TMI Blog2022 (8) TMI 1498X X X X Extracts X X X X X X X X Extracts X X X X ..... of software development service. In fact, we note that this company is a full fledged entrepreneur in the business of power generation and therefore is not comparable functionally with a captive software service provider like assessee. Thus direct the Ld.AO/TPO to exclude Aspire System India Pvt. Ltd. from the final list. Nihilent Technologies Limited - Based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon ble Mumbai Tribunal in Red Hat India Pvt. Ltd [ 2022 (2) TMI 1283 - ITAT MUMBAI] this comparable deserves to be excluded from the final list. Cybage Software Pvt.Ltd Primarily is a product company and has diversified business segments. We note that this company is a full fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE. SPI Technologies India Pvt.Ltd. and eClerx Services Ltd. - The assessee in Barracuda Networks India (P.) Ltd [ 2022 (5) TMI 322 - ITAT BANGALORE] was a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uant to the directions issued by the Learned Panel, erred in rejecting the comparability analysis in the TP documentation undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962, (`the Rules') and also erred in rejecting companies functionally akin to the Appellant while performing the comparability analysis. 4. That on the facts and in the circumstances of the case, the Learned Panel and the Learned AO erred in upholding the Learned TPO's approach of determining the arm's length price for the provision of SWD services and ITeS of the Appellant by conducting a fresh comparability analysis by rejecting certain filters applied by Appellant in the TP documentation and applying additional / modified filters. 5. The Learned TPO along with the Learned AO in pursuance of the directions of the Learned Panel erred in law and on facts in not providing the Working Capital Adjustment to the Appellant. 6. The Learned TPO along with the Learned AO in pursuance of the directions of the Learned Panel erred in law and on facts in not providing Risk Adjustment and thus ignored the limited risk nature of the services provided by the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd pass all the filters as adopted by the Learned TPO - I. Software Development Services Segment a) Yudiz Solutions Private Limited b) E-Zest Solutions Limited c) Benchmark IT Solutions India Private Limited d) Smartcloud Infoservices Private Limited II. IT enabled Services Segment a) Hello Information Services Private Limited b) Digicall Global Private Limited Other than Transfer Pricing - 12. That the Learned DRP erred in confirming the action of the Learned AO in disallowing deduction claimed under section 35AC and 8oG of the Act amounting to INR 7,50,00o. 13. That the Learned AO Learned DRP failed to appreciate the fact that no restriction is imposed on claiming deduction under section 35AC and 8oG of the Act provided the payment is made to eligible entities listed in section 35AC and 8oG of the Act. 14. That the Learned AO Learned DRP failed to appreciate the fact that the obligations to incur expenditure on CSR activities flows from the Companies Act, 2013 which has no linkage with section 35AC and 8oG of the Act. 15. On the facts and in the circumstances the Learned AO erred in leving interest under section 234A of the Act amounting to INR 43,54,634 without giving due consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng SWD Segment: Sl.No. Company Name Weighted Average % OP/OC 1 Kals Information System 0.06% 2 Akshay Software Technologies Limited 1.01% 3 Sagar Soft India Limited 1.17% 4 Accel Frontline Ltd. (Seg.) 3.53% 5 Sasken Communication Technologies Limited (Segmental) 6.98% 6 Maveric Systems Limited 9.46% 7 Mudumuru Systems Limited 9.66% 8 CG-VAK Software Exports Limited 10.91% 9 Infomile Technologies Ltd. 13.97% 10 Cigniti Technologies Ltd. 17.57% 11 R S Software (India) Limited 20.65% 12 R Systems International Limited (Seg.) 21.26% 13 SQS India BFSI Limited (formerly Thinksoft Global Services Ltd.) (Consolidated) 22.07% 14 Larsen Toubro Infotech Limited 22.12% 15 Infobeans Technologies Limited 28.75% 16 Kellton Tech Solutions Ltd. 29.23% 35th Percentile 9.46% Median 12.44% 65th Percentile 20.65% ITES Segment: Sl.No. Company Name Weighted Average OP/OC 1 Sundaram Business Services Limited -4.98% 2 Hartron Communications Limited (Seg.) -4.68% 3 Informed Technologies India Limited 1.36% 4 ACE Software Exports Ltd. 4.85% 5 Allsec Technologies Ltd. 5.05% 6 Crystal Hues Limited 7.40% 7 Jindal Intellicom Private Limited 11.15% 8 Cosmic Global Limited 13.29% 9 Suprawin Technologies Ltd. 17.35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 66.45% 35th Percentile 24.83% Median 27.28% 65th Percentile 32.42% ITES Segment: Sl. No Comparable Company OP/OC 1. Supra Technologies Ltd. 10.26% 2. Tech Mahindra Business Services Ltd. 20.44% 3. Infosys BPM Ltd. 26.44% 4. SPI Technologies India Pvt. Ltd. 37.77% 5. Eclerx Services Ltd. 56.44% 6. Bhilware Infotechnology Limited 23.84% 7. One Touch Soluctions (India) Pvt. Ltd. 15.57% 8. Microland Ltd. (Seg.) 13.62% Average by TPO (S.No. 1-5) 30.27% 35th Percentile 15.73% Median 22.14% 65th Percentile 26.44% 2.7 The Ld.TPO passed order u/s 92CA of the Act on 24/10/2019, and proposed TP adjustments to be made u/s 92CA to the Arm's Length Price, at Rs.51,31,30,728/- for SWD segment and Rs.16,58,20,569/- for ITES segment, being the shortfall. 2.8 On receipt of the transfer pricing order the Ld.AO passed the draft assessment order on 20/12/2019. In the draft assessment order the Ld.AO made further additions. 2.9 The Ld.AO noted that during the year under consideration, the assessee spent Rs.12,26,000/- towards CSR expenditure as per section 135 of Companies Act, 2013. It is submitted that the assessee in its return of income, disallowed the said expenditure as per explanation 2 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Ground No.6, 8, and comparables sought for exclusion/inclusion in 10 (g) partly and 10(h) partly not mentioned hereinabove are dismissed as not pressed. 5. Ground no.5 is in respect of non granting of WCA. 5.1 The contention of Ld.AR is that, the Ld.AO/TPO/DRP erred in not providing appropriate adjustments towards the difference in the working capital between the assessee and the companies selected as comparables. He submitted that in view of the following judgements, the assessee is entitled for working capital adjustment and prayed that the same may be granted:- 1. Huawei Technologies India Pvt. Ltd. (AY 2012-13) IT(TP) No.1939/Bang/2017 2. IKA India (P) Ltd. vs. Deputy Commissioner of Income-tax (AY 12- 13) IT(TP)A No.2192/Bang/2017. 3. Deputy Commissioner of Income-tax V. Apotex Pharmachem India (P) Ltd. in IT(TP)A No.156/Bang/2014 2200/Bang/2016 (AY 09-10 11-12). 5.2 We have heard the submissions of both sides on this issue based on the records placed before us. 5.3 We note that, this issue has been considered by this coordinate bench of this Tribunal in the case of Huawei Technologies India P. Ltd . in IT(TP)A No.1939/Bang/2017 dated 31.10.2018 , wherein, it was held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely:- (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 or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets.in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs. of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 invest. Note that the interest sate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) of by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16.The CIT(A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India ITA No.2112/Mds/2011 (2013) 38 taxmann.com. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT(A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would 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 his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of the same is at page 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT(A). We may also further add that in terms of 1ule 10B(1)( e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is, not the case of the CIT(A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT(A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d requirements with the AEs before commencing the assignment. Citrix R D India undertakes software coding according to the functional specifications and software requirement analysis provided by its AEs. Citrix R D India undertakes coding and documentation only for the software developed by it. During this phase, Citrix R D India regularly interacts with its AEs and receives technical assistance, reviews and feedback on the work done. Citrix R D India also generates and maintains documentation for the coding undertaken by it. The AEs and Citrix R D India jointly undertake project management for projects executed in India. The AEs provide more information (as required) in order to provide clarity in respect of the work to be performed. Citrix R D India interacts regularly with its AEs and project tracking happens through emails and conference calls. This ensures close co-ordination, quality control and minimal rework in the development process. Citrix R D India and its AEs are jointly responsible for maintaining the quality of work undertaken. Citrix R D India is responsible for initial / unit testing of the modules / components developed by it, to ensure that the activity undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l related intangibles or any brand names or trademarks. Risks: The key risks borne by Citrix R D India and AEs in relation to the order processing services provided by Citrix R D India to AEs. Type of Risks Order Processing Services Technical Support services Citrix R D India AEs Citrix R D India AEs Market risk Limited Yes Limited No Foreign exchange risk No Yes No Yes Service liability risk Yes No No Yes Idle capacity risk Yes No No Yes Credit and collection risk No No No No Characterisation: SWD Thus Citrix R D India can be characterised as a routine software development service provider, carrying out routine functions and bearing minimal risks typically borne by a contract service providers operating in these industries. ITES Based on the functions, risks and asset analysis, Citrix R D India can be characterised as a routine IT enabled service provider, bearing minimal risks typically borne by service providers operating in these industries. 8. Ground No.9 is in respect of the comparables sought for exclusion under the SWD ITeS Segment. The Ld.AR submitted that, the assessee seeks exclusion of following comparables under the SWD Segment: Inteq Software Private LTd, Larsen Toubr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of this company from the final list. 8.3 Infobeans Technologies Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally not similar with that of assessee, as it is specialised in business applications development for web and mobile. This company provides software engineering services primarily in Custom Application Development, Content Management Systems, Enterprise Mobility, Big Data Analytics. He placed reliance on page 1323 1356 of annual report paper book. The services rendered by this company are different from the routine low end software development services rendered by the assessee as a captive service provider to its AE. The Ld.AR further submitted that, segmental details of such diverse activities carried on by this company are not available. He thus prayed for exclusion of this company from the final list. 8.4 Thirdware Solutions Limited It is submitted that this company is functionally dissimilar to the assessee on various counts and therefore deserves to be rejected. The Ld.AR submitted that, this comparable is functionally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.). 15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it is also a global brand having presence in many countries and relied upon the order passed by the ld. TPO/ld. DRP. 16. When we examine profile of L T from its financials, available at pages 6, 7 11 of the paper book, it is into providing application development and maintenance services providing digital solutions such as big data analytics, enterprise computing, cognitive computing, infrastructure management services and enterprise solutions. It has also been awarded and recognized by various forums for providing such niche services in the field of innovation in information technology category, analytics solutions/services etc., explained at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intellectual Properties) owned by GDA Inc. were transferred to LTTSL, the Company was wound up during the year. 6.7 In view of the above reporting, it is clear that under the telecom segment, the assessee was engaged in providing engineering services, which is distinct from the services of the software development. Thus, at entity level, the company cannot be considered functionally similar to the assessee. The company cannot be considered comparable at the segment level also because of there are expenses of Rs. 205,80,17,445/- ( page 129 of PB-2) , which has not been allocated into three segments, and thus the segmental result are distorted. 6.8 During the year, the extraordinary event of demerger of produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium pricing and huge volume of business ultimately leading to the higher profitability. So, we are of the considered view that L T is not a suitable comparable vis- -vis the taxpayer, hence ordered to be excluded. THIRDWARE SOLUTION LTD. (THIRDWARE) 40. The taxpayer sought exclusion of Thirdware on the ground that it is functionally dissimilar vis- -vis the taxpayer. However, on the other hand, ld. DR for the Revenue relied upon the orders passed by the ld. TPO/ld. DRP to retain this comparable. 41. Perusal of Notes - Additional Information and Profit Loss account, available at page 570 of the annual reports paper book, shows that it has income earned from sale of licence and provision of training service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of functional dissimilarity vis- -vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of functional dissimilarity being into providing outsourced product development services and Healthcare BPO services to its customers as per website extracted at pages 83 to 85 of the appeal memo set. It being a private limited company its financials are not available in the public domain. Its annual report made available at pages 848 to 909 of the annual reports paper book does not provide segmental profitability earned from software development services, outsourced product development services and Healthcare BPO services. 47. When we examine profit loss account at page 873 of the annual report paper book, software development and service charges are shown in composite manner with no segmental profitability. In these circumstances, we are of the considered view that Inteq is not a suitable comparable vis- -vis the taxpayer which is a ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viz., gesture computing, machine learning etc. Using the innovations of Persistent labs. The Ld.AR further submitted that this company partnered with IBM and have added an engineering team that is building products and tools for continuous lifecycle management and for digital transformation and has partnerships with various leading platform providers in Analytics, Big Data, Cloud, Mobile, Machine Learning, and IoT. He placed reliance on page 1672 1676 1708 of the annual report paper book. The Ld.AR submitted that as a part of Aepona acquisition, this company acquired development centers in Belfast, UK and in Colombo, Sri Lanka during the year under consideration. He placed reliance on page 1706 of the annual report paper book. He thus prayed for exclusion of this company from the final list. The Ld.AR submitted thus submitted that Persistant Systems Ltd, is not functionally similar with that of assessee who is a captive service provider to its AE. 8.6 Infosys Ltd.: It is submitted that this company is functionally dissimilar to the assessee on various counts, and therefore, it ought to be rejected from the final list of comparables. It is submitted that the Ld.TPO erred rejected co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia Pvt. Ltd. vs. Addl. CIT reported in (2022) 136 taxmann.com 52. 2. Decision of coordinate bench of this Tribunal in case of OLF India Software Pvt.Ltd. vs. ACIT in IT(TP)A No.182/2021 by order dated 28/09/2022 for A.Y. 2016-17. 3. Decision of Hon ble Hyderabad Tribunal in case of Infor (India) Pvt. Ltd. vs. DCIT in ITA-TP.No. 198/Hyd/2021 by order dated 06.10.2021 for A.Y. 2016- 17. On the contrary, the Ld.CIT.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. Before us, the Ld.DR has not been able to place anything on record contrary to the above submissions by the Ld.AR. We of the view that with such varied functions, these companies cannot be compared with assessee before us, which is a captive service provider. We accordingly direct the Ld.AO/TPO to exclude Persistent Systems Ltd., and Infosys Ltd. from the final list. 8.7 Aspire Systems (India) Pvt. It is submitted that, this company is functionally not comparable with the assessee as it earns income from power generation. The Ld.AR placed reliance on page 127 of Annual Report. The Ld.AR submitted that, the company owns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igence and data science services and also providing related IT services. The Ld.AR submitted that, software-consulting services include end-to-end solutions, onsite management and IT functions, and planning system designing, which are in no way comparable to the captive software development activities as provided by the assessee. The Ld.AR further submitted that, this company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. And that, during the FY relevant to assessment year under consideration, this company acquired GNet Group LLC, a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd., specialising in ERP and enterprise innovation. The Ld.AR submitted that, these acquisitions are bound to have a significant impact on the financials of the company. The Ld.AR thus submitted that, for all the above reasons this company cannot be considered to be comparable with. He relied on the decision of Hon ble Mumbai Tribunal in case of Red Hat India Pvt. Ltd. v. ACIT (supra) On the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee in Red Hat India Pvt. Ltd. v. ACIT (supra) was a captive service provider to its AE for assessment year 2016- 17. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Red Hat India Pvt. Ltd. v. ACIT (supra). We are of the view that, based on the functions performed by this company as submitted by the Ld.AR and the observations of Hon ble Mumbai Tribunal , this comparable deserves to be excluded from the final list. We therefore respectfully following the above view, direct the Ld.AO/TPO to exclude Nihilent Technologies Ltd from the final list. 8.9 Cybage Software Pvt.Ltd. It is submitted that this company is engaged in the provision of diversified services which include product engineering, testing quality assurance services, specialized services, support services, etc. It is submitted that this company is engaged in product development and has developed a product called excelshore apart from providing spectrum of services including ITeS and BPO services and that segmental information of the diverse business functions undertaken by the company is not available. The Ld.AR submitted that this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. 11. This Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (supra) , 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-j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 ex cluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 12. Coordinate bench of this Tribunal in the case of Barracuda Networks India (P.) Ltd. vs. DCIT reported in [2021] 131 taxmann.com 337 excluded comparables from the final list for having high turnover more that 200 crores. 12. On the issue of application of turnover filter, we have heard the rival s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its 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, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee's turnover was around Rs. 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs. 200 crores as not comparable with the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income-tax Rules, 1962 ('Rules') via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of 'ALP' is done under the MAM being resale price method ('RPM'), cost plus method ('CPM') or transactional net margin method ('TNMM'). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable uncontrolled transaction undertaken in the financial year immediately preceding the current year; 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 aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that, - (i) The enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Company R.S. Software (India) Ltd., for the three financial years were 2013-14 to 2015-16 were 24.14%, 32.75% and - 2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to section 10CA(2) of the Rules provides for a situation where R.S. Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014-15 2015-16, then the weighted average of the two financial year 2014-15 and 2015- 16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to section 10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S. Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to Rule 10CA(2) of the Rules, R.S. Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014-15 because in those years, the turnover of this company was more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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]; ** (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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence on the determination of transfer prices in relation to the transactions being compared . If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of Rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of Rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly. The assessee in Barracuda Networks India (P.) Ltd. vs. DCIT. (supra ) was a captive service provider to its AE for assessment year 2016-17. Respectfully following the above, we direct Ld. AO/TPO to exclude Tech Mahindra Busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No. 7 is treated as allowed for statistical purposes. Respectfully following the above view, we remit the comparables back o the Ld.AO/TPO for fresh consideration in the light of information available in public domain. Accordingly this ground stands allowed for statistical purposes. 16. In Ground No.11 the assessee is seeking inclusion of following comparables under SWD segment, that was provided before the transfer pricing proceedings: Yudiz Solutions Pvt.Ltd., E-Zest Solutions Ltd., Smartcloud Infoservices Pvt.Ltd As these comparables have not been considered by the Ld.AO/TPO, we remand these comparables for fresh consideration. Accordingly this ground stands allowed for statistical purposes. 17. Ground No. 12 to 14 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t American (India) (P.) Ltd. (supra) on the same issue is as under: 15. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession , where as monies spent under section 80G are claimed while computing Total Taxable income in the hands of assessee. The point of claim under these provisions are different. 16. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, Income from Business and Profession . 17. For claiming benefit under section 80G, deductions are considered at the stage of computing Total taxable income . Even if any payments under section 80G forms part of CSR payments( keeping in mind ineligible deduction expressly provided, the same would already stand excluded while computing, Income under the head, In ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
