TMI Blog2021 (2) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... ough pilot projects. Unless the nature of the expenses is examined it is not possible to decide as to whether the same were revenue in nature and that it relates to existing business of an Assessee. The alternative contention of the Assessee that the claim should be examined u/s.35 of the Act also cannot be decided unless the correct description of the expense is considered. We therefore set aside the order of the AO on this issue and remand the issue for consideration afresh by the AO after affording opportunity of being heard to the Assessee. - IT(TP)A No.1851/Bang/2019 - - - Dated:- 15-2-2021 - Shri. B. R. Baskaran, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : Shri Narendra Kumar Jain For the Revenue : Shri Priyadarshi Mishra, Add. CIT (DR) ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee as against order dated 24/6/2019 passed by Ld.CIT(A)-10 Bangalore, for assessment year 2009-10. GENERAL GROUND 1. The Order of the learned Commissioner of Income Tax (Appeals)-10 (hereinafter referred to as CIT (A)) to the extent prejudicial to the Appellant is bad in law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent Systems Ltd vi. Mindtree Ltd vii. Larsen and Turbo Infotech viii. Infosys Technologies Ltd ix. Zylog Systems Ltd. 5. The learned CIT(A) has erred in confirming the action of the TPO in: a. Not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies; and b.Not recognizing that the appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account. GROUNDS RELATING TO CORPORATE TAX ADJUSTMENT R D Expenses 6. The learned CIT(A) has erred in confirming the action of the AO in: a. Disallowing a sum of ₹ 3,91,21,647/- being research and development expenses under section 37 of the Act stating that the said expenses confer an enduring benefit and is not revenue in nature; and b. In the alternative, the learned CIT(A) has erred confirming the action of AO in not granting depreciation on the amount capitalised by him. GENERAL GROUND RELATING INTEREST 7. The learned CIT(A) has erred in confirming the action of the AO in levying a sum of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO applied following filters: Companies whose software development service revenue ₹ 1 cr. were excluded Companies whose Software Development Service revenue is less than 75% of the total operating revenues were excluded Companies who have more than 25% related party transactions (income as well as expenditure combined) of the operating revenues were excluded; Companies who have export sales less than 75% were excluded. Companies whose employee cost to operating revenues is less than 25% of the revenues were excluded 4. The Ld.TPO rejected 16 comparables out of 21 comparables given by the assessee in its TP report. The assessee before Ld.TPO had also given some other additional comparables which was also rejected by the Ld.TPO on functional difference. The Ld.TPO on his own, on a search carried on in Prowess Database arrived at a set of 18 comparables over and above the 8 comparables relied upon by the assessee in its TP study, which the Ld.TPO accepted were comparable. Thus, the Ld.TPO arrived at following final set of 11 comparables: Sl No. Name of the Comparable Margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is ₹ 22.50 crores and hence the assessee falls under the category of companies having turnover between ₹ 1.00 crore to ₹ 200 crores. She submitted that the coordinate bench has held in the assessee's own case related to Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.) and also in the case of Tavant Technologies India (P.) Ltd. v. Dy. CIT [IT (TP)No. 1700 (Bang.) of 2017, dated 21-8-2020) has held that the companies having turnover of more than ₹ 200 crores could not be taken as comparable companies for an assessee having turnover of less than ₹ 200 crores. The Ld A.R submitted that, on application of above said upper turnover filter, the above said three companies would be excluded. Accordingly he prayed for application of upper turnover filter and exclusion of above said three companies. 10. He submitted that in assessee own case for assessment year 2007-08, reported in (2013) 29 taxmann.com310, coordinate bench of this Tribunal applied turnover filter to exclude comparables. This Tribunal observed and held as under: The ld. counsel for the assessee as well as the ld. DR made rival submissions on va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve economies 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 (₹ 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 Genisys Integrating Systems (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ang.) Electronic for Imaging India (P.) Ltd. v. Dy. CIT [ITA No. 1171/Bang/2010), dated 31-1-2012] 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 non-residents, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to an international transaction have not been kept and maintained by the assessee in accordance with 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 subsections (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 metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction if- none of the differences, if any, between the transactions being compared, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respectfully following the view taken by this Tribunal in assessee s own case for assessment year 2007-08, and decisions relired by the Ld.AR herein above, we direct exclusion of these comparables final list of comparables for failing turnover filter. Bodhtree Consulting Ltd. 11. The Ld.AR seeks exclusion of Bodhtree Consulting Ltd., on functional dissimilarities. 12. He submitted that this company is functionally different and should be rejected as a comparable. Our attention was invited to the directors report in annual reports of this company for financial year 2008-09 wherein this company has been categorised to have only one segment namely software development. It is also been stated therein that this company is engaged in providing open and end to end web solutions, off shoring Tata management, Tata warehousing, software consultancy, design and development of solutions, using the latest technologies. It has thus been submitted that the activities like that management, Tata warehousing etc are not akin to the captive service provided by assessee to its AE s. Ld. ar submitted that this comparable has been excluded in various decisions by coordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven circumstances, we are of the view that it would be safe to exclude both tree consulting from final list of comparables chosen by assessee. We hold and direct accordingly. 16. We note that the chart referred to and relied by coordinate bench of this tribunal has been also placed at page 349 of paper book filed before us. In the present facts assessee is a captive service provider and therefore there is a fixed-price project model followed in the present facts. Respectfully following the view taken by coordinate bench of this tribunal in this Tribunal in case of M/s Mindtech (India) Ltd vs DCIT in IT(TP)A No.70/B/2014 for assessment year 2009-10 (supra) we direct Ld.AO/TPO to exclude both tree from the final list of comparables. Accordingly Ground no.4(c ) stands allowed. 17. The next ground pressed by Ld. counsel is ground No. 6 is in respect of disallowance of ₹ 3,91,21,647/-being research and development expenses under section 37 of the act stating that the said expenses confer an enduring benefit and is not revenue in nature. 18. Both sides submitted that this issue stands squarely covered by the order of this tribunal in assessee s own case for assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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