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TMI Blog2022 (7) TMI 1372X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld.AO/TPO based on the annual reports. TPO shall consider these comparables after verifying the FAR of these comparables with that of assessee. Accordingly, Batchmaster Software Pvt. Ltd., DCIS DOT COM Solutions India Pvt. Ltd. and Evoke Technologies Ltd. for denovo consideration to Ld.AO/TPO. Sagarsoft (India) Ltd and Akshay Software Technologies Ltd - We note that above two comparables has not been verified by the Ld.AO/TPO in detail. We are therefore remanding these comparables also to the Ld.AO/TPO for a denovo verification. Working Capital Adjustment - This Bench referred to decision of Special Bench of this Tribunal in case of Instrumentation Corpn. Ltd. [ 2016 (7) TMI 760 - ITAT KOLKATA] held that outstanding sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. Alternatively, it also argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables as loans and advances to associated enterprise would amount to double taxation. As relying on ORANGE BUSINESS SERVICES INDIA SOLUTIONS PVT. LTD. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (lending) 1352,43,252 TNMM Withholding from employees and payment on their behalf for purchase of stock under ESPP Scheme 37,52,919 TNMM Total 2704,86,504 37,52,919 2742,39,423 2.3 The Ld.TPO noted that assessee computed its margin at 11.69% by using OP/OC as the PLI and TNMM as the most appropriate method. 2.4 The Ld.TPO noted that assessee selected 16 comparables with an average margin of 9.59% and held the transaction to be at arms length. 2.5 Dissatisfied with the comparables selected by the assessee, the Ld.TPO applied various filters and rejected 10 comparables chosen by the assessee. The Ld.TPO selected a set of 20 comparables with an average margin of 21.24% and computed the adjustment being shortfall at Rs.1,75,34,230/- for the SWD segment. Following were the comparables chosen by Ld.TPO. 2.6 The Ld.TPO thereafter observed that assessee had outstanding trade receivables and therefore computed notional interest by using six months LIBOR rate + 450 basis points and bench marked the transaction by applying interest at 5.975%. The Ld.TPO thus proposed following adjustment in the hands of the assessee. S.No Description Adjustment u/s 92CA(In Rs.) 1 Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the comparability of the comparables sought for inclusion / exclusion by the assessee in Ground nos. 1,2 (partly). 11. Ground no. 1 - The Ld.AR submitted that following are the turnover of the comparables sought for exclusion in ground no.1. 1. L&T Infotech Ltd. - Rs. 6183 crores 2. Persistent Systems Ltd. - Rs. 1720 crores 3. Tata Elxsi Ltd. - Rs. 1201 crores 4. Infosys Ltd. - Rs. 59,257 crores 5. R Systems International Ltd. - Rs. 264 crores 6. Nihilent Technologies Ltd. - Rs. 259 crores 7. Cybage Software Pvt. Ltd. - Rs. 759 crores 11.1 He submitted that these comparables are not at all similar even in functions with that of the assessee as they have product segment without segmental details available. It is the submission of the assessee that these comparables are involved in various research and development activities that generate huge intangibles. 11.2 The Ld.AR submitted that in case of the present assessee, the turnover for year under consideration is only 13 crores and it is a captive service provider rendering services only to its AE. The Ld.AR submitted that the business profile of the activities carried out by the assessee is no way a match with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP. 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered 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. v. Dy CIT [2018] 89 taxmann.com 44, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software (P.) Ltd. v. Dy. CIT [2016] 67 taxmann.com 243 wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. (supra) and the decision to the contrary in the case of CIT v. Pentair Water India (P.) Ltd ., [2016] 69 taxmann.com 180/381 ITR 216 (Bom.) wherein it was held that high turnover is a ground to exclude a company from the list of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover 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 Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are 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 (P.) Ltd. v. Dy. CIT [2018] 96 taxmann.com 263 (Bang-Trib), 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5- 8-2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding coordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea 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 favourab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a "range concept" for determination of ALP and "use of multiple year data" for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will 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 Incometax 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial year undertaken the same or similar comparable uncontrolled transaction then,- (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled transaction undertaken by R.S. Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to section 10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparables of TPO given in paragraph-4 of this order, the profit margins 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 rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, 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 subclause (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]; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that "if such data reveals facts which could have an influence 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 har ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)." 4.2.1 In view of the judicial pronouncements, cited supra, we direct the AO to exclude Larsen & Toubro Infotech Limited, Mindtree Limited, Persistent Systems Limited, Tata Elxsi Limited, Nihilent Limited, Infosys Limited and Cybage Software Private Limited from the list of comparables, since the said companies are having turnover far exceeding Rs.200 crore for the relevant assessment year. It is ordered accordingly. 4.3 In the result, ground 6(iii) is partly allowed." 12.1. Nothing has been placed by the Revenue to deviate from the above view taken by the coordinate bench of this Tribunal in Zynga Game Network India (P.) Ltd. (supra). Respectfully following the above, we direct Ld. AO/TPO to exclude Tata Elxi Ltd (Seg.), Mindtree Ltd., Larsen and Toubro Infotech Ltd., RS Software (India) Ltd., Persistent Systems Ltd., Nihilent T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Bang/2019. He submitted that this comparable cannot be rejected merely because it had incurred loss in two out of three preceding years. 13.6 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. 13.7 We note that above two comparables has not been verified by the Ld.AO/TPO in detail. We are therefore remanding these comparables also to the Ld.AO/TPO for a denovo verification. 13.8 The principles laid down by this Tribunal in various cases shall be kept in mind while considering the comparability of all these with that of assessee, having regards to the FAR analysis. Accordingly Ground no. 2 raised by assessee stands partly allowed for statistical purposes. 14. Ground nos. 7-9 is in respect of Working Capital Adjustment. 14.1 The Ld.TPO computed interest on outstanding receivables at the rate equal to 5.975% on receivables that exceeded 90 days as per the directions of the DRP. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 14.2 The Ld.AR placed reliance on decision of Hon'ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt arising during course of business becomes international transactions, calling for computing its ALP. He referred to decision of Hon'ble Delhi Tribunal in Ameriprise (supra), in which this issue has been discussed at length and eventually interest on trade receivables has been held to be an international transaction. Referring to discussion in said order, it was stated that Hon'ble Delhi Tribunal in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., reported in (2013) 215 Taxmann 108 (Bom.), which dealt with question of law: "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon'ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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