TMI Blog2019 (12) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... For the Respondent : Shri Pradeep Kumar, CIT(DR) ORDER Per PAVAN KUMAR GADALE, JM : The assessee has filed appeal against the order of assessment passed u/s 143(3) r.w.s.144C(13) of the Income tax Act,1961 ['the Act' for short] dated 27/10/2017 passed in pursuance to the directions of the Dispute Resolution Panel(DRP) dated 18/09/2017. 2. The assessee has raised the following grounds of appeal: The Appellant submits as under: 1. Assessment and reference to Transfer Pricing Officer are bad in law a) That the final assessment order passed by the Respondent (hereinafter referred to as 'the Ld. AO') is bad in law and on facts, and has been passed in violation of the principles of natural justice. b) That, without prejudice to the above, the final assessment order passed by the Ld. AO is bad in law to the extent the Ld. AO did not issue to the Appellant a show cause notice as per proviso to Section 92C(3) of the Income-tax Act, 1961 ['the Act']. c) That, on the facts and circumstances of the case and in law, the Respondent erred in not providing the Appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) That the Ld. AO/ Ld. TPO erred and the Ld. DRP further erred in confirming the non-application of multiple-year data while computing the margins of alleged comparable companies. f) That the Ld. AO/Ld. TPO grossly erred in benchmarking the above international transaction of the Appellant with services provided by companies operating as full-fledged entrepreneurs without considering the differences in the functions performed, assets employed and risks undertaken by the Appellant vis- -vis the other companies. g) That the Ld. AO/I.d. TPO erred in applying arbitrary filters to arrive at a fresh set of companies allegedly as comparables to the Appellant without establishing their functional comparability. The Ld. DRP further erred to the extent it confirmed the same. h) That the Ld. AO/Ld. TPO erred in deviating from the uncontrolled party transaction definition as per the Rules and arbitrarily applying a 25% related party criteria in accepting / rejecting comparables. Ld. The DRP erred in confirming the same. i) That the Ld. AO/ Ld. TPO erred in arbitrarily accepting companies without considering the turnover and size of the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables despite the fact that the functions performed, assets employed and risks assumed by these companies are entirely dissimilar and incomparable to that of the Appellant. The DRP further erred in confirming the same. d) That, in any event, Acropetal Technologies Ltd. ought to be excluded from the list of comparables as it also fails the ITE service revenue filter applied by the TPO and upheld by the DRP. e) That, furthermore, Hartron Communications Ltd. ought to be excluded from the list of comparables as it also fails the export revenue and ITE service revenue filters applied by the TPO and upheld by the DRP. f) That, in addition, Infosys BPO Ltd. ought to be excluded from the list of comparables also because it had significant related party transactions in FY 2012-13 and due to the acquisitions effected by it in FY 2012-13 in respect of which no adjustment can be madeto its margin to eliminate the materials effects thereof. g) That, without prejudice and in any event, the Ld. AO/Ld. TPO erred in wrongly computing the margins of Acropetal Technologies Ltd., Capgemini Business Services (India) Pvt. Ltd. and Hartron Communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware development services, sale of software license, maintenance and technical support services and filed the return of income on 29/11/2013 with total income of ₹ 11,51,91,960/-. Subsequently, the case was selected for scrutiny and notice u/s 143(2) was issued. In compliance, the ld. AR appeared from time to time and furnished details and clarifications. The AO found that the assessee has international transaction with its Associated Enterprises (AE) exceeding limit and hence, with prior approval of the Principal CIT, the matter was referred to the Deputy Commissioner of Income-tax(TP). The TPO has considered the financial results at page 2, para.3.1 and 3.2 as under: 5. The assessee has applied TNMM for software development services (SDS) and PLI of operating profit/operating cost is 8.97%. TPO in proceedings called for certain documents-maintained u/s 92D of the Act along with financial statements, Annual reports and copies of agreements. The assessee has submitted the details and as per TP document, 9 comparables were selected in respect of software development services activity and 7 comparables in respect of IT eservices(ITeS) and the assessee ha select ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Ltd. ii. M/s.Microgenetic Systems Ltd. iii. M/s.JindalIntellicom Ltd., iv. M/s.Harton Communications Ltd. v. M/s.Microland Ltd. vi. M/s.Capgemeni Business Services (India) Ltd. vii. M/s.E4e Healthcare Business Services Pvt. Ltd. viii. M/s.Infosys BPO Ltd. The ld. AR submitted that the TPO has applied turnover filter at lower limit and erred in not applying the said filter at upper end so as to reject High turnover companies and submitted that 3 comparables viz., M/s.Micrloand, M/s.Capgemeni and M/s.Infosys are to be excluded from the final list on turnover filter. The ld. AR submitted that the TPO has applied service revenue of ₹ 1 crore and erred in not applying higher cap on the upper limit of turnover or service revenue while selecting comparable company and whereas the turnover filter is relevant criteria in choosing comparable. The ld. AR prayed for exclusion of 4 comparables out of 8 comparables selected by the TPO and supported with chart and paper book and annual reports and prayed for allowing the appeal. Contra, the learned DR supported the orders of the lower author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and common significant intangibles and has acquired BPO division in this financial year and incurred significant expenditure in foreign currency. Further, the company also incurred expenditure of foreign currency being 22.08% of sales and engaged on onsite services and adopted different business modules and relied on the following decisions: i. Autodesk India (P) Ltd. vs. DCIT (96 Taxmann.com 263) ii. Principal CIT vs. H S Software Development Knowledge Management Centre Pvt. Ltd. (ITA No.912/2017 dated 03/01/2018 iii. E4e Business Solutions India (P) Ltd. vs. ITO (IT(TP)A No.1397/Bang/2016 dated 13/01/2017 iv. Hyundai Motor India Engineering (P) Ltd. vs. DCIT (2019) 102 taxmann.com 10 (Hyd. Trib) We found that this company has been considered in M/s.Auto desk India (P) Ltd.,(supra) for exclusion in para.48 as under: 48. In Ground No.4 (a) and (b) the Assessee has sought exclusion of the following four companies viz., Infosys Ltd., Persistent Systems Ltd., Tata Elxsi Limited, and Wipro Limited, on the ground that apart their high turnovers, they are also functionally not comparable with the Assessee which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dissimilar and fails the export and service revenue filters. The company is engaged in providing BPO, legal process, back office, software development services, tech solutions and medical billing and there is no segmental details and fails the ITeS revenue filter applied by the TPO having 55.05%. The revenue from ITeS and export service income is 54.33%. The TPO erred in holding that application of service income to total income filter does not arise and there is wide fluctuation in the margins of the company and the company has suffered losses during the financial years 2010-11 to 2012-13 and margin vary between 40.57% and 343.43% and the company has loss of -45.5% for the financial year 2010-11 and -27.09% for financial year 2011-12, -.245% for financial year 2013-14 and 20.65 for financial year 2014-15. There is wide fluctuation in the margin. As per Annual Report, policy of recognition of revenue as expenditure are accounted on accrual basis except for income charges (export income) interest and leave encashment are accounted for on cash basis. The ld. AR further supported the stand with reference to audit report at page 1514 and 1525 of paper book on segmental reporting and t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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