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TMI Blog2023 (5) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... have erred in rejecting the TP study of the Appellant and conducting fresh search process with additional and/or modified filters for selecting the companies comparable to the Appellant. 3. The AO/DRP/TPO have erred in rejecting companies if the data pertaining to FY 2017-18 are unavailable in the public databases. 4. The AO/DRP/TPO have erred in law in rejecting certain comparable companies merely on the ground that the financial year ending of the Appellant and the comparable company are different. 5. The AO/DRP/TPO have erred in law in rejecting the application of upper turnover filter without appreciating the fact that the lower turnover filter of Rs. 1 Crore have been applied on the comparable companies. 6. The AO/DRP/TPO have erred in law in applying the export earning filter with a threshold limit of 75% in selecting the comparable companies. 7. The AO/DRP/TPO have erred in law in rejecting comparable companies having losses in two (2) out of three (3) years by erroneously application of persistent loss filter. 8. The AO/DRP/TPO have erred in law in computation of Related Party Transaction (RPT) Filter by taking only the (RPT income)/(Total income) or (RPT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Appellant due to multiple reasons including functionality, lack of segmental data, inadequate financial information etc 11.1. RMD Mediaids Ltd 11.2. Biolitec India Pvt Ltd 12. The AO/DRP/TPO have erred in law and on facts in not including the following companies in the final list of comparable companies in the Trading Segment which are also in the business of trading in medical devices similar to the Appellant 12.1. Hicks Thermometers (India) Limited 12.2. ADS Diagnostics Limited 12.3. Cardiomed India Limited 12.4. Aishwarya Technologies and Telecom Limited 12.5. Kusam Electrical Industries Limited 12.6. Mohan Exim India Limited 12.7. Biomex Instruments Private Limited 13. The AO/DRP/TPO have erred in computing the transfer pricing adjustment for trading segment of the Assessee by adopting incorrect methodology of computing adjustment. The TPO has erred in ignoring the rectification order dated 02 December 2021 passed by himself wherein the TPO had rectified and recomputed the transfer pricing adjustment for trading segment. 14. The AO/DRP/TPO have erred in not restricting the transfer pricing adjustment to the value of international Trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law and on facts in erroneously computing interest under section 234C of the Act on 'assessed income' instead of 'returned income'. The Appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided." 2. Brief facts of the case are as under: 2.1 Assessee is engaged in the business of software development service ("SWD"). The assessee has entered into master service agreement with its holding company and other group companies to provide services at an agreed mark-up on costs incurred in accordance with the contractual terms. Further, the assessee also carries on the business of trading / marketing of test and measurements equipment and related maintenance services. The Assessee filed its return of income for the AY 2018-19 on 30.11.2018 declaring a total income of Rs. 21,27,94,790/-. The case was selected for scrutiny under CASS and a notice u/s 143(2) & 142(1) was issued and served on the assessee. 2.2 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.5 In respect of trading segment, the Ld.TPO observed that assessee had used a set of 4 comparables with mean of 2.97% and thus held the transaction to be at arms length. Dissatisfied with the transfer pricing study, the Ld.TPO shortlisted a set of 26 comparables under software development segment with a median of 22.27%. The details of which are as under: Sl.No. Company Name F.Year wise OP/OC (%) Wt. Average 2015-16 2016-17 2017-18 1. Infomile Technologies Ltd. 9.91 11.12 8.64 9.89 2 Harbinger Systems Pvt. Ltd. 12.69 12.8 9.46 11.65 3 Exilant Technologies Pvt. Ltd. 25.9 17.19 8.5 17.17 4 Tech Mahindra Ltd. 17.08 16.51 20.03 19.43 5 Backoffice I T Services India Pvt. Ltd. 26.74 19.49 14.13 19.44 6 Larsen & Toubro Infotech Ltd. 19.21 20.78 18.36 19.59 7 Great Software Laboratory Pvt. Ltd. 17.88 23.87 17.31 19.73 8 X S Cad India Pvt. Ltd. 27.57 18.93 15.96 20.40 9 Temenos India Pvt. Ltd. 18.47 20.37 20.6 20.60 10 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.61 11 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 21.19 12 Mindtree Ltd. 26.11 20.12 18.00 21.41 13 Nihilent Ltd. 24.46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of the transfer pricing order u/s. 92CA, the Ld.AO passed the draft assessment order by proposing an addition in the hands of the assessee at Rs.10,98,61,244/- 2.11 Against the draft assessment order passed on 27.09.2021, the assessee filed objections before the DRP. The DRP confirmed the transfer pricing adjustment proposed in respect of SWD segment. In respect of trading segment, the DRP did not accept the inclusion of two comparables sought by the assessee and also did not accept the exclusion of two comparables which were trading in medical and surgical equipments. 2.12 On receipt of the DRP directions, the Ld.AO passed the final assessment order making addition at Rs.8,52,25,669/- in respect of the transfer pricing order passed by the authorities. An order u/s. 154 was passed wherein certain corrections were made by the Ld.TPO under the trading segment and thus the adjustment was made at Rs.2,53,58,920/-. 2.13 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground nos. 1-4 and 6-8 are not pressed by the assessee. Accordingly these grounds are dismissed as not pressed. 4. Ground no. 5 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crore. As per the Dun & Bradstreet classification of software industry, the companies could be classified under three major heads depending on the turnover of the company viz., a. Less than Rs 200 crores categorized as small size companies; b. Rs 200 crores to Rs 2000 crores categorized as medium size companies; c. More than Rs 2,000 crores categorized as large size companies. 12. The turnover of the assessee for the relevant assessment year is Rs 134 crores and therefore would fall under the category of small size company having turnover in the range of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within the range, i.e, companies having turnover less than Rs.1 crore or turnover more than Rs 200 crores deserves to be excluded. The Bangalore Bench of the Tribunal in the case of BORQS Software Solutions Pvt. Ltd. v. ITO (supra) has considered various judicial pronouncements on this issue including that of the Hon'ble High Courts wherein divergent views were taken with respect to the application of different filters. It was held by the Tribunal that application of turnover filter is justified on the basis of classification of companies as per the repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ready reference:- "(ii) Mercury Outsourcing Management Ltd. 13.1 The learned Authorised Representative has submitted that the TPO has rejected this company on the similar reasoning of diminishing revenue and abnormal cost. 13.2 On the other hand, the learned DR has submitted that this company is incurring persistent losses and further the turnover of this company is less than Rs.1 Crore and therefore it does not satisfy the filter of turnover applied by the TPO. 13.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that turnover of this company in the ITES segment is only Rs.45.33 lakhs which is any case does not satisfy any filter of turnover in comparison to the assessee's turnover more than Rs.27 Crores. Even if we apply the tolerance range of turnover of 10 times on both sides of the assessee's turnover then the company which is having less than Rs. 2.7 Crores of turnover will be outside the said range of 10 times. Accordingly, we are of the view that this company which is having only Rs. 45.33 lakhs turnover cannot be considered as a good comparable to the assessee". 15. From the aforesaid findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be in a different context. The same need not be blindly or generally adopted in all the cases, irrespective of the context or circumstances calling for exclusion/inclusion of the comparables. The finding in each case is therefore a finding of fact. He pointed out that the Tribunal in the case of Autodesk (I) P. Ltd. v. DCIT [2018] 96 taxmann.com 263 [Bang. Trib.] after analysing the entire cases on the point, came to the conclusion that the decision rendered by the Tribunal in the case of Genesis Integrated Systems (I) P. Ltd. [2012] 53 SOT 159 lays down the correct law on the application of turnover filter and that decision has to be followed. He pointed out that the DRP in the present case has followed the ruling in the case of Genesis Integrated Systems (I) P. Ltd. (supra) and therefore the order of DRP has to be upheld. 18. We have given a careful consideration to the rival submissions and are of the view that as rightly submitted by the ld. Counsel for the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. (supra) does not positively say that for a company to be excluded on the basis of high turnover, the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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)." 19. In the given facts and circumstances of the case, we find no grounds to interfere with the order of DRP on this issue. Consequently, ground Nos.4 & 5 raised by the revenue are dismissed as without any merit. 20. In the result, the appeal by the revenue is dismissed." 13. Accordingly, by following the above orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi High Court in case of Keihin Panalfa Ltd. reported in 381 ITR 407 2) Decision of Hon'ble Bombay High Court in case of Alstom Projects India Ltd. reported in 2016 (12) TMI 1408 3) Decision of Hon'ble Bombay High Court in case of Hindustan Unilever Ltd. reported in (2016) 72 taxmann.com 325 4) Special Leave Petition filed has been dismissed in (2018) 99 taxmann.com 135 (SC). 7.2 The above principle has also been upheld by this jurisdictional Bangalore Tribunal in the following cases. Continental Automotive Components India Pvt. Ltd. in IT(TP)A No. 713/Bang/2017 Tokai Rika Minda India Pvt. Ltd. in IT(TP)A No. 2327/Bang/2016 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 7.3 We direct the Ld.AO/TPO to restrict the adjustment if any only in respect of the value of international transaction between assessee and AE. Respectfully following the ratios laid down in plethora of decisions hereinabove, we remand this issue back to the Ld.AO/TPO to consider the claim in accordance with law. Accordingly this ground raised by assessee stands allowed. 8. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon'ble Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 8.10. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ALP of the principal transaction. The Assessee also contends the outstanding receivables could not be made subject matter of TP adjustment as the same is not covered under the provisions of Section 92B of the Act. Also, it is submitted that the Assessee is a debt free company and does not bear any working capital risk since it is fully funded by its AEs. The Assessee has not incurred any interest expenses for its working capital requirement. Hence, the Assessee does not have any interest cost in the funds blocked on deferred receivables from AEs as it is entirely funded by its AEs for its working capital requirements. 9.2 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 9.3 This Bench referred to decision of Special Bench of this Tribunal in case Instrumentation Corpn. Ltd. v. Asstt. DIT in ITA No. 1548 and 1549 (Kol.) of 2009, dated 15/07/2016, held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it has been argued that working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Naturals (I) Pvt. Ltd., reported in (2015) 276 CTR 445 by considering a credit of 90 days. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Accordingly, ground nos. 19-23 raised by assessee stands partly allowed for statistical purposes. 10. Ground nos. 24-25 is in respect of short grant of TDS and interest u/s. 234C. 10.1 It is submitted that the Ld.AO has erroneously short granted the credit of TDS. It is submitted that an amount of Rs.50,56,162/- reflecting in PAN AABCT1733D of the entity merged with the company has not granted to the assessee. Further, it is submitted that the Ld.AO has erroneously levied interest u/s. 234C of the act on the 'assessed income' instead of 'returned income' as required under the provision of the Act. 10.2 We direct the Ld.AO to grant credit of TDS in accordance with law after carrying out necessary verifications in respect of the interest u/s. 234C, it is directed that the levy of interest must be on the returned income as mandated u/s. 234C of the act. Accordingly the Ld.AO is directed to carry out necessary corrections in accordance with law. Accordingly these grounds rai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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