TMI Blog2023 (3) TMI 1086X X X X Extracts X X X X X X X X Extracts X X X X ..... ngalore (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 2018-19. 2. The Assessee in engaged in the business of provision of Information Technology enabled Services (ITeS), 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 ITeS was an international transaction i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, 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 provided to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.85 10.17 8.58 3 Datamatics Business Solutions Ltd. 3.19 8.88 34.85 13.41 4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 5 Tech Mahindra Business Services Ltd. 18.95 18.51 19.09 18.85 6 Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95 7 CES Ltd. (seg) 12.50 26.48 31.90 21.77 8 Manipal Digital Systems Pvt. Ltd. 20.93 28.91 21.04 23.54 9 Domex E Data Pvt Ltd 35.61 35.97 13.77 26.34 10 Vitae International Accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.95% Adjustment Required (if PLI 35 th Percentile) Yes Median Margin of comparable set M 26.34% Arm's Length Price ALP=(1+M)*OC 10,64,00,348 Price Received OR 9,26,39,213 Shortfall being adjustment ALP-OR 1,37,61,135 23.4.2 The above shortfall of Rs.1,37,61,135/- is treated as Transfer Pricing adjustment u/s 92CA in respect of/ software development segment of the Taxpayer's International Transactions. Thus a sum of Rs.1,37,61,135/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The Assessee filed objections before the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable Companies 1 Excel Callnet Pvt Ltd 2 IServices India Pvt Ltd 3 Sureprep (India) Pvt Ltd. 4 iSN Global Solutions Pvt Ltd 5 RProcess Outsourcing Services Pvt Ltd 6 MAA Business Solutions Pvt Ltd 7 Intec InfraTechnologies Pvt Ltd. 8 Apex Covantage India Pvt Ltd. 9 Mobileum (India) Pvt Ltd. 10 Toluna India Pvt Ltd 11 CES Ltd. 12 AXS Online Pvt Ltd. 9. Before the DRP, in objection II ground 1.3, the Assessee has contended before the DRP as follows: 1.3. The Learned TPO is not justified in completely ignoring the comparable companies selected by the assessee on the pretext of data not available in database whereas the Assessee has provided annual reports of all the companies selected in the TP study and rejecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Pvt. Ltd. As far as this company is concerned, the TPO rejected this company as a comparable company on the ground that the said company failed export turnover filter. The Assessee had in its letter dated 21.07.2021 specifically pointed out that as per Note 16 to the Financial Statements, the export turnover of this company is 97.65% of the total turnover and therefore this company passes the export turnover filter and should be regarded as a comparable company. This submission of the Assessee was however not considered by the TPO. In objection II, ground 1.4, Assessee has specifically raised this issue before the DRP that the export turnover of this company was 97.65% of the total sales. This submission was however not considered by the DRP. We are of the view that inclusion of this company to the TPO/AO for fresh consideration as the plea of the Assessee has neither been considered by the TPO nor by the DRP. The TPO/AO will afford opportunity of being heard to the Assessee in the set aside proceedings. 14. The next issue that requires consideration is ground No.4.5 with regard to exclusion of 7 companies on the ground that the turnover of these 7 companies was more than Rs.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility 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 in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition 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) non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was 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 primarily relied on the decision rendered by the Hon ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), 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, 4.1 to 4.3 before the Tribunal challenging the aforesaid vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 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 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfully 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. 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 Pvt.Ltd. (supra) are to be regarded as p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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