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TMI Blog2020 (11) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... B. R. Baskaran, Accountant Member And Smt. Beena Pillai, Judicial Member Assessee by: Shri Aliasgar Ramprewala, C.A Respondent by: Shri Muzaffar Hussain, CIT (DR) ORDER Beena Pillai, Present appeal has been filed by assessee against final assessment order dated 10/10/2017 passed under section 143(3) read with section 144C(13) of the Act, by Ld.DCIT Circle 1(1)(2) for assessment year 2013-14, on following grounds of appeal: "1. That the order of the learned of Deputy Commissioner of Income-tax, Circle - 1(1)(2), Bangalore ("learned Assessing Officer" or "learned AO") pursuant to the directions of the Hon'ble Dispute Resolution Panel ("Hon'ble DRP") to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That on the facts and circumstances of the case, the Hon'ble DRP erred in upholding the approach of the Deputy Commissioner of Incometax, Transfer Pricing -i(i)(i) ("learned TPO") in not accepting the Transfer Pricing ("TP") Study/economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rule, 1962 ("the Rules" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Sasken Communication Technologies Limited, as a comparable on the groufe of functional dissimilarity, whereas this comparable company is functionally similar her should have been included. 10. That the Hon'ble DRP erred in upholding the approach of the learned TPO, in law and in facts by including CG - VAK Software and Exports Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the correct operating margin is to be considered. ii. That the l-lon'ble DRP erred in upholding the approach of the learned TPO, in law and in fact by including ICRA Techno Analytics Limited, as a comparable whereas this company should have been excluded on ground of functional dissimilarity and it fails related party transactio] filter of 25% applied by the learned TPO. Additionally, without prejudice to the above contention, the learned TPO has earned in margin computation of the comparable, hence the crfr operating margin is to be considered. 12. That the Hon'ble DRP erred in upholding the approach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The grounds mentioned herein are without prejudice to the grounds mentioned in Appeal No.: 2979/Bang/2017 dated December 12, 2017. Transfer Pricing Related 1. On the facts and in the circumstances of the case and in law the learned Transfer Pricing Officer ('TPO') / the learned Deputy Commissioner of Income Tax, Circle 1(1)(2), Bangalore ('Assessing Officer' or 'AO') / the Dispute Resolution Panel, erred in not applying the turnover filter for selection of comparable companies for benchmarking the international transaction of Software Development Services and Information Technology Enabled Services rendered by the Appellant to its Associated Enterprises. The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing." 3. Ld.AR submitted that failure to raise this ground at an earlier stage was not willful and that no new facts needs to be investigated upon in order to adjudicate these grounds. It has been submitted that by way of abundant caution assessee raises exclusion of certain comparables on tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide application dated 13/010/2020 is fundamental to the appeal and the nonadmission of the same would result in an incomplete appreciation and adjudication of the matter. Accordingly, the additional ground raised vide application dated 13/10/2020 stands admitted. 12. Ld.AR at the outset submitted that in the even certain comparables are considered for exclusion/inclusion under both the segments the other grounds becomes academic. 13. He submitted that, Ground Nos. 1-6, 9, 11 and 14 are not pressed by assessee. Accordingly, these Ground Nos. 1-6, 9, 11 and 14 are dismissed as not pressed. 14. Ld.AR submitted that, under SWD segment, assessee wish to argue upon following comparables for inclusion raised in Ground 7, 8 being; • Akshay software technologies Ltd. • Evoke Technologies Pvt. Ltd. 15. In Ground 10, 12, 13 assessee alleges following comparables for exclusion being: • CG-VAK Software and Exports Ltd. • Larsen and Toubro Infotech Pvt Ltd. • Persistent Systems Ltd. 16. Ld.AR submitted that, in respect of ITeS services, assessee wishes to allege following comparables for exclusion raised in Ground 15-17. He submitted that these compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Margin 1. Caliber Point Business Solutions Ltd., 9.82 2. Cosmic Global Ltd. 25.41 3. e4e Healthcare Business Services Pvt. Ltd., 13.46 4. ICRA Techno Analytics Ltd., 19.59 5. Informed Technologies India Ltd., 10.87 6. Jindal Intellicom Ltd., 5.17 7. Techprocess Solutions Ltd., -0.24 Average Margin 12.01% 20. Ld.TPO rejected the TP study carried out by assessee and the filters applied by assessee to shortlist the comparables. Ld.TPO instead carried out fresh search and finalised following set of comparables under both segments: SWD Segment S.No. Comparables Margin 1. CG-VAK Software Exports Ltd. 20.54% 2. ICRA Techno Analytics Ltd. 17.10% 3. Larsen & Toubro Infotech Ltd. 26.06% 4. Mindtree Ltd. (Seg) 18.19% 5. Persistent Systems Ltd. 28.27% 6. RS Software (India) Ltd. 17.41% 7. Tech Mahindra Ltd (Seg) 18.72% Average Margin 20.90% ITES Segment S.No. Comparables Margin 1. Acropetal Technologies Ltd. 24.16 2. Microgenetic Systems Ltd. 16.34 3. Jindal Intellicom Ltd. -3.00 4. Hartron Communications Ltd (Seg) 44.07 5. Microland Ltd. 8.62 6. Capgemini Business Services (India) Pvt. Ltd. 26.78 7. Tech Mahindr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and related documentation. It has been submitted that on finalisation of courts, it also undertakes systems testing which includes unit level testing and integration testing. For rendering such services, assessee has entered into an agreement with Cimnet Inc on 01/07/2003 and with Consona Corporation on 01/01/2011. Functions: 28. Functions performed by assessee under this segment includes unit level testing and integration testing on specified parameters. Once the software is developed and tested, it is given to AE which then undertake the integration of the software into the system. The software thus integrated and bundled with the products are sold in the market. It has been submitted in the TP analysis that assessee undertakes Ltd functions under this segment and is compensated on a cost plus basis. Business process outsourcing services: 29. Assessee provides BPO service to its AE, Cimnet LLC pursuant to agreement dated 01/11/2004. Under this segment services include back-office support and designing of printed circuit boards. Functions: 30. Functions performed by assessee under this segment include Quote Data Processing, front-and engineering , PreCAM and post-CAM s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "17. We heard the parties on this issue and perused the record. We notice that the TPO has obtained information u/s 133(6) of the Act from M/s Akshay Software Technologies Ltd, as per which it is engaged in providing professional services, procurement, installation, implementation and support & maintenance of ERP products and services. In the case of Mercedes-Benz Research & Development India (P.) Ltd. (supra), we notice that the co-ordinate bench has considered the nomenclature of "income from software services" given under the head "Revenue from Operations" , which mentioned that the Income from software services was ₹ 19.83 crores. Now the dispute boils down to the nature of functions performed by this company. It is the responsibility of the assessee to show that both the assessee and the comparable company perform similar functions. Before us, the Ld A.R placed her reliance on the decision rendered by co-ordinate bench in order to contend that this company is comparable. However, TPO has issued notice u/s 133(6) of the Act to the above said company and collected the details of functions performed by it, wherein the nature of activities performed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Ld.AO/TPO did not dispute that this comparable is providing SWD services. This is contrary to what is observed by DRP. 45. Under such circumstances, we deem it necessary to remand this comparable to Ld.AO/TPO. It is also directed that necessary details may be called for to verify the FAR with assessee. In the event it is found to be carrying SWD services during relevant period, and segmental details are available, the same may be considered for purpose of computing margin ALP. 46. In Ground 10 assessee alleges exclusion of CG-VAK Software and Exports Ltd. for being functionally not similar with that of assessee. CG-VAK Software and Exports Ltd. 47. Ld.AR submits that assessee seeks exclusion of this comparable for being functionally different with that of assessee. Ld.AR submitted that there are no segmental information is available in respect of this company. In support of his argument he placed reliance upon decision of coordinate bench of this tribunal in case of Tavant Technologies India Pvt.Ltd vs DCIT reported in (2020) 120 taxmann.com 122. 48. On the contrary Ld.Sr.DR placed reliance on orders passed by authorities below. 49. We have perused submissions advanced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed (ITA No. 2122/Hyd/2017 for assessment year 20132014). Vide order dated 20-11-2018, the Tribunal held as under:- "16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Ltd and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables. " 24.1 Similarly, in the case of M/s. ION Trading India Private Limited v. ITO (ITA No. 1035/Del/2015 for the assessment year 2010-2011). The Tribunal vide its order dated 7-12-2015, held as under:- "21. We have considered the submission of the Id. counsel for the assessee and have considered the argument of the ld. DR that the assessee is not producing any product, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal observed and held as follows: "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 nonjurisdiction High Court, even though the said decision is of a nonjurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id 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)." 54. Respectfully following the same, we also hold that turnover is a relevant criteria for considering comparables. Accordingly additional ground raised by assessee stands allowed. Assessee has alleged comparables for exclusion in Grounds 12-13 and 15-17 by applying turnover filter. We have upheld the turnover filter in that aforestated paragraphs, and that these comparables are admittedly more than 200 crores, we are of the opinion that they cannot be included in the final list for computing the arm's length margin. Accordingly grounds 12-13 and 15-17 stands allowed. Addit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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