TMI Blog2023 (4) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... rcle 1 (1)(1) Bangalore, (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 Software Development Services (SWD services) and 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 SWD Services 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 conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunity of being heard, shall by order in writing determine the ALP in relation to the international transaction in accordance with provisions of section 92CA(3) and send a copy of his order to the Assessing Officer (AO) and to the assessee for finalization of assessment order. Section 92C(2) provides that the variation between the ALP and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been under taken shall be deemed to be the ALP. The AO passes a draft order of assessment against which, the Assessee has a right to file objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. 3. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... F.Year wise OP/OC (%) Wt. Average 2015-16 2016-17 2017-18 1 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69 2 Harbinger Systems Pvt.Ltd. 12.69 12.80 9.46 11.65 3 Exilant Technologies Pvt. Ltd. 25.82 17.27 8.50 17.17 4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 5 Larsen Toubro Infotech Ltd. 20.78 19.21 17.14 18.94 6 Great Software Laboratory Pvt. Ltd., 17.88 23.87 17.31 19.73 7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OR 2,036,504 020 Taxpayers Operating Cost OC 1,829,458 659 Taxpayers Operating Profit OP 207,045,361 Taxpayers PLI PLI=OP/OC 11.32% 35th Percentile Margin of comparable set 20.19% Adjustment Required (if PLI 35 th Percentile) Yes Median Margin of comparable set M . 23.60% Arm's Length Price ALP=(1+M)*OC 2,261,210,903 Price Received OR 2,036,504,020 Shortfall being adjustment ALP-OR 224,706,883 Thus a sum of Rs.22,47,06,883/- 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. 8. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.14 18.94 12 Great Software Laboratory Pvt. Ltd. 17.9 23.87 17.31 19.73 13 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19 14 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.62 15 Mindtree Ltd. 26.1 20.12 18.41 21.21 16 Sagar Soft India Ltd 10.6 8.68 34.43 21.92 17 Aptus Software Labs Pvt.-Ltd. 27.7 24.83 15.16 22.7 18 AcewinAgriteck Ltd. . 26.5 23.23 22.73 24.51 19 Persistent Systems Ltd. 23.9 24.44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally affect the amount of net profit margin in the open market. 13. 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 uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from AEs have been accepted to be at ALP by the TPO. Thus, not having doubted the same, the TPO was not justified in allocating revenue from resale of the same to Non- AEs [sale of software products of Rs. 95,53,63,296/- and sale of hardware of Rs. 76,62,758/-] between SWD AE and ITES AE segments. 15. After apportioning non-AE revenue to AE revenue, the TPO apportioned the entire expenditure from P L Account except finance cost of Rs. 21,85,350 and Corporate Social Responsibility (CSR) expenditure of Rs. 63,44,357 between SWD AE and ITES AE. The segment wise expenditure as per P L Account is as follows: Particulars SWD AE ITES AE Commission Domestic Total Employee benefits expense 791,858,665 52,343,125 - 223,015,472 1,067,217,262 Other expenses 83,303,674 8,467,698 130,258,993 592,926,764 814,957,129 Depreciation and amortization expense 39,718,204 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to software segment and ITES' segment in contravention of the provisions of Chapter X of the IT Act, without adducing any reasons for the same. The segmental margins as computed by the Assessee was as follows: Particulars Margin Software Development Segment [SWD AE] - 16.18% ITES Segment [ITES AE] 9.37% The TPO did not accept the Assessee's margins and has recomputed the margins of the said segments incorrectly in paragraph 2.1.2 of the impugned TP order dated 29.07.2021 as under: Particulars Margin Software Development Segment [SWD AE] - 11.32% ITES Segment [ITES AE] 11.32% From the perusal of the impugned TPO order dated 29.07.2021, it is evidently clear that the Learned TPO has recomputed the margins by making certain apportionments as per his whims and fancies without adducing any reasons or basis for the same. From the perusal of the margins computed by the Learned TPO, it is clear that the TPO has apportioned Non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and both are nonjurisdictional 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 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 righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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). 20. In view of the aforesaid de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Revenue from operation (ROP) (in millions) RPT/ ROP [B] % RPT [A] + [B] 1 Three sixty Logica Testing Services Pvt. 1.8 mil 218.54 mil 8.23% 55.74 mil 274.1 mil 20.34 % - 28.57% 23. In the following decisions rendered by the various benches of the Tribunal, the methodology adopted by the Assessee has been held to be correct, i.e., RPT of all transactions whether it is on the expense side or revenue side has to be considered to see whether there would be impact owing to related party transactions between the comparable company and it s related party. After all the entire exercise of determining ALP is to compare margins in transactions between unrelated parties. Yahoo Software Development India P. Ltd. vs. JCIT [2020] 115 taxmann.com 60 (Bang) Infineon Technologies India (P.) Ltd. vs. DCIT [2020] 117 taxmann.com 821 (Bang) ITO vs. Sabre Travel Technologies (P.) Ltd., [2020] 120 taxmann.com 362 (Bang) Atlas Healthcare Software India (13.) Ltd. vs. ACIT [2020] 117 tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Services Pvt Ltd 26.35 26.63 28.75 27.35 11 A G S Health Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s added to the total income of the Assessee on account of determination of ALP for provision of ITeS by the Assessee to its AE. 28. 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 DRP and the DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 29. Pursuant to the directions of the DRP, the final list of comparable companies became 11. 30. The learned counsel for the Assessee prayed for exclusion of the following 7 companies out of the final list of 11 comparable companies that remain after DRP directions and in this regard raised ground No.11.5.2 of the original grounds of appeal, which reads as follows: 11.5.2. The Lower Authorities are not justified in failing to adopt the upper turnover filter of Rs. 200 crores that resulted in wrongful selection of following 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be equated or compared with a company rendering ITeS. 34. In so far as comparability of Domex E Data Pvt. Ltd., is concerned, the argument was that this company is engaged in providing KPO and therefore cannot be compared with an ITeS such as the assessee. On this objection, the DRP again held that ITeS and KPO have to be regarded as one and the same. Learned Counsel has pointed out that in the following decisions, Tribunal has taken the view that companies rendering KPO services cannot be regarded as a comparable company with an ITeS company. Transperfect Solutions India Pvt. Ltd vs ACIT [[TS-497-ITAT- 2022(PUN)-TP]] AY 2016-17 Schlumberger India Technology Centre (P.) Ltd. Vs DCIT [TS-473- ITAT- 2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd vs ACIT [2022] 138 taxmann.com 543 (Pune - Trib.), for AY 2016-17 35. In the light of the aforesaid decisions, we are of the view that Domex E Data Pvt. Ltd., should be excluded from the list of comparable companies. 36. Learned Counsel also made a prayer that Datamatics Business Solutions Pvt. Ltd., fails the export turnover filter for Assessment Year 2015-16 and therefore the profit margin of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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