TMI Blog2022 (6) TMI 1350X X X X Extracts X X X X X X X X Extracts X X X X ..... and the statement of computation of income for the assessment year 2014-15 that can be seen - Based on these facts we are of the considered view that that the disallowance which was already disallowed in the computation of income of the assessee should be deleted since otherwise the same would result in double disallowance. - IT(TP)A No. 260/Bang/2021 - - - Dated:- 13-6-2022 - Smt. Beena Pillai, Judicial Member And Ms. Padmavathy S, Accountant Member For the Assessee : Smt. Tanmayee Rajkumar, Advocate. For the Revenue : Smt. Susan Dolores George, CIT(OSD)(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S, Accountant Member This appeal is against the order of National e-Assessment Centre Delhi passed under section 143(3) r.w.s 144C(13)) of the Income Tax Act (the Act) dated 21.04.2021 for the assessment year 2016-17. 2. The assessee raised 8 grounds and several sub-grounds. The following are the main issues that arise for consideration from the appeal (a) Transfer Pricing (TP) adjustment of Rs. 1,86,14,568/- made by the Transfer Pricing Officer (TPO) towards the international transaction of provision of software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al before the Tribunal against the final order of the AO passed pursuant to the directions of the DRP. TRANSFER PRICING ADJUSTMENT 4. The FAR analysis of the assessee as per the TPO s order reads as under 2.1. Enstage Software Private Limited is a private limited company registered under the Companies act 1956 is a wholly owned subsidiary of Wibmo Inc., (formerly Enstage Inc) USA. The company is engaged in providing payment security software and related support services to be Wibmo Inc. Enstage India has been providing software development services to the parent company and successfully developed the software which is operational and they continue to maintain and support including forage improvement for their parent company and they also provide software and related ITeS support services for card payment authentication and processing solutions and focused on the prepaid online and mobile payments to their customers in India who are mostly public sector banks. 2.2 The summary of functions performed by Enstage Software Pvt. Ltd. vis-a-vis its AE are provided below: 2.3 In the performance of the above-mentioned functions, the taxpayer uses t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Digicall Teleservices Pvt. Ltd. 3.47% 3. Ajel Ltd. 4.03% 4. Kals Information Systems Ltd. 4.36% 5. Melstar Inforamation Technologies Ltd. 5.60% 6. Marketplace Tech Infra Services Pvt. Ltd. 5.76% 7. Sankhya Infotech Ltd. 7.47% 8. Net Access India Ltd. 8.12% 9. Onward Eservices Ltd. 9.27% 10. Ace Software Exports Ltd. 9.52% 11. Allsec Technologies Ltd. 9.62% 12. 8K Miles Software Services Ltd. 11.25% 13. C G-V A K S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating/Net mark-up (OP/TC) 15% The operating margin being within the range as per the comparables chosen by the assessee, the assessee is within the arm s length price for the SWD services rendered to its AE. 7. Out of the 30 comparables selected by the Assessee, the TPO accepted the 2 highlighted above, viz. Kals Information Systems Ltd., and CG-Vak Software Exports Ltd. and rejected the other 28. The TPO applied fresh filters and chose the following companies Sl. No. Name of the Company Mark-up on Total Costs (WC unadj) (in %) 1. Kals Information Systems Ltd. 8.05 2. E-Zest Solutions Ltd. 10.87 3. Rheal Software Pvt. Ltd. 14.50 4. Harbinger Systems Pvt. Ltd. 15.06 5. CG-VAK Software Exports Ltd. 18.50 6. Pure Software Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as raised several sub-grounds in Ground No.4. Out the same only the following sub-grounds are pressed a. The TPO while applying the turnover filter at the lower limit erred in not applying the said filter at the upper end so as to reject high turnover companies. (Ground No. 4.3) b. The TPO erred in erroneously computing the margins of certain companies. (Ground No. 4.9) c. The TPO erred in including RS Software (India) Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., Thirdware Solution Ltd., and Infosys Ltd. as a comparable despite the companies not being comparable to the Assessee (Ground No. 4.12.1, 4.12.2, 4.12.4, 4.12.5, 4.12.6) 11. The ld AR submitted that the TPO had not applied a cap on upper limit on the turnover/service revenue while selecting the companies comparable to the assessee and that application of turnover filter is a relevant criteria in choosing comparable companies. The ld AR also It is submitted that the difference in the scale of operations have a direct impact on the profitability and an increase in the size and scale of the operations leads to a decrease in the long run average cost of each unit or each service projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. We notice that the coordinate bench of the Tribunal in the case of Barracuda Networks India Private Limited v. DCIT (IT(TP)A No. 229/Bang/2021 dated 25.10.2021) has dealt in detail the application of the turnover filter and has held as under 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, 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 (Bang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% The ld AR argued that the wide fluctuations in profit suggest the existence of a peculiar economic circumstance, for which no appropriate adjustment could be made to mitigate the impact on the margin of the company and therefore the company cannot be selected as a comparable. 17. Without prejudice to the above submission the ld AR submitted that if the company were to be retained in the final list of comparables, the company s turnover for the financial years 2013-14 and 2014-15 is in excess of Rs. 200 crores, and therefore the margins for the said years ought to be excluded, and the margin of the company at -2.09% ought to be considered. In this regard reliance was placed on the decision of this Hon ble Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ACIT (IT(TP)A No. 310/Bang/2021 dated 25.10.2021 at paras 15-20). 18. We heard the DR who supported the decision of TPO/DRP. This issue of inclusion of R S software (India) Ltd has also been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income tax Rules, 1962 ( Rules ) via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of ALP is done under the MAM being resale price method ( RPM ), cost plus method ( CPM ) or transactional net margin method ( TNMM ). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,- (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013-14 to 2015-16 were 24.14%, 32.75% and -2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S.Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014-15 2015-16, then the weighted average of the two financial year 2014-15 and 2015-16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S.Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to Rule 10CA(2) of the Rules, R.S.Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014-15 because in those years, the turnover of this company was more than Rs.200 crores. Therefore as per the first and second proviso to Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction [or the specified domestic 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; (iv) 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); (v) 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 [or the specified domestic transaction]; .. (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby 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. We hold accordingly. 19. Respectfully following the decision of the coordinate bench of the Tribunal we hold that R.S.Software Ltd., should be excluded from the list of comparables. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce stating that (i) the Assessee has not written off the amount and the same is still outstanding; and (ii) the Assessee has not established that the amounts were disclosed as income in the previous years as required under Section 36(2) of the Act. 23. The ld AR reiterated the submissions made before the lower authorities. The ld AR also submitted that the amount of Rs. 16,25,897/- which is the actual write off done during the year under consideration was created as a provision in books of accounts for the assessment year 2014-15 and the same was also disallowed in the computation of income for the said assessment year. The ld AR drew our attention to the partywise list of actual bad debts as submitted before the DRP and the computation of income of the assessment year 2014-15. As regards the balance amount of Rs. 2,96,713/-, the ld AR submitted that the amount was inadvertently not added back while computing the taxable income. 24. The ld DR relied on the order of the DRP where the DRP has upheld the disallowance on the basis that it is an unascertained liability. 25. We heard the rival submissions and perused the material on record. We notice that the party wis ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
