) of 2010 [ASSESSMENT YEAR 2005-06] - - - Dated:- 11-4-2018 - R.S. Syal And Ms. Suchitra Kamble, JJ. Kumar Pranav, Sr. DR for the Appellant. Himanshu Sinha, Adv. for the Respondent. ORDER Ms. Suchitra Kamble, This appeal is filed by the Revenue against the order dated 29/10/2010 passed by CIT(A)-XX, New Delhi for Assessment Year 2005-06. 2. The grounds of appeal are as under:- 1. The order of Ld.CIT(A) is wrong, perverse, illegal and against the provisions of law, liable to be set aside. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of ₹ 23,89,54,060/- on account of transfer pricing addition. 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the addition of ₹ 11,34,76,048/- on account of addition u/s 10A. 3. The assessee company is in the business of providing Software Development Service (from Chennai), Information Technology (IT) enabled Services of Business Process Management i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm's Length Price for inter-company transactions. While applying TNMM, the assessee had arrived at the Arm's Length Margin earned by comparable independent of Indian services provided. The major international transactions entered into by the assessee are in respect of provision of IT Enabled Services Software Development Services to the Associated Enterprises (A.E). The assessee had conducted a segmental analysis wherein it had segmented its business into two main segments viz. provision of service by SDC (Software Development Segment) provision of IT Enabled Services. The application of TNMM and the computation of Arm's Length margin was described in detail in the Transfer Pricing Report and are in the accordance with Section 92C(1) and (2) of the Income Tax Act, 1961 read with Rule 10B and 10C of the Income Tax Rules, 1962. A reference was made by the Assessing Officer to the Transfer Pricing Officer regarding these international transactions. The TPO vide order dated 17-10-2008 held therein that he did not agree with the analysis undertaken by the assessee for determination of the Arm's Length Price of the International Transaction which the assessee had wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Similarly, the ITAT Delhi held in case of Ameriprise India (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 237 (Delhi - Trib.) that an otherwise comparable company cannot be excluded on strength of high or low turnover. 8.2 The Ld. AR relied upon the order of the CIT(A). 8.3 We have heard both the parties and perused the record. It is pertinent to note that the CIT(A) has excluded this comparable because the turnover of this company was more than ₹ 100 crore. The CIT(A) has given a finding that TPO should have defined threshold limits, based on the turnover achieved by the tested party, to eliminate companies for both the segments on the basis of this filter. The Ld. DR relied upon the decision of the Hon'ble Delhi High Court in case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra) in which it has been held that high or low turnover is not a criteria for excluding an otherwise comparable company. When average PLI of comparables, consisting of companies having similar or high or low turnover, is considered for benchmarking, effect of different volumes of turnover is automatically ironed out. Therefore, simply excluding the comparable because turnover of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusion of this comparable by the CIT(A) is that the turnover was more than ₹ 100 crore and the financial records were not reliable. Regarding the turnover filter, the Ld. DR once again submitted the same submissions to that of earlier two comparables as stated above. Regarding non-reliability of financial, the Ld. DR submitted that this was not a ground taken before the CIT(A) and this was not also objected by the assessee before the TPO. In fact, it is assessee's own comparable. The Ld. DR submitted that the CIT(A) has given no justification for treating the financial not reliable thus the decision is clearly perverse. 8.8 The Ld. AR relied upon the order of the CIT(A). 8.9 We have heard both the parties and perused the record. Here also, the CIT(A) has excluded this comparable because the turnover of this company was more than ₹ 100 crore. Thus, simply excluding the comparable because turnover of this company is more than ₹ 100 crore is not a proper reason. The CIT(A) has not set out any other reason in the order for excluding this comparable. Thus, we set aside the order of the CIT(A) to that extent. Accordingly we direct the TPO/AO to include this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) rejected the diminishing revenue filter and included this comparable without assigning any reason thereto. The reliance of the co-ordinate bench order by the Ld. DR supports the contentions of the Ld. DR. This comparable is continuously disclosed declining revenue culminating in negative net worth in subsequent year, whereas, the assessee company is having increasing revenue trend. Thus, this comparable company cannot be compared with the assessee. Thus, revenue succeed in this aspect and we set aside the order of the CIT(A) to that extent. 9.4 Maars Software: The Ld. DR submitted that it was excluded by TPO on account of extraordinary event i.e. merger and acquisition during the relevant financial year which impacted its profitability. The CIT(A) failed to adopt filter of exclusion on account of occurrence of extraordinary event. The law is well settled that such comparable cannot be selected where extraordinary event has taken place during- the relevant financial year. 9.5 The Ld. AR relied upon the order of the CIT(A). The Ld. AR further submits that the process of merger was called off and there was no merger in this year. Thus, the CIT(A) rightly included this compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Segment was not properly done. The Ld. DR further submitted that deletion of TP Adjustment of ₹ 17,37,29,025 made by the TPO on account of IT enabled Services (ITeS)is not proper. The assessee adopted TNMM (OP/TC - PLI) and selected 12 comparables for benchmarking. The TPO observed that the assessee failed to submit FAR analysis and thus selection of comparables is not appropriate. The TPO rejected 7 comparables out of 12 comparables by adopting several filters. The CIT(A) made analysis and selected 3 comparables out of 5 comparables selected by the TPO by rejecting certain filters of the assessee and by adopting certain new and modified filters. The exclusion of following 2 comparables are challenged by Revenue:- i. Nucleus Netsoft ii. Vishal Information 10.1 Nucleus Net Soft: The Ld. DR submitted that the reason for exclusion of this comparable by the CIT(A) is that turnover was less than ₹ 50 crore by adopting turnover filter of ₹ 50 crore to 200 crore. The Ld. DR submitted that the actual turnover is ₹ 2.79 cr. This filter is arbitrary and without any justification. The Hon'ble Delhi High Court held in case of Chryscapital Investment Adviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the basis of this filter. Thus, the ratio of Chryscapital Investment Advisors (India) (P.) Ltd. (supra) is applicable in the present case. The CIT(A) has not set out any other reason in the order for excluding this comparable. Thus, we set aside the order of the CIT(A) to that extent. Accordingly we direct the TPO/AO to include this comparable after verifying all the other filters applied by the TPO/AO. 11. The Ld. DR further submitted as relates to other aspect of Ground No. 2, the CIT(A) recomputed the margin of SDS Segment to 14.86% from 6.51% (as determined by the TPO) on the ground that the computation given by the TPO included domestic transactions as well. This issue was never raised by the assessee before the TPO and the CIT(A) re-computed the margin without providing any opportunity to the TPO especially considering the fact this was not raised by the assessee before TPO. Similarly, the CIT(A) recomputed the margin of ITeS Segment from 14.79% (as computed by the TPO) to 17.87% on the ground that the TPO erroneously included corporate allocation cost of ₹ 3,43,23,659/- pertaining to SDC Segment. This issue was never raised by the assessee before the TPO and th ..... 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