TMI Blog2022 (12) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi, (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 Assessment Year 2017-18. 2. The Assessee in engaged in the business of providing 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 property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng determine the ALP in relation to the international transaction in accordance with provisions of section 92CA(3) and send a copy of his order to the Assessing Officer (AO) and to the assessee for finalization of assessment order. Section 92C(2) provides that the variation between the ALP and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been under taken shall be deemed to be the ALP. The AO passes a draft order of assessment against which, the Assessee has a right to file objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. 3. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd worked out the average arithmetic mean of their profit margins as follows: Sl. No. Company Name F.Year wise OPIOC (%) Wt. Average 2016-17 2015-16 2014-15 1 Rheal Software Pvt. Ltd. -12.27 3 .28 3.01 -1.85 2 Kals Information Systems Ltd 1.37 3.97 5.77 3.62 3 Infomile Technologies Ltd. 10.22 9.91 11.12 10.43 4 Harbinger Systems Pvt Ltd 12.28 12.69 17.18 14.1 5 C G-V A K Software Exports Ltd. 11.65 16.95 17.3 15.09 6 Larsen Toubro Infotech Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35th Percentile 21.24 Median 26.18 65th Percentile 26.46 6. The TPO computed the Addition to total income on account of adjustment to ALP as follows: Computation of Arm's Length Price: The median of the weighted average Profit Level Indicators is taken as the Arm's Length margin. Please see Annexure A and Annexure B for details of computation of PLI of the comparables. Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its AE(s) is computed as under: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 434,686,071 Taxpayers Operating Cost OC 373,288,326 Taxpayers Operating Profit OP 61,397,745 'Taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which is more than INR 200 crores from the relevant segment, where segmental information is applicable/ available. S. No Name of the company Turnover (in INR crores) Reference from Annual Report Paperbook 1 Larsen Toubro Infotech Limited 6,182.90 Pg 1939 - Part I of VI of Paperbook II 2 Tata Elxsi Limited 1,166.45 Pg 2472 - Part I of VI of Paperbook II 3 Persistent Systems Ltd 1,720.15 Pg 2346 - Part I of VI of Paperbook II 4 Nihilent Technologies Ltd 259.38 Pg 2634 - Part II of VI of Paperbook II 5 Infosys Ltd 59,257.00 Pg 2802 - Part II of VI of Paperbook II 6 Cybage Software Pvt Ltd 758.86 Pg 3077 - Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt. Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on (functions performed, Assets employed, Risks Assumed) FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee s turnover was around Rs.110 Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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