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TMI Blog2019 (4) TMI 1757X X X X Extracts X X X X X X X X Extracts X X X X ..... to 500 crores falling in another category and so on It would be appropriate while choosing comparable companies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than 1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. This tribunal in Assessee s own case for AY 2013-14 has upheld similar contention. For the reasons given above, we uphold the order of the CIT(A). Direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. Assessee, at the time of hearing submitted that, if turnover filter is applied to exclude high turnover companies, then PLI determined by the TPO is within + 3% range, therefore, other grounds of appeals becomes academic in nature, and does not require specific adjudication. X X X X Extracts X X X X X X X X Extracts X X X X ..... lief to assessee for delayed payment of employee's monthly contribution towards PF/ESI, which are required to be considered as income u/s 36(1)(va) and thë amendment to the provisions of section 431B-including the deletion of the second proviso by the Finance Act, 2003 w.e.f. 2004 has no relevance in this regard. 7. Leave may be granted to add, alter, delete or modify any of the grounds during the appeal stage." 3. The assesse has raised the following grounds in its cross-objection: On the facts and circumstances of the case and in law and without prejudice to the directions passed by the Dispute Resolution Panel: "1. The Dispute Resolution Panel ('DRP") has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming the action of the learned Assessing Officer ("AO)/Transfer Pricing Officer ('TPO") of not accepting the economic analysis undertaken by the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and conducting a fresh economic analysis for the determination of the arm's length price of the international transaction entered by the Respondent 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transaction has to be determined having regard to Arms Length Price (ALP). 5. As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of ₹ 17,56,78,482/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction is at Arm's Length, the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was ₹ 17,56,78,482. The Operating cost of the Assessee was ₹ 15,27,63,874/-. The operating profit was thus ₹ 2,29,14,608 and thus OP/OC was 15%. The Assessee in its TP Study had chosen 13 companies as comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed with the TPO on some of comparables chosen by the TPO on different criteria. Finally, the following comparable companies remained as comparable companies after the order of the DRP. 9. Aggrieved by the order of the DRP in deleting some of the comparables chosen by the TPO, the revenue has raised Gr.No.1 to 5 before the Tribunal. Aggrieved by the action of the TPO in retaining some of the comparable companies chosen by the TPO which were objected as not comparable by the Assessee before the DRP, the Assessee has filed Cross-objection before the Tribunal. 10. We shall first take up for consideration Gr.No.2(b) raised by the Assessee in its cross objection, viz., the objection that the AO applied lower turnover filter of ₹ 1 Crore and rejected companies with turnover of less than ₹ 1 crore from the list of comparable companies and by the same logic he ought to have excluded companies with high turnover from the list of comparable companies (companies having turnover of ₹ 200 crores and above). If that ground is adjudicated two out of the 4 companies which remain after the order of the DRP, viz., Persistent systems Ltd. and Saken Communications Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee's turnover for the relevant previous year was ₹ 10.65 crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than ₹ 1 Crore. The contention of the Assessee before the CIT(A) 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 companies. The CIT(A) agreed with the submission of the Assessee and he excluded the following 5 companies whose turnover was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding companies with low turnover of say ₹ 1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of ₹ 139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was ₹ 21140 crores but its profit margin was only 44.91%. According to him therefore the profit margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ₹ 1 crore to ₹ 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 the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon'ble Court however at page 218 of the report (the said decision is reported as 376 ITR 183 (del)) observed that the mere circumstance that a company-otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not "materially affect the price …….……… or cost". Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon'ble Delhi High Court in so far as it relates to application of turnover filter are obiter dictum. Obiter dic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over filter that are contrary to the decision rendered in the case of M/s. Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon'ble Supreme Court in the case of Union of India Vs. Raghubir Singh AIR 1989 SC 1933, Union of India Vs. S.K. Kapoor (2011) 4 SCC 589 and Sundeep Kumar Bafna Vs. State of Maharashtra and another (2014) 16 SCC 623. In the aforesaid decisions the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt.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 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. Resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold 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)." 13. Following the aforesaid decision of the Tribunal, we hold that it would be appropriate while choosing comparable companies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than ₹ 1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. This tribunal in Assessee's own case for AY 2013-14 in IT (TP)A.No.2046/Bang/2017 has upheld similar contention. For the reasons given above, we uphold the order of the CIT(A). 14. We, therefore, direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. The ld AR for the assessee, at the time of hearing submitted that, if turnover filter is applied to exclude high turnover companies, then PLI determined by the TPO is within + 3% range, therefore, other grounds of appeals becomes academic in nature, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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