TMI Blog2021 (12) TMI 1421X X X X Extracts X X X X X X X X Extracts X X X X ..... capital adjustment - We find that identical reasons assigned by the TPO for not allowing working capital adjustment was a subject matter of consideration by this Tribunal in the case of Barracuda Networks India Private Limited [ 2022 (5) TMI 322 - ITAT BANGALORE ] and this Tribunal following the decision in case of Huawei Technologies India Pvt. Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE ] held that working capital adjustment has to be allowed to the assessee and directed the TPO/AO to examine the claim of the assessee in the light of the details of working capital adjustment furnished by the assessee which is given as annexure to this order. Grant of risk adjustment - Though the assessee has given a general note with regard to assessee s right to claim risk adjustment while computing ALP, no specific details have been given with regard to allowing risk adjustment. In this scenario, we are of the view that it would be just and appropriate to remand the issue to AO/TPO with a direction to the assessee to furnish computation of risk adjustment and the basis of claim for deduction on account of risk adjustment. The TPO will consider the same after affording the assessee opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Selecting foreign AE as a tested party was an appropriate method of determining ALP and the Revenue authorities were not justified in rejecting the plea of the assessee - The facts of the Assessee s case is similar to the case decided by the Hon ble Madras High Court Virtusa Consulting Services Pvt. Ltd [ 2021 (2) TMI 378 - MADRAS HIGH COURT ] in as much as the Assessee had in its Transfer Pricing Study chosen the foreign AE as a tested party and the TPO refused to examine the said claim. The decision of the Hon ble Madras High Court being the only decision available on the issue of a High Court, judicial discipline requires us to follow the same in preference to the decisions of Tribunal to the contrary. Following the aforesaid decision of the Hon ble Madras High Court, we remand the issue with regard to foreign AE being chosen as a tested party to the TPO for fresh consideration. The relevant ground of appeal of the assessee in this regard is treated as allowed for statistical purposes. - IT(TP)A No.187/Bang/2021 - - - Dated:- 20-12-2021 - Shri N.V. Vasudevan, Vice President And Shri Chandra Poojari, Accountant Member For the Appellant : Shri. P.V.S.S. Prasad, CA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Wayside Technology Group Inc 2.23% 2.43% 2.95% 2.51% 4. Synnex Corp 2.73% 2.31% 2.54% 2.54% 5. Scansource Inc NA 3.49% 3.73% 3.60% 6. Eplus Inc 6.47% 6.41% 5.90% 6.27% 7. Rand Worldwide Inc. NA 9.71% 8.15% 8.91% Data Count Lower Quartile 3 2.51% Median 4 2.54% Upper Quartile 5 3.60% ATMECS US Segmental data for the period April 2015 to March 2016 Particulars Off-shore business On-site business Others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OR range of the aforesaid 7 comparable companies and it was claimed that since Atmecs US margin were within the range of comparable companies, the Price paid in the International transaction has to be regarded as at Arm s Length. 4. The Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred by the AO u/s.92C of the Act, issued a show cause notice dated 24/9/2019 wherein he proposed to reject TP study as the taxpayer had chosen its parent company as a foreign tested party and had benchmarked the international transaction relating to software company by applying TNMM. In response to this notice, the taxpayer has given a detailed reply dated 11/10/2019 stating that the assessee objects to the TPOs proposed rejection of choice of foreign AE as tested party by citing various reasons supported by several case laws. 5. The TPO rejected the TP study of the assessee choosing foreign AE as tested party. According to the TPO, the OECD transfer pricing guidelines and the UN transfer pricing manual provide guidance on selection of tested party. The tested party is the party to the transaction which is least complex and for which reliable data is available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the same base: (iii) the net profit margin referred to in sub-clause (i) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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: (i) 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) (ii) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. According to the TPO a cursory look at the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such an international transaction is required to be determined at ALP: thirdly, the ALP in respect of such an international transaction should be determined by one of the prescribed methods, which also includes the TNMM. The term 'enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s foreign/AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise with the profit realized by the foreign/AE for the purpose of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign/ AE. He held that profit realized by the foreign/AE cannot be relevant, when the profit of the Indian enterprise is sought to be ensured at ALP. He therefore rejected the TP study of the assessee holding that the foreign/AE cannot be considered as a tested party for determining the ALP of the international transaction, as it has no statutory sanction. He also drew support for his conclusions as above from the decisions of ITAT Mumbai Bench of the Tribunal in Onward Technology Ltd. Vs. DCIT (2013) 36 CCH 46 (Mumbai) holding that Foreign/ Associated Enterprise cannot be a tested party. Similar view has been taken in Aurionpro Solutions Ltd. Vs. ACIT (TS-75-I TA T- 2013 (Mum)-TP) - (2013) 27 ITR (Trib) 276 (Mumbai). In the light of the foregoing discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O Particular SWD Revenue from operations 236484177 Expenditure 230252330 Employee benefit expenses 182295434 Finance cost 2042322 Depreciation and Amortisation expense 5213634 Other expenses 40700940 Profit before taxes 6338492 OP/OC 2.75% 8. The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows: 10. The final list of comparables along-with year wise OP/OC margins are as follows: Sl. No. Company Name Financial Year wise OP/OC (%) 2015- 16 201415 2013-14 Average 1 Kals Information Systems Pvt. Ltd. 4.33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35th Percentile 20.87 Median 25.64 65th Percentile 33.55 * For FYs 2013-14 FY 2014-15, if the comparable fails one of the quantitative filters or is found to be not carrying out similar functions, then margin for that year was not included. 9. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 24 Computation of Arm's Length Price: 24.1 The median of the weighted average Profit Level indicators is taken as the arm's length margin. Please see Annexure A B for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: (computation has to be included) SWD SEGMENT Particulars Formula Amount (in Rs.Lacs) Taxpayers operating revenue OR 236484177 Taxpayers ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejecting the transfer pricing study maintained by the Assessee, thereby rejecting ATEMCS USA, our AE as tested party at the threshold. 5. The Ld DRP/AO erred in not appreciating the fact that selection of foreign AE as a tested party is in line with the OECD TP guidelines and UN TP Manual. 6. The Ld DRP/AO erred in not providing certain capacity utilization adjustments, risk adjustments and working capital adjustments in accordance with Rule 10B of the Act. 7. The Ld DRP/AO are not justified in law in considering wrong comparables and consequently arriving at a high operating profit margin of 25.64% as a ratio of OP/OC. 8. The Ld DRP/AO is not justified in law in making an adjustment u/s 92CA of Rs 5,28,04,851/- to the price received by the appellant. 9. The Ld. TPO, while including the Companies as comparables has erred in applying the appropriate filters. 10. Without prejudice to the above grounds, the Ld DRP/AO erred in selecting the below companies as comparables on the grounds of functional comparability, super profit, high turnover or other appropriate filter etc. S. No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the Assessee prayed for adjudication of ground with regard to not allowing risk adjustment, working capital adjustment projected in Grd.No.8 of the grounds of appeal. The other grounds that calls for adjudication is Grds.3 to 5 with regard to the grievance of the Assessee in not accepting the TP study of the Assessee choosing the foreign AE as a tested party. 14. We shall first take up for consideration Grds.10, with regard to the choice of comparable companies. As far as exclusion of companies chosen by the TPO and confirmed by DRP is concerned, the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpetition 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, if any, between the transactions being 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 (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 15. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 16. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18. 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, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 19. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), 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 observations: 17.7. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. 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 the basis to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct accordingly. 22A. As far as grant of risk adjustment is concerned, though the assessee has given a general note with regard to assessee s right to claim risk adjustment while computing ALP, no specific details have been given with regard to allowing risk adjustment. In this scenario, we are of the view that it would be just and appropriate to remand the issue to AO/TPO with a direction to the assessee to furnish computation of risk adjustment and the basis of claim for deduction on account of risk adjustment. The TPO will consider the same after affording the assessee opportunity of being heard and allow adjustment on account of risk, in accordance with law. In this regard, we find that the DRP has not called for the computation of manner of risk adjustment and has merely proceeded to hold that the risk adjustment cannot be granted unless it is established that differences has a material effect on the margin of the comparable companies and computation can be made on reliable data without calling for working of risk adjustment. Such conclusions in our view cannot be sustained. 23. The next grievance of the assessee is with regard to not allowing adjustment towards capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed. i) M/s SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) ii) M/s Meritor LVS India Pvt. Ltd. [ 2015] 64 taxmann.com 136 (Bangalore - Trib.) iii) M/s. Symantec Software Solutions Pvt. Ltd. Vs ACIT (2011) 46 SOT 48 (Mumbai). 24. The Learned DR relied on the order of the DRP and submitted that the Assessee has not given any calculation of capacity utilization details nor has he requested the TPO for obtaining such details from the comparable companies chosen by the TPO. 25. We have considered the rival submissions. We find that the DRP has made the following observations while rejecting the claim of the assessee in this regard. 2.5.2.2 It is relevant to note that an independent enterprise outsourcing its functions in software industry would not bear any risk towards capacity unutilization and would have negotiated for the same as part of its operating cost. Further, no independent software service provider will be able to demand markup on account of creation of any excess capacity in normal course of business. It is not therefore appropriate on the part of the assessee to seek separate adjustment for capacity underutilization. We also note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. The tribunal held that once it is accepted that the assessee has underutilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. The Tribunal gave the following directions in this regard, viz., the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as -- Installed Capacity, Actual Production in Units, Break-up of Fixed Cost and Variable Cost; Segmental/ product wise information, if any. Post obtaining the information, he is requested to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. Further, the OECD Guidelines indicate that, the tested party ought to be the enterprise that offers a higher degree of comparability, with uncontrolled companies. Consequently, the enterprise that requires the least amount of adjustments as compared to potentially comparable companies should be the tested party. Accordingly, the tested party should be the participant in a transaction which would have higher degree of comparability or would require lesser adjustment. Thus, for the purpose of undertaking a rational transfer pricing comparability analysis, tested party has to be the enterprise which would be the least complex and assumes lesser risk amongst the transacting parties. (ii) separate 'India' section of the UN TP Manual which states as under: ...10.3.1.3. The regulation prescribes mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... With regard to the offshore segment of ATMECS US, the role of ATMECS US is limited to acting as a distributor of the services of ATMECS India in the US region. ATMECS US undertakes lead generation of services to be distributed and once agreed, it contracts with the third-party customers. There ends the role of ATMECS US in the supply chain of services. Hence, with respect to the offshore services, ATMECS India undertakes the end-to-end delivery of the project to the customers as primary instructions are received from customers. In relation to the services sub-contracted/ distributed by ATMECS US, the clients provide their functional requirement and specifications. ATMECS India is involved in understanding the clients' requirements. The engineers supporting and providing the services in ATMECS India interact directly with the third-party customers, understand the requirements, modifications, alterations or any additional features required in the services delivered. Thus, ATMECS India is primarily responsible for the assessment of client requirements. ATMECS India is responsible for the management of the off-shore projects undertaken by it. ATMECS India's software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visage construing both Indian Assessee as well as overseas AE as a tested party as may be suitable in fact and circumstances of the case. Sub rules (2) and (3) of Rule 10B of the Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. As per Rule 10B(2), the factors prescribed for inclusion or exclusion of comparables to determine the ALP are based on the comparison of the Assessee with the chosen entities. It was submitted that the operative word used in the said rule is respective parties to transaction rather than Assessee. A construction, which interprets respective parties to transaction to mean Assessee , is prima-facie inappropriate, and it would be rationale to consider that legislation by design, by using an open-ended phrase (i.e respective parties to the transactions), has kept the possibilities of considering both parties to transactions as tested parties alive. It was submitted that the Indian TP legislation has been consistent in using such open ended or generic phrase (i.e enterprise, respective parties to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he foreign parties cannot be compared with the price charged by the the Assessee and ALP determined by the Indian tax authorities. He placed reliance on the orders of the lower authorities. 33. We have carefully considered the rival contentions. We find that the Hon ble Madras High Court in the case of Virtusa Consulting Services Pvt. Ltd., (supra) considered the issue whether foreign AE can be considered as a tested party and has held as follows: 24. Before doing so, we may point out the following. The assessee in ground Nos.6 to 8 before the Tribunal had contested the issue relating to consideration of the foreign AE as tested party. The assessee has submitted evidences and documents relating to the assessee's transfer pricing documentation, global transfer pricing reports of the foreign AE at United Kingdom, Australia and German; extracts of inter-company service agreement, reconciliation of operating credits earned by the overseas subsidiaries. etc. So far as the risks assumed by the assessee, the same has been elaborately brought out in the TP documentation as could be seen from paragraph 4.03.3 under the sub heading Risks Assumed and paragraph 4.06 under the sub h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of. 27. The revenue seeks to pin the assessee based upon the auditor's certification as filed in Form 3CED. As could be seen from the statutory form, it pertains only to the transactional claims and has got nothing to do with a tested party. The revenue cannot compare the case of the assessee with that of the assessee who fails to claim in his return of income a deduction or a benefit which he would be otherwise entit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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