TMI Blog2022 (2) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... aluru, (hereinafter referred to as the Assessing Officer, AO in short) passed u/s. 143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2015-2016. 2. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec. 92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ( AEs ). In terms of Sec. 92B(1) of the Act, the transaction of providing SWD Services was an international transaction i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 Average 1 Kals Information Systems Ltd 5.77 16.94 13.51 11.88 2 E-Zest Solutions Ltd 12.59 15.80 Fails Export Filter 14.05 3 CG-VAK Software Exports Ltd. 19.87 13.81 22.07 18.50 4 Tata Elxsi Ltd. (Seg) 23.33 22.02 11.24 19.34 5 Rheal Software Pvt. Ltd. 2.76 36.64 No data in Public Domain 19.88 6 Mindtree Ltd. 20.55 21.18 19.75 20.55 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edian of the weighted average Profit Level indicators is taken as the arm's length margin. Please see Annexure 1 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: SWD SEGMENT Particulars Form Amount Taxpayers operating revenue OR 122,34,5 Taxpayers operating cost OC 105,51,6 Taxpayers operating profit OP 16,82,92, Taxpayers PLI PLI=OP/ 15.95% 35th Percentile Margin of 20.55% Adjustment Required (if PLI Yes Median Margin of comparable set M 27.37% Arm's Length Price ALP=(1+ M)*OC 134,39,5 9,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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,-- (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-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences. 9. 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. 10. 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 purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No. 1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of ₹ 1 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 13. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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). 14. In view of the aforesaid decision, we hold that 7 companies listed in Sl. N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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