TMI Blog2020 (9) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... over more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores - HELD THAT:- No infirmity in the directions of the DRP in excluding the companies having turnover more than ₹ 200 crores. Consequently ground No.4 raised by the revenue is dismissed. Grant of risk adjustment @ 1% by DRP - HELD THAT:- DRP has not directed the AO to allow risk adjustment @ 1%, but has only directed the AO to decide the percentage of risk adjustment to be calculated and to take guidance from the decision of Hellosoft Pvt. Ltd. [ 2013 (10) TMI 747 - ITAT HYDERABAD] . Hence we are of the view that the ground projected by the revenue does not arise out of the directions of the DRP. Application of RPT filter between 15% and 25% - HELD THAT:- DRP, however, following the decision of the ITAT Delhi Bench in the case of Mentor Graphics P. Ltd. [ 2007 (11) TMI 339 - ITAT DELHI-H] took the view that there should be Nil RPT for a company to be taken as a comparable company. The department is in appeal on the above conclusion of the DRP. Inclusion of Thinksoft Global Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue should also be set aside to the AO for verification of proof of payment. If necessary evidence is available on record, the AO is directed to allow deduction and if some additional evidence is required, the AO should afford opportunity to assessee to produce the same to substantiate its claim for deduction. We hold and direct accordingly. Error in computation of deduction under section 10A - Incorrect amount of export turnover considered for computation of section 10A deduction - HELD THAT:- At the time of hearing, both the parties agreed that the aforesaid incorrect computation requires verification by the AO and for this purpose this has to be sent back to the AO. Accordingly the AO is directed to consider the plea of the assessee and rectify the error in the computation of deduction u/s. 10A. - IT(TP)A Nos. 203/Bang/2015, IT(TP)A Nos. 559 & 595/Bang/2015 And ITA No.332/Bang/2018 - - - Dated:- 31-8-2020 - Shri N.V. Vasudevan, Vice President And Shri B R Baskaran, Accountant Member For the Assessee : Shri K R Vasudevan, Advocate For the Revenue : Shri Muzaffar Hussain, CIT(DR)(ITAT), Bengaluru. ORDER PER N.V. VASUDEVAN, VICE PRESIDENT IT(TP)A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case, the Disputes Resolution Panel erred in excluding uncontrolled comparables having turnover more than ₹ 200 crores in the absence of Turnover criterion prescribed in Rule 10B of Income Tax Rules and also there being no correlation between turnover and profit margin. 5. On the facts and in the circumstances of the case the Dispute Resolution Panel relying on the decision of the jurisdictional ITAT in the case of DCIT Vs. Hello Soft Pvt. Ltd. (2013) erred in directing the AO to apply risk adjustments at 1% to the average margin without appreciating the fact that a single customer risk borne by the tax payer in its status of a captive service provider was equivalent to the marketing and technical risk attached to the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems Solutions Ltd Thinksoft Global Services Ltd. 6. The Assessee is a company engaged in the business of providing contract Software Development Services (SWD Services) to its holding company. The transaction of rendering software development services to holding company was a transaction with an Associated Enterprise (AE) and was therefore an international transaction. As per the provisions of Sec.92 of the Act, income from international transaction has to be computed having regard to Arm s Length Price (ALP). 7. The details of the international transaction of rendering SWD services between the Assessee and its AE in AY 2010-11 is as follows:- Particulars Amount in Rs. Provision of SWD services 88,25,18,949 SOFTWARE DEVELOPMENT SERVICES SEGMENT 8. It is not in dispute between the Assessee and the revenue that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determination of ALP and that the profit level indicator to be adopted for comparison of the Assessee s profit with that of comparable companies was Operating Profit/Total Cost ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.05% 14.54% AVERAGE MARGIN 22.71% 21.76% The TPO restricted the working capital adjustment to 1.98%. 9. Based on the above average arithmetic mean of profit margin of the comparable companies, the TPO computed the ALP of the international transaction of rendering of SWD services by the Assessee to its holding company as follows:- Computation of arm s length price by the TPO and the adjustment made: Computation of Arm s Length Price Particulars Amount INR Arithmetic Mean PLI 22.71% Less: Working Capital Adjustment 0.95% Adjusted Arithmetic mean PLI 21.76% Arm s Length Price Particulars Amount INR Operating Cost 78,58,99,253 Arm s Length Price ( ALP ) @ 121.76% of Operating Cost 95,69,10,930 Price received vis- -vis the Arm s Length Price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd the rival submissions. As far as ground No.4 raised by the Revenue is concerned the question boils down on application of turnover filter in choosing comparable companies. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:- 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 fluctuation profit margins, as co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pports 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 the ratio laid down in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies from the list of comparable companies chosen by the TPO. The ld. DR s objection was that the assessee not having challenged the inclusion of Persistent Systems Solutions Ltd. and Thinksoft Global Ltd. before the DRP, cannot seek to take advantage of the DRP s direction of RPT filter and seek exclusion of these two companies. As far as ICRA techno analytics Ld., is concerned, the Assessee challenged the inclusion of this company on functional comparability but not on application of RPT filter. As far as application of RPT filter is concerned, this Tribunal has been taking a consistent view that the threshold limit for application of RPT filter should be 15% and in cases where the available samples are less, then the threshold limit can be fixed at 25%. Therefore, we are of the view that the directions of the DRP fixing the threshold limit as 0% for application of RPT filter is not correct. We direct the TPO to adopt the RPT filter @ 15% and decide the comparability of all the companies that remain for comparability as per the directions in this order. Accordingly, the additional grounds by the revenue and ground No.4 by the assessee are partly allowed. 18. In the result, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lments for a period of five years after which the Company shall not be liable to pay any monthly rentals to ITPL on account of fit-out charges. The lease rentals paid to ITPL towards such fit-outs has not been debited to the profit and loss account. Accordingly. the Company has claimed the lease rental paid to ITPL amounting to ₹ 16,445,484 towards such fit-out charges as revenue expenditure in the computation of income. The copies of lease rental agreement are enclosed as Annexure 1. 23. The AO, however, came to the conclusion that the payment was capital in nature and therefore cannot be allowed as a deduction. The same was accordingly added to total income of the assessee. The DRP on this issue held that assessee can claim depreciation on the amount disallowed. The following were the relevant observations:- 16.1 Disallowance of lease rentals claimed as revenue expenditure amounting ₹ 16,445,484 a) The Learned Assessing Officer ( learned A0 ) has erred in treating the lease rental payments made by the Assessee as capital expenditure, thereby, disallowing an amount of ₹ 16,445,484 being lease rental payments claimed as tax deductible expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating the fact that the Appellant had submitted (vide submission dated 19 March 2014) before the learned AO a copy of ledger extract of contributions made towards gratuity fund duly approved by the Commissioner of Income-tax. iv. The learned AO had erred in not appreciating that the Appellant had submitted before the Honourable DRP bank statement evidencing the remittance of contribution made by the Appellant and copy of the receipt from the approved gratuity fund. 27. In the computation of total income, the assessee claimed a deduction of ₹ 62,31,918 towards gratuity contribution paid during the year. The assessee submitted that the gratuity was a part of approved gratuity fund and contributions were entitled to deduction u/s. 43B of the Act. The AO held that the assessee did not file any documentary evidence regarding proof of payment and therefore disallowed the claim of assessee for deduction. 28. Before the DRP, the assessee submitted that the documentary evidence was filed and the AO s observations were not correct. The DRP directed the AO to verify from the record regarding the claim of assessee that evidence was filed on 19.3.2014 in the course of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging of interest u/s. 234B of the Act is purely consequential and the AO is directed to give consequential relief. ITA 332/Bang/2018 33. This appeal by the assessee is against the order dated 31.10.2017 of the CIT(Appeals)-6, Bengaluru relating to AY 2012-13. 34. Ground Nos.2 3 are substantive grounds which read as follows:- 2 Disallowance of lease rentals claimed as revenue expenditure The Ld. M(-A), without taking cognisance of the submissions filed by the Appellant has erred in law and in facts in holding that the Learned Assessing Officer (Id. AO') was justified in treating the lease rental payments made by the Appellant as capital expenditure instead of revenue expenditure. 3 Non grant of consequential depreciation on disallowance made in earlier years Without prejudice to the above, the Ld. AO has erred in law and in facts in not granting the consequential depreciation on lease rental payment made by the Appellant, which were treated as capital expenditure by him and was disallowed during the assessment proceedings of AY 2010-11 and AY 2011-12. 35. The issue projected in the aforesaid ground is identical to ground No.10 raised by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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