TMI Blog2021 (4) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... or which details could not be filed, the Ld. AO/TPO shall call for necessary information under section 133(6) in order to compute necessary adjustment. Not applying the upper limit of turnover on sales filter and for in appropriate inclusion/exclusion of comparables by Ld. AO/TPO in the final list - HELD THAT:- This Tribunal in case of Genesis Integrating Systems India Pvt. Ltd. vs [ 2011 (8) TMI 952 - ITAT BANGALORE] and various other decisions have held that, companies having turnover in excess of ₹ 200 crores cannot be compared with companies having turnover less than ₹ 200 crore. This preposition has been accepted by Hon'ble Bombay High Court in case of CIT vs Pentair Water Pvt. Ltd.,[ 2016 (5) TMI 137 - BOMBAY HIGH COURT] - Hon'ble Court upheld rejection of companies having turnover holding that turnover is a relevant factor in considering comparability of companies. Accordingly we direct Ld. AO/TPO to exclude Tata Elxi Ltd. (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt. Ltd. for having high turnover as compared to a captive s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Present appeal has been filed by assessee against final assessment order passed by Ld. DCIT dated 30/10/2019 under section 143 (3) read with section 144C (13) of the Act on following grounds of appeal: A. TRANSFER PRICING GROUNDS: The grounds mentioned hereinafter are without prejudice to one another. 1. GROUNDS IN RELATION TO ADJUSTMENT MADE IN THE SOFTWARE DEVELOPMENT SEGMENT: 1.1. The learned Assessing Officer ( Ld AO ), learned Transfer Pricing Officer ( Ld TPO ) and the Hon'ble Dispute Resolution Panel ( Hon'ble DRP ) (together referred to as lower Authorities ) have erred in facts and in law in determining transfer pricing ( TP) adjustment of ₹ 7,76,58,654/- with respect to the international transaction rendered by the Appellant in the software development segment; 1.2. The lower Authorities erred in invoking provisions of section 92C(3) of the Income-tax Act, 1961 ( Act ) and rejecting comparability analysis undertaken by the Appellant in the TP documentation maintained under section 92D of the Act; 1.3. The lower Authorities have acted in an arbitrary manner in selecting comparable companies only if the data pertaining to FY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited (13) Inteq Software Private Limited 1.14 The lower Authorities have erred in not considering the following companies as comparable to the Appellant, despite being functionally comparable and qualifying the legally accepted criteria for comparability: (1) Ingenuity Gaming Private Limited (2) Indiagames Limited (3) R Systems International Limited (4) Akshay Software Technologies Ltd. (5) TVS Infotech Limited (6) Evoke Technologies Ltd. (7) 12T2 India Ltd. (8) FCS Software Solutions Limited (9) Orion India Systems Private Limited (10) DCIS Dot Corn Solutions Private Limited (11) Harbinger Private Limited 2. GROUNDS IN RELATION TO ADJUSTMENT OF NOTIONAL INTEREST ON OUTSTANDING DEBTORS: 2.1 The lower Authorities have erred in facts and in law in imputing notional interest with regard to the trade receivables by the Appellant from its Associated Enterprises ( AE ) outside India when the Appellant has received all trade receipts for FY 2014-15 from its AE within the mutually agreed credit period of 90 days; 2.2 Without prejudice to the above, the lower authorities have erred in facts in not appreciating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 CEB. The Ld. TPO from the details filed noted that assessee had entered into following international transaction: Particulars Amount Received Amount paid Method Used Provision of Software Development services 961,414,277 TNMM Reimbursement of expenses paid 15,199,390 TNMM Taxes on equity plans paid on behalf of the AE 12,788,057 Other Trade receivables 137,516.837 TNMM Trade Payables 2.315,295 TNMM Unbilled Revenue 6.173,066 TNMM Total 1,117,892,237 17,514,685 1,135,406,92 2 5. The Ld. TPO noted that assessee renders software development services for the games ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014) or data of the company does not fall within 12 month period ie, April 1, 2013 to March 31, 2014, were rejected 3 Companies whose income was 1 crore were excluded 4 Companies whose Software Development Service is less than 75% of its total operating revenues were excluded 5 Related party transaction ( RPT ) greater than 25 percent of the sales were excluded 6 Export sales less than 75 percent of sales were excluded 7 Employee cost less than 25 percent of turnover were excluded 9. Comparables selected by the Ld. TPO S No Comparable Weighted average OP/OC 1 Kals Information Systems Ltd 11.88% 2 E-Zest Solutions Limited 14.05% 3 CG-VAK Software Exports Limited 18.50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it failed export filter of 75%. The DRP observed from the annual reports that the export revenue of this comparable was 24.63 crores out of total revenue of ₹ 30.16 crore which amounts to 81.65%. 15. In respect of notional interest computed by the Ld. TPO, the DRP upheld the reasoning given by the Ld. TPO by holding that the deferred revenue receivables is a separate international transaction. The DRP upheld the action of the Ld. TPO as a justified, examining short charging or non-charging of interest on deferred receivables from AE. 16. It also did not consider the claim of assessee for working capital adjustment and upheld the notional interest computed by the Ld. TPO against delayed receivables based on actual realisation on each invoices. 17. On receipt of the directions by the DRP, the Ld. AO passed final assessment order by making addition in respect of transfer pricing adjustment amounting to ₹ 7,77,80,026/-. 18. Aggrieved by order of the Ld. AO, the assessee is in appeal before us now. 19. The Ld. AR submitted that, assessee wishes to argue only certain comparables for inclusion/exclusion under both the segments. He submitted that, for year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary details in respect of the same. In respect of the companies for which details could not be filed, the Ld. AO/TPO shall call for necessary information under section 133(6) in order to compute necessary adjustment. Accordingly this ground raised by assessee stands allowed. 27. Ground No. 1.10 1.13 is raised for not applying the upper limit of turnover on sales filter and for in appropriate inclusion/exclusion of comparables by Ld. AO/TPO in the final list. 28. He submitted that 9 comparables is sought to be excluded on turnover filter which are as under: 29. Tata Elxsi Ltd.(Seg.), mind tree Ltd., RS Software (India) Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Thirdware Solutions Ltd., Cybage Software Pvt. Ltd. 30. The Ld. AR submitted that assessee is seeking exclusion of Infobeans Technologies Ltd. on functional dissimilarities. 31. Before we undertake comparability analysis, it's sine qua non to understand functions performed, assets owned and risk assumed by the assessee under both these segments. The Ld. TPO observed as under: Functions 32. Zynga India is an Indian Private Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent Technologies Ltd., Infosys Ltd., Cybage software Pvt. Ltd. by applying turnover filter. The Ld. AR submitted that authorities below applied lower limit of turnover filter of ₹ 1 crore and ignored applying an upper turnover filter. It was submitted that, consistently revenue always took stand that turnover is not a relevant filter in software industry. It has been contended by revenue that in software industry size has no influence on the margins earned by a comparable company. What matters is a human capital. It was under these circumstances that The Ld. TPO applied only lower limit of turnover filter for excluding companies having turnover less than ₹ 1 crore. Assessee also relied on decisions of this Tribunal in case of Metric Stream Infotech (India) Pvt. Ltd., Vs. ACIT in IT(TP)A No. 2347/Bang/2019 dated 24/4/2020 for asst. year 2014-15. 36. The Ld. CIT.DR submitted that when companies functionally similar to assessee, and is potentially comparable, the same cannot be excluded merely because of high or low turnover. 37. We have perused submissions advanced b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Systems (I) (P.) Ltd. (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 Systems (I) (P.) Ltd. (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 Systems (I) (P.) Ltd. (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll filters, based upon response received from this company under section 133 (6) of the Act. He submitted that this observation is contrary to the facts and figures appearing in annual report. Referring to page 1364 the Ld. AR submitted that this company is engaged in software engineering services. In the company overview this company has been stated to be primarily engaged in providing custom developed services to offshore clients and it provides software engineering services primarily in custom application development, content management systems, enterprise mobility, Big Data analytics. Ld. AR thus submitted that this company is functionally not at all similar with a captive service provider like assessee that this providing Ltd. services to its associated enterprises. 42. On the contrary Ld. CIT DR, referring observations of DRP in para 19.1 submitted that the activities of company fall under the gamut of software development has categorised by company itself and that the information obtained under section 133 (6) is sufficient enough to come to such conclusions. However he submitted that this comparable also may be sent back to the Ld. AO/TPO for verification. 43. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons Ltd., DCIS DOT COM Pvt. Ltd. Accordingly ground 1.14 stands allowed for statistical purposes. 49. Ground No. 2 is in respect of proposed adjustment of notional interest on outstanding debtors. 50. The Ld. AR submitted that the Ld. TPO imputed note additional interest with regard to trade receivables from the AE even when assessee has received all the trade receipts for year under consideration from its AE is within the mutually agreed period of 90 days. The Ld. AR submitted that, authorities below upheld the computation of notional interest at LIBOR +400 basis points that is 4.3836%, by using CUP as most appropriate method. 51. The Ld. AR submitted that assessee has actually received the trade receivables within the credit period and therefore no adjustment is called for. He submitted that invoice wise details were given before the authorities below however the same were not verified. 52. The Ld. AR further submitted that even otherwise adjustment is not called for as assessee is following TNMM as most appropriate method which is not been disputed by the authorities below and therefore working capital adjustment would subsumes all the trade receivables. He placed ..... 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