TMI Blog2023 (1) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... y attracting the provisions of rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. Thus we hold that R.S. Software Ltd., should be excluded from the list of comparables. Akshay Software Technologies Ltd.- As per director s report the Technology Absorption (i) The assessee company does not import any technology during the year under review (ii) The company is a service provider and therefore has not set up a formal Research and Development unit whereas in the case of assessee company the Research and Development activity is done at the entity level as noted supra. As per director s report the Akshay Software is a service provider. The assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has filed detailed chart in the case of delay receivables from the debtors. therefore, the matter needs reconsideration. As in the case of Verifone India Technology (P.) Ltd. [ 2022 (12) TMI 1203 - ITAT BANGALORE ] wherein the Tribunal has directed the lower authorities to benchmark the transactions by following any one of the methods prescribed under the Income-tax Rules. We are inclined to follow the same and direct the AO/TPO to benchmark the transaction as per the provisions of the Act and Rules formulated there under. It goes without saying that any proposed addition should result in an opportunity of being heard and adhere to the principles of natural justice. Capacity Utilization - HELD THAT:- We observe from the order of the DRP that he claimed first time before the ld. DRP. Since this is the first year of operation and if the assessee has underutilized his capacity and if he satisfied the provisions of the income tax act on this issue then the assessee is eligible for capacity utilization. On perusal of the documents/Financial Statements/ Copy of Income Tax Return filed before us, we observed that the assessee has claimed full depreciation on entire Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. The Hon ble DRP has erred in confirming the action of the Deputy Commissioner of Income Tax, Circle-6(1)(2) ( Learned Assessing Officer or Ld. AO ). [Ground of appeal no. 1(b) Grounds of appeal filed on 22 June 2021] 3. The lower income tax authorities have erred in making an adjustment under section 92CA of the Income-tax Act, 1961 ( the Act ) without appreciating that a) there is no amendment to the definition of income and charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X; and b) passing the orders without considering all the submissions and/ or without appreciating properly the facts and circumstances of the case and the law applicable. [Ground of appeal no. 1(c) Grounds of appeal filed on 22 June 2021] Information Technology ( IT ) infrastructure support services 4. The lower income tax authorities erred in not factoring the under-utilized capacity of the Appellant thereby, not providing capacity utilization adjustment. [Ground of appeal no. 6 Grounds of appeal filed on 22 June 2021] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... %). Further, the Ld. TPO did not provide any basis for computation of the NCP mark-up. The Appellant has provided above the rectified NCP mark-up from the annual reports available in the public domain. [Grounds of appeal no. 4(u) Grounds of appeal filed on 22 June 2021; and Ground of appeal no. 2 First additional grounds of appeal filed on 6 October 2021] 10. The lower income tax authorities erred in including the following companies, even though they are not functionally comparable to the Appellant: (a) Rheal Software Pvt. Ltd.; (b) C G Vak Software Exports Ltd.; (c) Infobeans Technologies Ltd.; and (d) Inteq Software Pvt. Ltd. [Grounds of appeal no. 4(i), 4(j), 4(m) and 4(q) Grounds of appeal filed on 22 June 2021] 11. The lower income tax authorities erred in excluding the following companies, even though they are functionally comparable to the Appellant: Transfer pricing study comparable (a) Akshay Software Technologies Ltd. Additional comparable (a) 8K Miles Software Services Ltd.; and (b) Sasken Technologies Ltd. [Grounds of appeal no. 3(b), 5(c) and 5(d) Grounds of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, LIBOR should be applied as the interest rate to compute the transfer pricing adjustment. Further, the interest rate should be restricted only to the LIBOR rate without adding any further basis points; and (g) Without prejudice, no separate adjustment for interest on delayed receivable is required where the NCP mark-up of the international transaction is held to be at arm s length price. [Grounds of appeal no. 7 and 8 Grounds of appeal filed on 22 June 2021; and Grounds of appeal no. 3 and 4 First additional grounds of appeal filed on 6 October 2021] 2. The brief facts of the case are that the assessee filed original return of income on 30/11/2016 declaring loss of Rs.82,68,35,113/-. The case was selected for scrutiny under CASS and statutory notices were issued to the assessee. During the assessment proceedings, it was observed by the assessing officer (AO) that the assessee has undertaken international transactions, therefore, after obtaining approval from Pr.CIT, Bengaluru,6 the case was referred to the TPO for computation of ALP u/s 92C of the Act with regard to international transactions. 2.1 After obtaining reference the TPO called information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice was issued to the assessee in respect of Software Development Services segment (SWS). The assessee submitted details on 27/06/2019 and information were also received as per sec. 133(6) of the Act from the companies proposed as comparables. On the determination of ALP, certain defects were observed by the TPO in the Transfer Pricing Report , thereafter, the TP study report was rejected and the final list of comparables considered by the TPO was also furnished to the taxpayer. 3. The TPO adopted following filters for selection of companies which are as under:- 1) Companies whose income was more than Rs.1 crore were excluded 2) Companies who have more than 25% related party transaction were excluded 3) Companies who have export service income less than 75% of the sales were excluded. 4) Companies with employees cost less than 25% turnover were excluded 5) Use of current year data where available. 6) Companies whose Software Development Service income is less than 75% of its total operating revenue were excluded. 7) Companies having positive net worth. 3.1 The ld.TPO after applying above filters, rejected the following companies :- 3.2 As the 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 3) Advanta India Ltd. Vs. ACIT (2015-TH-294-ITAT-Bang- TP) 4.2 After considering the above judgments, the TPO observed as under:- 23.26 Further. the Hon'ble Delhi High Court in Cotton Naturals have held that the interest rate used would depend on the currency of the transaction. Therefore, following the Hon'ble High Court decision. interest rate is being computed as under: if receivables are to be paid to the taxpayer in Indian Rupees, interest shall be computed taking the SBI base rate as on 30th June of the previous year plus ISO basis points if the receivables do not exceed Rs,50 Cr, and 300 basis points if the receivables exceed Rs,50 Cr, This is as per the Safe Harbour Rules and is in conformity with the decision in Cotton Naturals. This rate of interest shall also be applied lithe foreign exchange risk is borne by the AE, and not the taxpayer, because such an agreement results in the receivables being effectively denominated in Rupees, and not in a foreign currency. If receivables are to he paid to the taxpayer in foreign currency, the arm's length price shall be determined considering the following factors: The RBI Master Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign exchange rate, borne by the taxpayer. Considering the aforementioned facts, a mark-up of 100 basis points is appropriate towards the additional currency risk arising from fluctuations in the foreign exchange rate, borne by the taxpayer. This mark-up must he added to the interest rate discussed in para (i) above. (iv) Considering these facts and judicial decisions oil subject, 6 month LIBOR plus 450 basis points is the most appropriate CUP. As discussed in para (iii) above, a mark-up of IOU basis points is appropriate towards the currency risk arising from fluctuations in the foreign exchange rate, borne by the taxpayer. The LIBOR plus 450 basis points rate discussed in para (i) above compensates the remaining costs. (v) The 6 months LIBOR rate in March 2016 was 0.985% (Source: https://www.globalrates.com/interestrates/ libor/american-dollar/ therefore the benchmarking rate of interest shall be 4.985% (vi) The period for which interest has been calculated has been limited to the year under consideration as interest accrued in other years cannot be taxed this year. Similarly. interest accrued during the year under consideration, in respect of' invoices raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of hearing the ld.AR was asked to file written synopsis only on the basis of arguments which has been filed on 21/07/2022 bearing acknowledgment No.1386. The relevant part of written synopsis is as under:- I. GROUNDS OF APPEAL BEFORE THIS HON BLE BENCH The detailed grounds in the appeal which were argued by the authorised representative of the Appellant before your Hon ble Bench, are as follows: (i) Ground of appeal with respect to turnover filter The lower income tax authorities erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: a) Infosys Ltd.; b) Larsen Toubro Infotech Ltd.; c) Persistent Systems Ltd.; d) Aspire Systems (India) Pvt. Ltd. (for Financial Year ( FY ) 2015-16); e) Thirdware Solution Ltd.; f) Cybage Software Pvt. Ltd.; g) Nihilent Ltd.; and h) R S Software (India) Ltd. (for FY 2013-14 and FY 2014-15) [Ground of appeal no. 4(g) Grounds of appeal filed on 22 June 2021; and Ground of appeal no. 2 Second additional grounds of appeal filed on 3 December 2021] The Appellant seeks for exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 turnover of Rs 1 crore to 200 crores have to be taken as a particular range and the assessee being in that range of Rs 32 crores, the companies which also have turnover of Rs 1 crore to 200 crores only should be taken into consideration for the purpose of making TP Study. Autodesk India (P.) Ltd. vs DCIT, Circle 11(1) [IT(TP) Appeal Nos. 540, 541, 616, 617 (BANG) of 2013, AY 2005-06 and AY 2008-09] 17.8 .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 CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided by the Appellant. The Appellant would like to draw reference to Director s Report in the Annual Report, wherein it has been disclosed that the company focuses on the niche areas of outsourced product development space. The relevant extract from the annual report of relevant years are provided below, for your Hon ble Bench s reference: In this regard, the Appellant places reliance on the principle laid down in the case of M/s. 3DPLM Software Solutions Ltd. Vs DCIT - [IT(TP)A No.1303/Bang/2012] AY 2008-09 wherein it was held that Persistent Systems Ltd. is predominantly engaged in outsourced software product development and was accordingly excluded as a comparable. The relevant extract from the case law has been provided below: 17.2 submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that :(i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand.(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities during the assessment proceedings (Refer page 590 to 595, 1016 to 1020 and 1068 to 1073 of paper book) and is also captured in the briefing chart shared with the Hon ble Bench during the course of hearing on 12 July 2022. The same is attached herewith this synopsis again. The Appellant further submits that the details with respect to capacity utilisation of the comparable companies are not available in the public domain. The Appellant further submits that while the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule 10B(3) of the Income-tax Rules, 1962 which clearly emphasizes the necessity of undertaking adjustments. Hence, in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then the adjustments should be made on the tested party. This proposition was also accepted by the Hon ble Bench in case of M/s Atmecs Technologies Private Limited vs ITO, Ward - 1(1)(1) [IT(TP)A No. 187 (BANG.) of 2021. The relevant extract from the case law has been provided below: 26 While the Indian transfer pricing regulations refer to the adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant undertook international transactions with its AE resulting in receivables for the same. The arm s length determination for the said consequential receivables is subsumed within the arm s length price determination of the principal international transaction itself. Also, the said outstanding receivables are a result of the international transaction undertaken by the Appellant with its AE and are not a separate international transaction as per provisions of Section 92B of the Income-tax Act, 1961 ( the Act ); and therefore, the same does not warrant determination of any separate arm s length price under Section 92C of the Act. In this regard, the Appellant has relied on the decision of Hon ble Bench in the case of Avnet India P Ltd v DCIT [2016] 65 taxmann.com 187 (Bangalore - Trib.); the relevant extract from the case law has been provided below: 8 .we hold that there can be no separate international transaction of 'interest' in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature. The Appellant also relies on the additional case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f coordinate Bench of the Tribunal in the case of M/s Genisis Integrating Systems ( India) Pvt. Ltd. Vs DCIT in ITA NO. 1231/Bang/2010, Barracuda Networks India (P.) Ltd. v. Dy. CIT [2021] 131 taxmann.com 337 (Bang. - Trib.) and Autodesk India (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang. - Trib.) in addition to several other decisions of the Hon'ble Tribunal. 7. On the other hand, the ld.DR relied on the order of the lower authorities and he submitted that as per Rule the FAR should be seen for considering suitable comparables, there is no any specific rule for fixing the upper limit of turnover for Rs. 200.00/- may not be considered as good comparables. If the comparables selected by the lower authorities which are otherwise functionally comparable, it should be considered as a good comparable. In respect of interest receivables, the lower authorities have rightly treated the receivables which are not recovered beyond the prescribed time limit. As per the agreement, it is a findings of the AE s and interest calculation done by the lower authorities are correct and they have applied correct rate as per RBI guide lines for the libor plus 450 bias points which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han Rs. 200 Crores and the Assessee's turnover is only Rs. 20,18,51,846/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The Assessee raised objections before the DRP that while the TPO excluded companies with low turnover, whereas he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The TPO excluded the companies with less than Rs. 1 crore turnover is 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 rejected the contention of the assessee by analyzing the turnover vs the profitability of one of comparables Infosys Ltd for prior years, to conclude that there is no direct impact on margin on account of turnover. The DRP also relied on several Tribunal decision and also the decision of the Delhi High Court in the case Chryscapital In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 for 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 in business. A big company would be in a position to bargain the price and also attract more 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 Brads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision 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 v. 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 of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an 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 (supra) by the ITAT Bangalore Bench should continue to be followed. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pectfully following the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks India Private Limited (supra) we hold that the companies whose turnover in the current year is more than Rs. 200 crores needs to be excluded for the purpose of comparable companies. 9. The assessee is seeking exclusion of R S software (India) Ltd vide Ground No. 4.12.1. In this regard the ld AR submitted that the company, during the financial years 2013-14 and 2014-15 had realised turnover of Rs. 351.88 crores and 345.51 crores, and profit margin of 24.14% and 32.75%, respectively. However, during the financial year 2015-16, the company realised a turnover of Rs. 171.41 crores, leading to loss of - 2.09%. Therefore it was submitted that there is an apparent wide fluctuation in the margin of the company. The relevant details as computed by the TPO is extracted hereunder: *figures in crores FY 2015- 16 FY 2014- 15 FY 2013- 14 Operating revenue 171.41 345.50 351.89 Operating cost 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, we need to look at 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 Incometax 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions shall be determined; 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 finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respective prices ** ** ** 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 sec. 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 sec.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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rules. 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lysing the comparability 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seas thus the functional profile of the company is different from the assessee hence, it was rejected. The ld.AR submitted that it passes all the filters applied by the TPO, therefore, it should be taken as a comparable, whereas the DRP has also not accepted and he also refer to page no,995 to 999 of the paper book and he relied on the decision of coordinate bench of this Tribunal in the case of of ARM Embeded Technologies Pvt. Ltd., in IT(TA)A No.1824/Bang/2017 for assessment year 2013-14 and in IT(TA)A No.3374/Bang/2018 for assessment year 2014-15. Further in respect of remaining two companies 8A Miles Software Services Ltd., and Sasken Technologies Ltd., he submitted that this issue has been decided by the ld.DRP at para No.30 and 31 of his order in which he has rejected the additional comparables files before him whereas these two companies passes all the filters as applied by the TPO, therefore he requested that the matter may be sent back to the file of AO/TPO. 10.1 On the other hand, the ld.DR relied on the order of the lower authorities and he vehemently submitted that the company Akshay Software Technologies Ltds., has rightly been rejected by the AO/DRP/TPO because it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs and as per Note 25. the foreign branch expenditure was Rs.2036 lakhs. As per information in the notes forming financial information of the annual report revenue mainly represent income front professional services from Dubai. 32.3 In this regard, it is relevant to note that ERP is a multilayered software that integrates all the different functions within an organization. The ERP implementation requires professionals who have expertise in - 1) Functional domain (i.e. domain knowledge of the business, its operations management). 2) Software domain (i.e. technology expertise in software development) 32.4 Thus, ERP implementation support involves personnel from professional domain and technology or software domain Therefore, such services cannot be strictly said to be software services as non-software personnel may play a dominant role in the implementation. The very fact that this company has described that it had rendered professional services in Dubai, indicate that it pertained to the non-software services; or it is also possible it may be a mix of software services and professional services. As segmental information is not available for the same, we c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support services as engaged by the assessee and significant research and development activities has also been carried out by this company. He also relied on the Director s report as quoted supra in his return synopsis. The markup is also wrongly calculated by te lower authorities. HE also objected that the ld.TPO has not provided the basis for preparation of markup and he relied on the decisions of ITAT Benches in the cae of M/s Aptean India Pvt. Ltd., in IT(TP)A No.2638/Bang/2017 for assessment year 2013-14, ARM Embeded Technologies Pvt. Ltd., in IT(TP)A No.1824/Bang/2017 and M/s Hewlett Packard India Software Operations Pvt. Ltd., in IT(TP)A No.2866/Bang/2017. In this regard he also reiterated the submissions made before the lower authorites as well as on the written synopsis. 11.1 The ld.DR relied on the order of the lower authorities and he further submitted that if company is incurring expenditure on R D only for improving the process in delivering the software development services, then the said comparables cannot be rejected merely because it is incurring R D expenditures. The assessee has not demonstrated as to how the R D Expenditures being incurred by the company is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 359 annual report of 31.03.2015, which is significant accounting policy at sl.no.ix. and for the financial year 31.03.2016 at page no. 1456 at sl. No. ix In respect of segment reporting the auditor has reported as under:- The company s main business is providing of software services. There are no separate reportable segments as per Accounting Standard 17. Secondary segmental reporting is based on geographical location of customer and assets. 11.5 Further as per revenue recognition reported by the auditor at page no.1358 1456 for the financial year 31.03.2015 31.03.2016 is as under:- Revenue from contract period on time are recognized when services are rendered and related costs are incurred 11.6 Further we observe that as per page no.1365 1462 note no.4.02 which is a note annexed to forming part of accounts, which is as under:- Quantitative details are not furnished as the company is engaged in the development of computer software, providing services in IT and ITES. 11.7 From the financial data it has also been observed that the CG Vak is incurring employee cost expenses which is 69.85%, 66.62% and 68.53% for three financial year 31-03-2014, 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to how it affects functional comparability. WE are of the view that revenue fluctuation and margin variation in different years is a normal business incidence; and we also note that there is no information in the annual report to suggest that the fluctuation arose out of abnormal events. The assessee also could opt point to any such abnormal event in the annual report. Further, the fluctuations gets evened out as weighted average margin of all tile comparables for 3 years and the median of all the weighted average margins is reckoned for ALP determination. Thus, we note that fluctuation in profit margins s such cannot be a valid reason for rejecting a comparable when measures to ensure averaging out of fluctuations are already in-built in the overall process. 16.4 It satisfies all the filters applied by the TPO. Accordingly, we confirm the inclusion of this comparable. 11.7.1 We also from the TP study report in regard to the arguments of the ld.AR that the CG Vak is incurring significant R D expenditures and having sufficient intangibles is rejected because the assessee company is a subsidiary of IBM and the IBM is worldwide organization and the business of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is also getting different support from its AEs. During the impugned assessment year the assessee has paid import of services of Rs.10,38,91,091/- but the assessee has not described why the payments has been made for import of services. As it is clear from the above paragraphs extracted from the TP study report that the R D activities are taken by the IBM and 6% of the total revenue is spent and the intangibles created are lying with the IBM which are used by the AEs, therefore, objections raised by the ld.AR is not tanable. 11.8 The assessee submitted that there is error in the margin computation of this company. The TPO has calculated OP/OC is as under Year 31.03.2015 31.03.2016 31.03.2017 AVERAGE 13.81% 19.87% 20.16% 18.05% As per Assessee 9.38% 13.42% 13.06% 11.9 We consider it appropriate to direct the TPO to verify and adopt the figures as per the annual report of these companies and accordingly their PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principles of natural justice and assessee is directed to follow the directions/ instructions and has to provided requisite details It is ordered accordingly. This ground is allowed for statistical purpose. Capacity Utilization:- 13. The ld.AR of the assessee in his written submissions, has submitted that the capacity utilization should be given and he requested that the matter may be sent back to the file of AO/TPO for the fresh consideration. As per Ld.DRP, the assessee had not included this issue in his T.P.Study report. We observe from the records that the assessee filed details for capacity utilization before the TPO on 22/10/2019 and the same were also filed before the DRP as annexure 35 in which it has contested that the total number of servers were available of 1232out of which 303 were utilized and 68% of the capacity was not utilized by the assessee, The ld.AR of the assessee also relied on the decision of the Tribunal in the case of M/s Atmecs Technologies Pvt. Ltd. VS. ITO in IT(TP)A No.187/Bang/2021 for the assessment ear 2016-17. therefore he is eligible for under utilization capacity and submitted details and relying on some case law. We observe from ..... 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