TMI Blog2022 (10) TMI 1225X X X X Extracts X X X X X X X X Extracts X X X X ..... he inclusion of Evoke Technologies Ltd. on the basis that the financials of the company has also included the financials of the financial branch which is un-audited and therefore the data is unreliable - e notice that the coordinate Bench in the case of Mindteck India Ltd [ 2022 (6) TMI 1334 - ITAT BANGALORE] has considered the issue of inclusion of Evoke Technologies P. Ltd wherein held 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 Addition made on account of receipt of fixed assets received free of cost/on loan basis - DRP has upheld the addition mainly on the ground that the assessee has not produced invoices and other relevant documents to substantiate that the assets have been received on loan basis/free of cost and also no evidence was produced that the assets have been returned to the lender - HELD THAT:- With regard to assets received from Quantum data International, the assessee had submitted before the DRP that the customs has wrongly recorded the assets received a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 200 crores despite several rulings of this Hon'ble Tribunal, have upheld the application of turnover filter and thereby excluded companies whose turnover exceeds more than Rs. 200 crores. The learned DRP/AO/TPO has erred in law and facts by not rejecting following companies that fail turnover filter of INR 200 crore: Third ware Solutions Limited Aspire Systems (India) Private Limited Nihilent Technologies Limited R.S. Software (India) Limited Cybage Software Private Limited Tata Elxsi Limited Persistent System Limited Mindtree Limited Larsen and Turbo Infotech Limited Infosys Limited Ground No. 13: Rejection of additional comparable companies requested for inclusion by the Appellant during the course of TP assessment proceedings 13. The learned DRP/AO/TPO has erred in law and on facts in rejecting the following comparable companies requested for inclusion by the Appellant during the course of TP proceedings: Minvesta Infortech Limited Akshay Software Technologies Limited Sasken Communication Technologies Limited Evoke Technologies Limited Helios Matheson IT Bangalore Limited TVS In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 19.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 R S Software (India) Ltd. 32.66 24.14 17.44 24.82 9 Infobeans Technologies Ltd. 20.70 41.95 29.22 29.91 10 Persistent Systems Ltd. 31.11 35.44 28.20 31.69 11 Nihilent Technologies Ltd. 29.19 35.72 No data in Public Domain 32.21 12 Aspire Systems (India) Pvt. Ltd. 30.98 38.04 No data in Public Domain 34.18 13 Integ Software Pvt. Ltd. 31.16 45.00 Fails Employee cost 37.90 14 Infosys Ltd. 40.29 36.28 39.25 38.59 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,36,603. 14. Ground No. 8 relates to application of turnover filter by the TPO. The Ld. AR submitted that the TPO has applied the lower turnover filter while choosing the fresh comparable companies but failed to apply the upper turnover filter. The Ld. AR submitted that the turnover of assessee for the year under consideration is Rs. 108 crores and that by applying the upper turnover filter Rs. 200 crores, the following companies need to be excluded. In this regard, the Ld. AR presented a table with the turnover details of the comparable companies:- Sl. No. Company name Turnover In INR Crores 1. Tata Elxsi Ltd. 781.85 2. Mindtree Ltd. 3,547.40 3. Persistent Systems Ltd. 1,242.50 4. Nihilent Technologies Ltd. 267.80 5. Aspire Systems (India) Pvt. Ltd. 230.81 6. Infosys Ltd. 47,300 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)........ (2) For the purposes of sub-rule (1), the comparability 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd. No. 8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 24,71,71,242/-. 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are (sic) making losses as comparable companies. This shows that there is a limit for the lower end for identifying the comparable companies. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be 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 are loss making are excluded from comparable companies, 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No. 18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has excluded the comparable companies based on the upper turnover filter of Rs. 200 crores. In assessee's case from the table submitted, it is evident that the turnover all 10 comparable companies is more than Rs. 200 crores. Therefore respectfully following the aforesaid decision of the Tribunal, we hold that the companies having more than 200 crores turnover need to be excluded. We accordingly direct the TPO to exclude these companies while re-computing the ALP. 17. Through ground No. 13, the assessee contended the rejection of additional comparable companies requested for inclusion during the course of TP assessment proceedings. Out of the list of comparable companies, the Ld. AR during the course of hearing, pressed for inclusion of Akshay Software Technologies Lt., Evoke Technologies Ltd. and I2T2 India Ltd. The rest of the inclusions are not pressed and dismissed accordingly. 18. The TPO rejected the inclusion of Akshay Software on the ground that the company has incurred significant foreign branch expenditure. The DRP while rejecting the inclusion of Akshay Software has held that the company is engaged in professional services and procurement implementation and sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the company states that the company is engaged in rendering IT services; which are in the nature of MVO and caters to the needs of corporate bodies, banks and financial institutions. Further, it was submitted that the income from commission and sale of software licenses constitutes a meagre 0.5% of the total revenue and therefore the same would not have any impact on the profitability of the company. It was submitted that the exclusion of this company on the basis that it incurs foreign branch expenses indicating that the business model adopted by it is different is erroneous as the TPO did not apply the on-site development filter. Therefore the action of the DRP is arbitrarily rejecting Akshay on this count, without first applying the filter at a uniform threshold across all companies is erroneous and unsustainable. In any event, it was submitted that there is no difference in the business model adopted by the company and the Appellant, and without prejudice, it was submitted that the difference if at all, would not have any impact on the profitability of the company. Reliance was placed on the decision of this Hon'ble Tribunal in EMC Software and Services India Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance in this regard was placed on the decision of this Hon'ble Tribunal in the case of LG Soft India Pvt. Ltd. v. DOT (Order dated 28.05.2019 passed by this Hon'ble Tribunal in IT(TP)A No. 3122/Bang/2018 for the assessment year 2014-15). (iii) We have considered the submission. We find that on identical submissions, this Tribunal in the case cited by the learned Counsel for assessee directed inclusion of 12T2 Company in the list of comparable companies with the following observations: 12. We find force in the contentions of the Ld. A.R. If the Annual report of this company does not mention about Related Party transactions, then the assessee cannot be held responsible to prove a fact relating to a third party. which may or may not exist. We notice front the Auditors Report of I2T2 India Ltd. that the auditor in para 5(b) of Annexure to the Auditors' report has mentioned as under:- There are no transactions that are made at prices exceeding 14.5 lakhs in respect of any party who is covered under section 301 of the Act during the financial year. Hence, in the absence of any specific information, there is merit in the contentions of the assessee that the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he light of the decision brought to our notice as above. 30. Considering the facts being identical for the year under consideration, we respectfully follow the decision of the coordinate Bench and remit the issue to the TPO for consideration in the light of the decision stated above. 31. Through ground No. 20, the assessee is contending the addition made on account of receipt of fixed assets received free of cost/on loan basis. The AO noticed from Note 9 of audited financials that the assessee has received assets free of cost amounting to Rs. 1.23 crores and assets on loan basis amounting to Rs. 1.7 crores as on 31.3.2015. The AO was of the view that since the assessee has received free of cost assets during the year and therefore provisions of section 28(iv) is attracted. The assessee made the following submissions before the AO:- During the A.Y. 2015-16, the company obtained certain assets from its Group Affiliates and third parties in relation to project assignment for testing, analyzing and validating the software developed at the premises of the company. These products are used to carry out the process of testing the software and are returned to the Group Affiliates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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 addition by holding that- 18.1 Having considered the submissions, and on perusal of the details filed, we note that assets worth Rs. 71.55 lakhs have been received free of cost during the year. Though it was claimed that the assets have been received on free of cost or on loan basis, the assessee failed to submit any documentation to understand the terms and conditions of such loan arrangement, if any. The invoices and relevant documents were not produced to substantiate that these assets were obtained on loan basis or free of cost, and from whom it was obtained. It was also claimed that the assets were obtained on loan basis for carrying out some tests and would be returned back. However, no evidence was placed on record to show that such assets have been returned back to the so-called lender. In the absence of documentation, we are unable to accept any of the pleas raised by the assessee. Hence, we concur with the reasoning of the AO that these are perquisites/benefits arising to the assessee arising the course of its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functioning of the software that is testing, analysing and validation, developed by assessee and is no way connected with income earning mechanism. He placed reliance upon a chart wherein the breakup of assets received free of cost has been tabulated. It has been submitted that it is Marvell Semiconductor Inc has given the assets on loan basis. Ld. counsel submitted that assets were received only for testing analysing and validation of software and they had no relation to the core business of assessee. He placed reliance upon the decision of Hon'ble Supreme Court in case of Excel industries reported in 358 ITR 295, wherein following CIT vs. shoes Kariwala pass an company reported in 46 ITR 114, Hon'ble Supreme Court laid out following principles: there must be an income on which tax is to be levied an income tax is a tax on income tax cannot be levied on hypothetical/notional income. 5.1 Ld. Counsel thus submitted that for section 28(iv) to be applicable income should accrue to assessee. He submitted that in the present facts of the case, machines were taken on loan only for purposes of carrying out testing analysing and validating of the software. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prises. 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 substantiate that the assets have been received on loan basis/free of cost and also no evidence was produced that the assets have been returned to the lender. We further notice that with regard to assets received from Quantum data International, the assessee had submitted before the DRP that the customs has wrongly recorded the assets received as replacement for defective assets imported earlier as assets received free of cost. This fact has not been considered or verified by the DRP. In view of this discussion, we remit the issue back to the AO to verify the invoices and other relevant documents that would substantiate the assessee's claim and decide the issue in accordance with law. The AO is directed to keep in mind the decision rendered by the coordinate bench of the Tribunal in assessee's own case while deciding the issue. The assessee is directed to produce all the relevant documents and cooperate with the proceedings. It is ordered accordingly. This ground is allowed for statistical purposes. 38. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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