TMI Blog2019 (4) TMI 1757X X X X Extracts X X X X X X X X Extracts X X X X ..... ies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than ₹ 1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. This tribunal in Assessee s own case for AY 2013-14 has upheld similar contention. For the reasons given above, we uphold the order of the CIT(A). Direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. Assessee, at the time of hearing submitted that, if turnover filter is applied to exclude high turnover companies, then PLI determined by the TPO is within + 3% range, therefore, other grounds of appeals becomes academic in nature, and does not require specific adjudication. - IT(TP)A No.59/Bang/2016 AND C.O.NO. 57/BANG/16 IN IT(TP)A No.59/Bang/2015 - - - Dated:- 24-4-2019 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER For the Appellant : Shri Ketan K Ved, C.A For the Responddent : Shri Pradeep Kumar, CIT ORDER Per N.V. VASU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar to that of the taxpayer as seen from its websites. 6. The Hon,ble DRP has erred in allowing relief to assessee for delayed payment of employee's monthly contribution towards PF/ESI, which are required to be considered as income u/s 36(1)(va) and th amendment to the provisions of section 431B-including the deletion of the second proviso by the Finance Act, 2003 w.e.f. 2004 has no relevance in this regard. 7. Leave may be granted to add, alter, delete or modify any of the grounds during the appeal stage. 3. The assesse has raised the following grounds in its cross-objection: On the facts and circumstances of the case and in law and without prejudice to the directions passed by the Dispute Resolution Panel: 1. The Dispute Resolution Panel ('DRP ) has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming the action of the learned Assessing Officer ( AO)/Transfer Pricing Officer ('TPO ) of not accepting the economic analysis undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and conducting a fresh economic analysis for the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SWD services) by the Assessee to it s Associated Enterprise (AE). . It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transaction has to be determined having regard to Arms Length Price (ALP). 5. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of ₹ 17,56,78,482/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction is at Arm s Length, the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was ₹ 17,56,78,482. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the above submission of the Asssessee on the ground that when a company is functionally comparable, large turnover would not be a criteria to say that the company is not comparable. 8. Finally the DRP agreed with selection of some the comparables chosen by the TPO and disagreed with the TPO on some of comparables chosen by the TPO on different criteria. Finally, the following comparable companies remained as comparable companies after the order of the DRP. 9. Aggrieved by the order of the DRP in deleting some of the comparables chosen by the TPO, the revenue has raised Gr.No.1 to 5 before the Tribunal. Aggrieved by the action of the TPO in retaining some of the comparable companies chosen by the TPO which were objected as not comparable by the Assessee before the DRP, the Assessee has filed Cross-objection before the Tribunal. 10. We shall first take up for consideration Gr.No.2(b) raised by the Assessee in its cross objection, viz., the objection that the AO applied lower turnover filter of ₹ 1 Crore and rejected companies with turnover of less than ₹ 1 crore from the list of comparable companies and by the same logi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling within one category and companies with turnover of ₹ 200 crores to ₹ 500 crores falling in another category and so on. The following were the relevant observations:- 17. The first issue to be decided in Revenue s appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee s turnover for the relevant previous year was ₹ 10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the CIT(A) 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 reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 22.4.2016 10 5. Willis Processing Services (I) (P)Ltd. Vs. DCIT (2013)30 Tamann.com 350 (Mumbai-Tribunal) for AY 2007-08 order dated 1.3.2013 47 6. Capgemini India Pvt. Ltd. Vs. ACIT ITA No.7861/Mum/2011 for AY 2007-08 order dated 28.2.2013 4.3 17.2. The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say ₹ 1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Engineering and Business Solutions Ltd. Vs. DCIT ITA No.1519/Bang/2013 order dated 13.9.2017 after considering the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover was around ₹ 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than ₹ 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 17.4. His submission was that the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Chryscapital decided by the Hon ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon ble Court has expressed a clear opinion on the issue. 17.5. The learned counsel for the Assessee also drew our attention to a decision of the Hon ble Delhi High Court rendered in the case of PCIT Vs. New River Software Services (P) Ltd. In ITA No.924/2016 order dated 22.8.2017 wherein the Hon ble Delhi High Court followed the decision of the Hon ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon ble Punjab Haryana High Court in the case of CIT Vs. Mercer Consulting (I) (P) Ltd. (2016) 76 Taxmann.com 153 (Punjab Haryana) wherein the Hon ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks. 17.6. As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the decision rendered in the case of M/s. Genisys Integrating Systems (supra), the first submission of the learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed. 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 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 learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
