TMI Blog2023 (4) TMI 223X X X X Extracts X X X X X X X X Extracts X X X X ..... working capital adjustment. - IT(TP)A No.204/Bang/2022 - - - Dated:- 1-11-2022 - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Appellant : Shri Nageswar Rao, A.R. For the Respondent : Shri Praveen Karanth, D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of ld. AO passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 ['the Act' for short] dated 17.2.2022 for the assessment year 2017-18. The assessee has raised following grounds of appeal:- On the facts and circumstances of the case and in law. the Addl. /Joint / Deputy / Assistant Commissioner of Income Tax / Income-tax Officer. National Faceless Assessnlent Center. Delhi i.e. the learned Assessing Officer ( learned AO ) has erred in passing the assessment order under section 143(3) read with section 144C(13) read with section 144B of the Income Tax Act, 1961 ( the Act ) after considering the adjustments proposed by the learned Transfer Pricing Officer (-the learned TPO ) in his order passed under section 92CA(3) of the Act and subsequently confirmed by the Hon'ble Dispute Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken Technologies and Evoke Technologies, even though these companies are comparable to the appellant.7.2The learned AO/TPO/DRP have erred in including certain companies to the final set of comparables viz. Larsen Toubro Infotech. Great Software Laboratory, Mindtree, R Systems. Persistent Systems. Tata Elxsi. Aptus Software Labs. Cygnet Infotech, Infobeans Technologies. Nihilent. OFS Technologies. Threesixty Logica Testing Services. Infosys Limited, Cybage Software, Consilient Technologies even though these companies are not comparable to the appellant. 8. The learned AO/ TPO has passed an order under section 92CA(3) of the Act which suffers from several computational errors which has led to incorrect computation of adjustment made in respect of the subject transaction. 9. The learned AO/TPO/DRP have erred by failing to make appropriate adjustments to accounts - differences in working capital employed by the appellant vis- -vis comparable companies in respect of the subject transaction. 10. The learned AO/TPO/DRP have erred in not making suitable adjustments to account for differences in the risk profile of the appellant vis-a-vis the comparable companies. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables to the file of AO/TPO for fresh consideration as decided in that order. 4. Ground No.7.2: The learned AO/TPO./DRP have erred in excluding certain companies from the final set of comparables viz. Batchmaster Software, DCIS Dot.Com Solutions India, Sasken Technologies and Evoke Technologies, even though these companies are comparable to the appellant.7.2The learned AO/TPO/DRP have erred in including certain companies to the final set of comparables viz. Larsen Toubro Infotech. Great Software Laboratory, Mindtree, R Systems. Persistent Systems. Tata Elxsi. Aptus Software Labs. Cygnet Infotech, Infobeans Technologies. Nihilent. OFS Technologies. Threesixty Logica Testing Services. Infosys Limited, Cybage Software, Consilient Technologies even though these companies are not comparable to the appellant. 4.1 In this ground, assessee wants exclusion of following 8 comparables: i. L T Infotech ii. Mindtree iii. R Systems iv. Persistent Systems v. Tata Elxsi vi. Infosys Ltd. vii. Nihilent viii. Cybage software 4.2 After hearing both the parties, we are of the opinion that these comparables were considered in the case of M/s. Quicklogic Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 17,77,11,711/-. 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 contention of the Assessee before the DRP was that 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) (P.) Ltd v. Dy. CIT [2017] 82 taxmann.com 167(Delhi - Trib), 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r filter by reason of its turnover in the earlier two years being more than Rs. 200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards or whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs. 200 Crore turnover filter. 16. To answer the above question, 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 Income-tax 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 underta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,- (i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions 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 sub-rule (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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of sub-rule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at 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 section 10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y preceding the current year undertaken the same or similar comparable uncontrolled transaction ) undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S. Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of 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 ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (iii) (4) The data to be used in analysing 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 : (iv) 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: (v) A reading of Rule 10B(3) shows that comparison of an uncontrolled transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial pronouncements:- (i) Autodesk India (P) Ltd. v. DCIT, Circle 11(1), Bangalore (2018) 96 taxmann.com 263 (Bangalore Trib.) (iii) Cenduit (India) Services Pvt. Ltd. v. DCIT, Circle 2(1)(1), Banglaore (TS-19-ITAT-2022 Bang-TP). (vi) M/s.Software Paradigms Infotech Pvt. Ltd. v. ACIT, Circle 1(1), Mysuru (TS-676-ITAT-2021 Bang-TP) 4.1 The learned Departmental Representative was duly heard. 4.2 We have heard rival submissions and perused the material on record. Admittedly, the assessee's turnover in the software development segment is Rs.45.35 crore. The turnover of for Larsen Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited, are far exceeding Rs.200 crore for the relevant assessment year. The TPO/DRP has excluded the companies having turnover of less than Rs.1 crore, however, the TPO / DRP has not put upper limit of the turnover for exclusion of comparables having high turnover. The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd. v DCIT, Circle 11(1), Bangalore (supra) has held as follows:- 17.7. We have conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 coordinate 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 ..... AO/TPO to correct the mistake in computation of adjustments made in respect of international transactions while determining the ALP. 6. Ground No.9: The learned AO/TPO/DRP have erred by failing to make appropriate adjustments to accou,n-t4;- differences in working capital employed by the appellant vis- -vis comparable companies in respect of the subject transaction. 6.1 The grievance of the assessee in this ground is with regard to non-granting of working capital adjustment. 6.2 After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018 in which it was held as under:- 17. In the light of the above discussion we are of the view that the CIT(A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT(A) has not found any error in the TPO s working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the assessee and a copy of the same is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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