TMI Blog2022 (12) TMI 1258X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Authorities Below ) erred in adding the sum of ₹ 38,26,58,668 to the Appellant's total income. 2. The learned Authorities Below erred in rejecting the Appellant's transfer pricing documentation maintained in accordance with rule 10D of the Income-tax Rules, 1962 read with section 92D of the Income-tax Act, 1961 and ought to have considered the merit of comparables irrespective of whether they figured in the TPO's search database. 3. The learned Authorities Below erred in their computation of the profit-level indicators of the comparables. (Additional Ground 2) 4. The learned Authorities Below erred in not following rule 10B(1)(e)(ii) of the Income-tax Rules 1962 in computing the Arm's Length Price. 5. The learned Authorities Below adopted the wrong turnover filter. 6. The learned Authorities Below adopted the wrong related party transactions filter. (Additional Ground 1) 7. The learned Authorities Below erred in rejecting the following comparables: 7.1. Akshay Software Technologies Ltd., 7.2. ASM Technologies Ltd., 7.3. Benchmark IT Solutions India Pvt. Ltd., 7.4. Evoke Technologies Pvt. Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 5. The assessee has applied Transactional Net Margin Method [TNMM] as the most appropriate method and the Profit Level Indicator [PLI] is taken as the Operating Profit / Operating Cost. The assessee s PLI as per the TP study is computed at 10.92% as per Table below:- Particulars Amount Total Revenue 2,84,83,31,417 Employee Benefits 2,23,98,04,589 Project Cost 15,19,23,277 Depreciation and amortization 2,00,79,599 Other expenses 17,00,48,037 Less: Net loss on foreign currency transactions andtranslation (12,309,888) Less: Loss on sale of assets (1,724,020) Less: Prior period expenses (17,435) Less: Interest on TDS Delayed Payments (2,513) Total Expenses 2,567,801,646 Operating Profit 280,529 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value 7.93% 65th 11.05 12th value 11.43% Median (50th) 8.50 9th value 9.22% 7. The operating margin of the comparable is in the range of 7.93% to 11.43% with the median of 9.22%. Therefore, the assessee concluded that the operating margin of the assessee 10.92% is within the arm s length. During the TP proceedings, the TPO rejected 12 of the 17 comparables selected by the assessee. The TPO conducted independent search to include 15 fresh comparables. The TPO computed the revised margin at 26.18% as per the following computation :- Sl.No. Company Name F. Year wise OP/OC (%) 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 3.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41.94 19 Cybage Software Pvt. Ltd. 41.89 62.90 68.68 57.52 20 Consilient Technologies Pvt. Ltd 54.85 71.82 69.51 65.14 35th Percentile 21.24 Median 26.18 65th Percentile 26.46 8. Based on the same, the TPO worked out a TP adjustment of Rs.38,26,58,668 as computed below:- SWD SEGMENT Particulars Formula Amount (In Rs.) Taxpayers Operating Revenue OR 2,84,83,76.417 Taxpayers Operating Cost OC 2,56,06,55,481 Taxpayers Operating Profit OP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Larsen Toubro Infotech Ltd. 6,182.90 12 Mindtree Ltd. 4,752.60 13 OFS Technologies Ltd. 9.38 14 Threesixty Logica Testing Services Pvt. Ltd. 32.11 15 Rheal Software Pvt. Ltd. 5.22 11. The ld. AR in this regard placed reliance on the decision of coordinate Bench of Tribunal in the case of Autodesk India Pvt.Ltd. v. DCIT, [2018] 96 taxmann.com 263 (Bang.Trib.) and Dell International Services India Pvt.Ltd. v. DCIT [2018] 89 taxmann.com 44 (Bang.Trib.). 12. The ld. DR relied on the orders of the lower authorities. 13. We have considered the rival submissions and perused the material on record. The Tribunal in the case of Autodesk India Pvt.Ltd. (supra) took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elected by TPO and average of Cybage Software Pvt. Ltd. worked out to 66.27% which is more than 1/3rd average of the rest of the companies. Therefore, argued that Cybage Software Pvt. Ltd. is not a comparable in view of highest margins. The assessee also objected before the AO for taking Cybage Software Pvt. Ltd. as comparable stating that it is functionally dissimilar and diversified activities engaged in product development and insufficient information available in the public domain. Both the Ld.TPO and he Ld.DRP rejected the contentions of the assessee. The Ld.DR supported the orders of the lower authorities. 6.4.1. We have considered the rival submissions and observe that Cybage Software Pvt. Ltd., though comparable company, the margin declared by the Cybage Software Pvt. Ltd. is abnormally high which is as much as 68.17% in the year under consideration and average margin is at 66.27%. The Ld. TPO has excluded the loss companies and also the companies which are with lowest margins as argued by the Ld.AR and which was not disputed by the department. Following the same analogy Cybage Software Pvt. Ltd. required to be excluded. The TPO or DRP has not gone into the reasons fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:- 7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the TPO has applied the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt portion of the said judgment is quoted below for ready reference: Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FAC (2022) 139 taxmann.com 62 (Mum. Trib.). 24. We notice that the Mumbai Tribunal in the case of Red Hat Pvt.Ltd. (supra) has held that 46. The assessee sought exclusion of Nihilent Ltd. as a comparable on the ground that it is functionally dissimilar vis-a-vis assessee. This objection was also raised before the Ld. DRP but rejected. The assessee relied upon website of the company which is made available at page A412 of the paper book wherein Nihilent Ltd. is shown to be engaged in providing advanced analytics, artificial intelligence, blockchain, business intelligence, data signs, cloud services etc. The annual financials of this company available at page A412 A413 of the paper book shows that it is rendering Enterprise transformation and change management, Digital transformation services and Enterprise IT services but segmental financials are not available as is apparent from its financials available at page A305, A412 A413 of the paper book. When this company is into various segments but segmental financials are not available it cannot be a valid comparable vis-a-vis assessee which is a routine software development service provider working on cost + markup model, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the software products and services segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under Revenue recognition in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable . 15. Since ld. DR of the revenue could not point out any difference in facts, respectfully following these Tribunal orders, we direct the AO/TPO to exclude this company also from the list of final comparables. 27. Respectfully following the above decision, we exclude this company from the comparables list. R Systems International Ltd. 28. With regard to R Systems International Ltd., the ld. AR submitted that the financial year of the comparable ends on 31st December and therefore fails the different financial year filter adopted by both the assessee and TPO. The ld. AR submitted that there are decisions of the coordinate Bench of the Tribunal and also the judgment of two High Courts where it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial details relate to the financial year adopted by the assessee. In view of the decision of Hon'ble Punjab Haryana High Court in the case of Mercer Consulting (India) (P.) Ltd. (supra), the AO/TPO is directed to examine this company by examining the correctness of collation of financial data and also by undertaking FAR analysis. Accordingly we restore this company to the file of AO/TPO for examining the same. 31. The assessee has now submitted additional evidence which goes to the root of the issue of inclusion of R Systems International Ltd. as a comparable and therefore admitted for adjudication. Respectfully following the decision of the coordinate bench of the Tribunal in the case of Autodesk India Pvt. Ltd. (supra), we remit the issue back to AO/TPO, who is directed to examine the comparable by verifying the correctness of the financial data for the four quarters as submitted by the assessee as additional evidence, after giving reasonable opportunity of being heard to the assessee. It is ordered accordingly. Sasken Technologies Ltd (Sasken) 32. The ld. AR submitted that Sasken. is selected by the assessee but rejected by the TPO on the ground of tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e included in the final list of comparables. 24. In any event, it was submitted that the DRP upheld the rejection of this company as its income from export of services as a percentage of total revenue was 74.35%, i.e. for the reason that it fails the export revenue filter by a meagre .65%. In this regard it was submitted that the DRP has proceeded on a hyper- technical basis to exclude the company, without appreciating the object behind application of the said filter. The export revenue filter was applied by the TPO to exclude predominantly domestic companies which cannot be compared with the assessee having major earnings from export. Therefore, while the objective stands complied substantially, the company cannot be excluded for failing the threshold marginally. 25. It was submitted that this company was selected by the TPO and its inclusion was upheld by the DRP for the assessment year 2011-12 in the assessee's own case. Therefore this company ought to be included in the final list of comparables. 26. Reliance was also placed on the decision of this Hon'ble Tribunal in the case of EMC Software and Services India (P.) Ltd. (supra) wherein in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
