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TMI Blog2022 (10) TMI 1225X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of arm's length transactions of the assessee with its Associated Enterprises [AE]. The TPO determined a TP adjustment of Rs. 14,23,45,600. The AO passed draft assessment order incorporating the TP adjustment. The AO also made an addition u/s. 28(iv) with regard to the assets received by the assessee from its AE free of cost/loan basis for an amount of Rs. 71,55,525. 3. Aggrieved, the assessee filed its objections before the DRP and the DRP gave marginal relief to the assessee whereby the TP adjustment was reduced to Rs. 11,44,36,603 and the addition made by the AO towards assets received free of cost/loan basis was confirmed by the DRP. The assessee is in appeal before the Tribunal against the final assessment order passed by the AO pursuant to the directions of the DRP. 4. During the course of hearing, the Ld. AR pressed for only the following grounds:- "Ground No. 8: Turnover filter should have an upper limit 8. The learned DRP/AO/TPO has erred in not excluding uncontrolled comparables having turnover more than Rs. 200 crores despite several rulings of this Hon'ble Tribunal, have upheld the application of turnover filter and thereby excluded companies whose turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emittance 39150370 39150370 Free of cost goods (assessable value) 4910810 4910810 7. The assessee has applied Transactional Net Margin Method [TNMM] as the most appropriate method. The Operating Profit to Operating Cost ratio has been taken as the Profit Level Indicator. The financials of the taxpayer as per TP study are given below:- Particulars Amount in Rs Income Export of Software 1092854334 Foreign Exchange Gain (Net) 7726297 Total Operating Income 1100580631 Expenses Employee costs 522643046 Other Expenses 361081986 Depreciation 92114044 Total Operating.Expenses 975839076 Total Operating Profit 124741555 OP/OC 12.78% OP/OR 11.33% 8. The assessee has chosen 8 comparables as under:- Company name Weighted Average NCP (percent) Melstar Information Technologies Ltd. -5.28 Lycos Internet Limited (earlier known as Ybrant Digital Limited) 12.38 CG-VAK Software & Exports Ltd. 12 38 R Systems International Ltd. 18.54 Bells Softech Ltd 19.29 Helios & Matheson information technology Ltd 19.62 Larsen & Toubro Infotech Limited 24.88 R S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osys Ltd. 40.29 36.28 39.25 38.59 15 Thirdware Solution Ltd. 43.69 44.68 32.65 41.12 16 Cybage Software Pvt. Ltd. 68.17 68.82 60.81 66.27 35th Percentile 20.55% Median 27.37% 65th Percentile 32.21% 11. The TPO computed the TP adjustment based on the weighted margin of the revised comparables as below:- SWD SEGMENT Particulars Formula Amount (in Rs. Lacs) Taxpayers operating revenue OR 1,10,05,80,631 Taxpayers operating cost OC 97,58,39,076 Taxpayers operating profit OP 12,47,41,555 Taxpayers PLI PLI=OP/OC 12.78% 35th Percentile Margin of comparable 20.55% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 27.37% Arm's Length Price ALP=(1+M)* OC 1,24,29,26,231 Price Received OR 1,10,05,80,631 Shortfall being adjustment ALP-OR 14,23,45,600 12. Aggrieved, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --(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-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 companies listed in Sl. No. (a) to (g) of Grd. No. 8.7 raised by the Assessee whose turnover in the current year is more than Rs. 200 Crores should be excluded from the list of comparable companies." 16. We notice that in the above decision the Tribunal has excluded the comparable companies based on the upper turnover filter of Rs. 200 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material on record. We notice that the coordinate Bench in Cypress Semiconductor Technology (supra) has considered the issue of inclusion of Akshay Software Technologies Ltd. and held that- "18. As far as ground No. 4.9 raised by the assessee is concerned, in this ground, the assessee is seeking inclusion of Akshay Software Technologies Limited, celstream Technologies Limited, 12T2 India Limited. in the list of comparables. "(a) Akshay Software Technologies Limited: (i) This company was selected by the assessee and came to be rejected by the TPO for the reasons that (i) the company is engaged in providing professional services, procurement. installation, implementation, support and maintenance of ERP products and services: and (ii) it incurred significant foreign branch expenses indicating that the operating model was different from that of the Appellant. and the DRP upheld its exclusion. (ii) It was submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. The website of the company states that the company is engaged in rendering IT services; which are in the nature of MV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a fact relating a third party which may or may not exist. The Ld. AR further submitted that this company is held to be comparable in the decision of the coordinate bench M/s. Cypress Semiconductor Technology (supra). 26. We heard the rival submissions. We notice that the in the case of M/s. Cypress Semiconductor Technology (supra), the coordinate bench of the Tribunal has held that- (c) I2T2 India Limited: (i) The companies came to be rejected by the TPO for the reason that information regarding its related party transactions was not available in the annual report. The DRP further upheld the exclusion. (ii) It was submitted that if there is no disclosure with respect to the RPT made in the annual report the presumption out to be that there is no RPT transaction. Further, it was submitted that these companies render SWD services and are functionally comparable to the assessee. This company also passes all the filters applied by the TPO. It was submitted that in cases of similar placed companies this company is included in the final list of comparables. Reliance in this regard was placed on the decision of this Hon'ble Tribunal in the case of LG Soft India Pvt. Ltd. v. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d held that- "21. As far as the plea of the assessee for inclusion of Evoke Technologies Pvt. Ltd. is concerned, this company was rejected by the TPO on the ground that the financials of this company includes figures from outside branches which are unconnected. The DRP agreed with the view of the TPO. The learned Counsel for the assessee placed reliance on the decision of the ITAT, Hyderabad Bench in the case of Infor India P. Ltd. Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad - Tribunal) wherein it was held that availability un-audited accounts cannot be the reason to reject the comparability of the company which satisfies all filters. Reliance was also placed on the decision of the ITAT, Bengaluru Bench in the case of Zynga Game Network India Pvt. Ltd. Vs. DCIT in IT(TP)A No. 2573/Bang/2019, order dated 23.03.2021 for Assessment Year 2015-16 in which the comparability of this company was remanded to the TPO for fresh consideration. We are of the view that the comparability of this company has to be remanded to the TPO for fresh consideration in the light of the decision brought to our notice as above." 30. Considering the facts being identical for the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of Section 28 makes "the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession" as income chargeable to income tax under the head "Profits and Gains from Business or Profession". Therefore, it is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, is covered by section 28(iv). iii. The assessee has received a benefit in the nature of receipt of tangible assets of Rs. 71,55,525 (Rs. 1,603,519 of free of cost asset and Rs. 5,552,006 of assets on loan basis) during the AY 2015-16 which is arising from business of the assessee. iv. The receipt of assets free of cost would certainly tantamount to receipt of a benefit. Hence, in view if the above-mentioned reasons, benefit received by the company under section 28(iv) of the IT Act is Rs. 71,55,525/- and the same is being added to income of the assessee. Reliance is placed on decision of Hon'ble High Court of Madras in the case of CIT Vs. Ramaniyam Home Pvt. Ltd. [2016] 384 ITR 530 (Madras) dated 22/04/2016." 33. The DRP confirmed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's own case and brought to our attention that the Hon'ble Tribunal has restricted the relief to the extent to which the assessee has been able to prove that the assets have been re-exported. The Ld. DR prayed for a similar direction for the year under consideration also. 36. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in assessee's own case (supra) has considered a similar issue and held that- 5. Ground No. 19 is in respect of addition made under section 28(iv) of the Act by considering receipt of tangible asset for free of cost as on loan basis from group companies. Ld. Counsel filed written submission in support of his arguments advanced on the issue on 09/08/18. It has been submitted that assessee had received tangible assets worth Rs. 32,20,147/- as free of cost towards testing, analysing and validating of software from its group entity is before it's finalisation. It has been submitted that these assets are used for assessing the functioning of the software that is testing, analysing and validation, developed by assessee and is no way connected with income earning mechanism. He plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arent company of assessee. Unless assessee is able to establish that equipments so received on loan from its AE's have been re-exported, by way of cogent materials on record, argument advanced by Ld. Counsel cannot be accepted. For section 28(iv) to be applicable income taxable must be referable to benefit or perquisite arising from business. Assessee is unable to establish that equipments taken on loan from its parent company has been re-exported back and therefore, has been unable to rebut to observation of Ld. AO/TPO that those equipments were retained by assessee for purposes of its business. Under such circumstances we are unable to hold that no benefit accrued to assessee in the form of equipment that have been received on loan free of cost. We are therefore inclined to grant relief to assessee only to the extent of Rs. 70,22,257/- being equipments re-exported to Rohde & Schwaez Gmbh & Co.KG Germany and confirm balance addition being value of equipments taken on loan free of cost from its associated enterprises. 37. We also notice that the DRP has upheld the addition mainly on the ground that the assessee has not produced invoices and other relevant documents to substa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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