TMI Blog2022 (2) TMI 1296X X X X Extracts X X X X X X X X Extracts X X X X ..... poses. - IT(TP)A No.349/Bang/2021 - - - Dated:- 11-2-2022 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER For the Assessee by Shri, Nemichand Sirvi, CA For the Revenue by Shri. Sumer Singh Meena, CIT (DR) (ITAT) Bengaluru ORDER Per N V Vasudevan, Vice President This appeal by the Assessee is directed against the order dated 30.03.2021 of National e-Assessment Centre, Delhi (hereinafter referred to as the Assessing Officer, AO in short) passed U/S.143(3) read with Section 144C (13) of the Income Tax Act, 1961 (Act) in relation to AY 2016-2017. 2.The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its 'wholly owned holding company were Associated Enterprises ( AEs ). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services was an international transaction i.e., 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company and arrived at a set of 13 comparable companies. The PLI was reworked by the TPO at 24.83%. The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows: SL.NO Company Name Financial Year wise OP/OC (%) 2015-16 2014-15 2013-14 Average 1 Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 2 Rheal Software Pvt. Ltd 3.20% 2.76% 36.64% 14.50% 3 C G-V A K Software Exports Ltd. 19.60% 19.87% 13.81% 18.50% 4 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 5 Larsen Toubro 26.29% 24.22% 23 54% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91,56,626 Taxpayers PLI PLI=OP/OC 12.69% 35th Percentile Margin of comaparable set 24.83% Adjustment Required (if PLI 35th Percentile) Yes Median Margin of comparable set M 28.20% Arm's Length Price ALP=(1+M)*OC 9,24,91,036 Price Received OR 7,21,45,894 Shortfall being adjustment ALP-OR 2,03,45,142 22 4.2 The above shortfall of Rs- 2, 03, 45,142/-is treated as transfer pricing adjustment 92CA in respect of software development segment of the taxpayer s international transactions. Thus a sum of was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the .AO wherein the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to lake into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause(i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47-3.54 and in the Annex to Chapter Ill of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what i comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (eg price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments, 11. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee's turnover is only Rs. 8,13,02,520/-. The TPO excluded from the list of comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt.Ltd v. DCIT, ITA No 1231/bang/2010, relying on Dun and Bradstreet's analysis. held grouping of companies having turnover of Rs.1crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which ire (sic) making losses as comparables. This shows that there is a limit for the lower end identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the -Assessee the Observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt ltd Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases, There is no decision or the jurisdictional High Court on this issue. the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned 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 of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that 7 companies listed in SL.No.(ii), (iii), (v), (vi) to (x) of Grd.No.6 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 15. Apart from the exclusion of the comparable companies, the Assessee has also pleaded for inclusion of certain companies. The Assessee has raised ground No.7 in this regard which reads as follows: 7. The Ld. TPO / Ld. DRP erred in not accepting the assessee's contention of inclusion of following 6 companies which were considered by assessee as its comparables in the TP study. The Ld. TPO ought to have considered the availability of data and ought to have selected these companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee :9.73% 6 Maveric Systems Ltd Assessee :9.64% Company Appendix No. p No. Sankya infotech Appendix 17, vol4. Pg 882 Evoke Technologies Appendix 18; Vol5 Pg 959 Sasken Appendix 19; vol5;pg 997 (summation tech Appendix 20; vol5 pg 1156 Kireeti Soft Appendix 21;Vol6; pg 1184 Maveric system Appendix 22, vol6;pg 1285 17. The DRP, however, after capturing the gist of the submissions made by the Assessee, proceeded to hold that since the T PO documentation has been rejected by the TPO, the Assessee cannot ask for inclusion of companies which were not part of T PO's search matrix. For these reasons, the DRP rejected the plea of the Assessee for inclusion of the aforesaid 5 companies, Aggrieved by the order of the DRP, the Assessee has raised ground No. 7 befor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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