TMI Blog2022 (7) TMI 1372X X X X Extracts X X X X X X X X Extracts X X X X ..... that of assessee. Accordingly, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO. Sagarsoft (India) Ltd and Akshay Software Technologies Ltd - We note that above two comparables has not been verified by the Ld.AO/TPO in detail. We are therefore remanding these comparables also to the Ld.AO/TPO for a denovo verification. Working Capital Adjustment - This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. [ 2016 (7) TMI 760 - ITAT KOLKATA] held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. As relying on ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD. [ 2018 (2) TMI 1151 - ITAT DELHI] e deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software development services 1352,43,252 TNMM Extended credit period for receivable (lending) 1352,43,252 TNMM Withholding from employees and payment on their behalf for purchase of stock under ESPP Scheme 37,52,919 TNMM Total 2704,86,504 37,52,919 2742,39,423 2.3 The Ld.TPO noted that assessee computed its margin at 11.69% by using OP/OC as the PLI and TNMM as the most appropriate method. 2.4 The Ld.TPO noted that assessee selected 16 comparables with an average margin of 9.59% and held the transaction to be at arms length. 2.5 Dissatisfied with the comparables selected by the assessee, the Ld.TPO applied various filters and rejected 10 comparables chosen by the assessee. The Ld.TPO selected a set of 20 comparables with an average margin of 21.24% and computed the adjustment being shortfall at Rs.1,75,34,230/- for the SWD segment. Following were the comparables chosen by Ld.TPO. 2.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions performed, assets owned, risks assumed by assessee under the software development segment. From the order passed u/s. 92CA, we note that Ld.TPO has regarded the functions performed by assessee as under: Assets employed Risks assumed Assessee is found to be undertaking foreign exchange risk as the AE remunerates the assessee for the services rendered in foreign currency. Apart from that all major risks are being borne by the AE. Assessee is thus held to be a captive service provider who is remunerated on cost plus basis for the services rendered. 10. Based on the above, we shall carry out the comparability of the comparables sought for inclusion / exclusion by the assessee in Ground nos. 1,2 (partly). 11. Ground no. 1 The Ld.AR submitted that following are the turnover of the comparables sought for exclusion in ground no.1. 1. L T Infotech Ltd. - Rs. 6183 crores 2. Persistent Systems Ltd. Rs. 1720 crores 3. Tata Elxsi Ltd. Rs. 1201 crores 4. Infosys Ltd. Rs. 59,257 crores 5. R Systems International Ltd. Rs. 264 crores 6. Nihilent Technologies Ltd. Rs. 259 crores 7. Cybage Software Pvt. Ltd. Rs. 759 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) (P.) Ltd v. Dy. CIT [2017] 82 taxmann.com 167(Delhi - Trib), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on 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 Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP. 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs. 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate 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 decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amendment to the rules that allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a range concept for determination of ALP and use of multiple year data for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1): Provided further that in a case referred to in clause (ii) of subrule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,- (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es ** 17. Let us apply the above rules to the comparable company R.S. Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to Rule 10CA(2), R.S. Software (India) Ltd., was chosen as a comparable company based on the data relating to the current year and in the earlier two financial years immediately preceding the current financial year. In all the financial years the said company has undertaken similar comparable uncontrolled transaction. Clause (i) to 1st proviso to section 10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S. Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to section 10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparables of TPO given in paragraph-4 of this order, the profit margins of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B: 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 [or a specified domestic 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 method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current 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: A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are 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. A reading of Proviso to Rule 10B(4) would show that use of data relating to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittedly, the assessee's turnover in the software development segment is Rs.45.35 crore. The turnover of for Larsen Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited, are far exceeding Rs.200 crore for the relevant assessment year. The TPO/DRP has excluded the companies having turnover of less than Rs.1 crore, however, the TPO / DRP has not put upper limit of the turnover for exclusion of comparables having high turnover. The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd. v DCIT, Circle 11(1), Bangalore (supra) has held as follows:- 17.7. 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 Court 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutions (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 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). 4.2.1 In view of the judicial pronouncements, cited supra, we direct the AO to exclude Larsen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has been rejected by the Ld.TPO as he found to be engaged in providing system administration, human resources and training and facilities. The Ld.AR submitted that, the company is engaged in the business of software development service segment along with system administration and that this fact has been not considered by the Ld.TPO. 13.5 In respect of Akshay Software Technologies Ltd., the Ld.TPO rejected it as he found this company to be a persistent loss making company. The Ld.AR on the contrary submitted that this comparable has incurred losses only for two out of 3 years and is not a persistent loss making company placing reliance on the decision of Coordinate Bench of this Tribunal in case of M/s. Goldman Sachs Services Pvt. Ltd. vs. JCIT in IT(TP)A No. 2355/Bang/2019. He submitted that this comparable cannot be rejected merely because it had incurred loss in two out of three preceding years. 13.6 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 13.7 We note that above two comparables has not been verified by the Ld.AO/TPO in detail. We are therefore remanding these comparables also to the Ld.AO/TPO for a denovo verification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that: (i) the expression international transaction shall include- (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;.... . 14.5 Ld.CIT.DR submitted that expression debt arising during the course of business refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of 2009, dated 15-7-2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. Hon ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 observed that: There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis- -vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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