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TMI Blog2022 (6) TMI 1334X X X X Extracts X X X X X X X X Extracts X X X X ..... vices and ITeS was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services and ITeS to the AE. 3. As far as the provision of Software Development services are concerned, the assessee filed a Transfer Pricing Study (TP Study) to justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 30.89% 9. Infobeans Technologies 34.98% 20.78% 41.95% 32.42% 10. Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 11. Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 12. Aspire Systems (India) 34.26% 47.56% 38.04% 39.28% 13. Cybage Software Pvt. 62.90% 68.68% 68.82% 66.45% 35th Percentile 24.83% Median 28.20% 65%th Percentile 32.42% 5. The TPO computed the Addition to total income on account of adjustment to ALP as follows: "22.4. Computation of Arm's Length Price: 22.4.1 The median of the weighted average Profit Level indicators is taken as the arm's length margin. Please see Annexure A for details of computation of PLI of the comparables. Based on this, the arm's length price. of the services rendered by the taxpayer to its AE(s) is computed as under: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 82,52,62,269 Taxpayers operating cost OC 71,35,24,740 Taxpayers operating profit OP 11,17,37,529 Taxpayers PLI PLI=OP/OC 15.66% 35th Percentile Margin of comaparable set 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shay Software Ltd. (b) Sagarsoft (India) Limited. (C) Evoke Technologies Limited. (d) Sankya lnfotech Limited. 8. As far as Ground No. 4 is concerned, the learned Counsel for the assessee prayed for exclusion of 7 companies set out in Ground No.6. The relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 9. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing 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 Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference." 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per 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 excluding companies by following the ratio laid down in the case of Genisys In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 21. As far as exclusion of this company R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15% as projected in Ground No.7(b) of the concise grounds of appeal is concerned, we find that the admitted position with regard to related party transaction in this case is 17.52% as evident from page-100 of Form No.35A being the grounds of objection before the DRP by the Assessee. The DRP in its order proceeded on the basis that the threshold limit for application of the Related Party Transaction filter (RPT filter) would be 25% of the total transaction. The Hon'ble Karnataka High Court in its Judgment 28-06-2018 in I.T.A.No.684/2017 & I.T.A..No.685/2017 Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Yodlee Infotech Pvt Ltd., had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 17 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs." 6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed and are dismissed accordingly. 22. We are of the view that the facts of the Assessee's case is similar to the case decided by the Hon'ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon'ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly. Respectfully following the aforesaid decision, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and professional services. As segmental information is not available for the same, we consider it appropriate to hold that this company is not functionally comparable to the assessee. Accordingly. fire exclusion of this company is upheld." 18. The learned Counsel for the assessee relied on the following decisions in support of his plea for inclusion of this company as a comparable company: Global Logic India Ltd. vs. ACTT [2020] 117 taxmann.com 640 (Delhi - Trib.)-AY 2015-14 LSI India Research & Development (P.) Ltd. vs. DCIT [2021] 124 taxmann.com 83 (Bangalore - Trib.)-AY 2014-IS ARM Embedded Technologies (P.) Ltd.-es. DCIT [2021] 129 taxmann.com 263 (Bangalore - Trib.)-AY 2013-14 19. We find that in the decision cited, the TPO himself accepted this company as a comparable company and there was no dispute whatsoever. In the other decisions which were in relation to different Assessment Years, the facts were totally different. In the present case, the assessee has not been able to demonstrate availability of segmental information. The learned Counsel has drawn our attention to page No.3396 of the Paper Book which is notes forming part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the financials of this company included 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 Pvt. Ltd., Vs. DCIT (2019) 109 taxmann.com 435 (Hyderabad - Tribunal) wherein it was held that availability unaudited 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. 22. The assessee pressed for inclusion of Sankhya Infotech Ltd., as a comparable company. The TPO rejected this company on the ground that it was functionally different and the DRP confirmed the order of the TPO. Learned Counsel for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P-OR 40,00,338 24. The DRP confirmed the order of the AO. In so far as the determination of ALP in the ITeS segment is concerned, the concise ground which was pressed for adjudication is ground No.10 with regard to exclusion of certain companies on the basis of huge turnover and ground No.11b with regard to exclusion of Bhilwara info Technology Ltd. Apart from the above, the assessee seeks inclusion of 2 comparable companies in ground No.12. Grounds 10, 11b and 12 raised by the assessee read as follows: 10. The Learned TPO/Hon'ble DRP erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: (a) Tech Mahindra Business Services Ltd. (b) Infosys B P M Ltd. (c) S P I Technologies India Pvt. Ltd (d) Eclerx Services Ltd. 11. The Learned TPO/Hon'ble DRP erred in facts and in law in including: (b) Bhilwara Info Technology Limited (Seg) even though the same was not proposed by the TPO as a comparable during the proceedings under section 92CA. 12. The Learned TPO/Hon'ble DRP erred in excluding the following companies even though they are comparable to the appellant: (a) Sundaram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... afresh in the light of the directions given by the DRP. 28. The next ground to be considered is ground No.12 raised by the assessee with regard to inclusion of 2 comparable companies. As far as the first comparable company viz., Sundaram Business Services Ltd., is concerned, the TPO rejected this company on the ground that this company was making persistent losses and this was upheld by the DRP. It is the submission of the learned Counsel for the assessee that this company did not suffer losses in the 3 consecutive Financial Years 2014-15, 2015-16 and 2016-17. We have already held while discussing a similar ground in the SWD services segment that the company can be excluded on the ground of persistent loss making company only in the 3 previous financial years the company has made financial losses. Since this company is stated to have made profit in the 3 Financial Years, it cannot be excluded on the ground of persistent loss making company. We are of the view that this issue requires re-examination by the AO in the light of the directions given above after affording due opportunity to the assessee. 29. The next company which the assessee seeks to include is Informed Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h consideration. The assessee will furnish the required details before the AO/TPO adopting the internal CUP method and the TPO will decide the issue afresh after affording adequate opportunity of being heard to the assessee. 32. Apart from the above grounds which were pressed in the concise grounds of appeal, the assessee has also prayed for adjudication of ground Nos.15 and 16 in the original grounds of appeal which reads as follows: 15. The Learned AO erred in making an adjustment of Rs. 3,59,722/- under section 28(1)(iv) is not permissible as per the Act and the same is to be quashed, for the below mentioned reasons: 15.1 The Learned AO failed to understand the nature of the transaction between the appellant and its customer viz., Remote Diagnostic Technologies (RDT'). 15.2 The Learned AO erred in making an erroneous interpretation of the fact that the equipmet received from its customer (RDT) was a benefit/ perquisite envisaged in section 28(1)(iv) the Act without understanding the nature of the service. 15.3 The Learned AO erred in understanding the fact that the appellant has received the equipment from RDT for testing the functionality of IT services provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the above extent. During the previous year, the assessee imported materials worth Rs.12,44,851 and could provide invoices only to the tune of Rs.8,68,116 and hence the AO made the addition of Rs.3,76,735 being the value of invoices not provided. Before DRP, the assessee submitted that during assessment proceedings, the assessee had requested the AO to provide the information on imports made during the AY 2016-17, having assessable value of Rs.12,44,851 and duty paid of Rs.3,58,429 on it. In this regard, the assessee provided the information on imports to the extent of Rs.8,68,116 vide its submission dated December 13, 2019. Upon checking the books of accounts, the assessee came to know that the actual value of imports made during the AY 2016-17 was Rs.13,16,225 and the duty paid was Rs.3,58,429. Given this, the assessee provided below the import information for the balance assessable value of Rs.4,48,109 along with the purpose for which these have been imported before the DRP. Date Name of the Supplier Assessable Value (Rs) Description of Goods/Equipment Purpose of Import 31/03/2016 Teledyne instruments 2,21,748 PC BD Assy Heater controller, cable ASSY MDL 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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