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TMI Blog2022 (6) TMI 1350X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds are general, academic or not pressed by the ld AR during the course of hearing. Therefore these grounds do not warrant adjudication and hence dismissed. 2. The assessee is a subsidiary of Wibmo Inc., USA. The Wibmo group is a leader in mobile payments. The assessee is engaged in rendering software development and related support services to its AE. In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services were "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, any income arising from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orms the necessary R&D function and owns intangible of products developed. 2.4 A summary of the risks assumed by the taxpayer and its AE under software development services is as under: Risks Taxpayer AE Market risk NO YES Financial Risk NO YES Credit & Collection risk NO YES Technology obsolescence risk NO YES Foreign exchange fluctuation risk YES No Working Capital Risk NO. YES The FAR analysis serves as a foundation to characterize entities for the purpose of intercompany transfer pricing. Based on the analysis of the functions performed, assets employed and risks assumed, it is appropriate to characterize the taxpayer as a captive service provider which assumes minimal risks associated with the business of providing software development services." 5. The assessee has entered into the following international transaction with its AE during the year under consideration Particulars Amount in Rs. Provision of software development services Rs. 20,18,51,846/- Trade advances received Rs. 5,50,19,732/- 6. The assessee has adopted transactional net margin method (TNMM) as the most appropriate (MAM) for computing arms length price (ALP). Operating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. 14.50 4. Harbinger Systems Pvt. Ltd. 15.06 5. CG-VAK Software & Exports Ltd. 18.50 6. Pure Software Pvt. Ltd. 19.25 7. R S Software (India) Ltd. 20.87 8. Larsen & Toubro Infotech Ltd. 24.83 9. Nihilent Technologies Ltd. 26.36 10. Inteq Software Pvt. Ltd. 28.20 11. Persistent Systems Ltd. 30.89 12. Infobeans Technologies Ltd. 32.42 13. Thirdware Solution Ltd. 36.90 14. Infosys Ltd. 38.61 15. Aspire Systems (India) Pvt. Ltd. 39.28 16. Cybage Software Pvt. Ltd. 66.45 35th Percentile 19.25 Median 25.60 65th Percentile 30.89 8. The TPO accordingly arrived at the TP adjustment as per the below given workings Taxpayers operating revenue Rs. 20,18,51,846/- Taxpayer operating cost Rs. 17,55,30,585/- Taxpayers operating profit Rs. 2,63,21,261/- Taxpayers PLI 15% 35th Percentile Margin of comparables set 19.23% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set 25.60% Arm's length price Rs. 22,04,66,414/- Price received Rs.20,18,51,846/- Shortfall being adjustment u/s. 92CA 1,86,14,568/- 9. The DRP rejected the objections of the assessee and affirmed the adjustment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factual position is that the turnover of these companies (except R S software (India) Ltd) is more than Rs.200 Crores and the Assessee's turnover is only Rs.20,18,51,846/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The Assessee raised objections before the DRP that while the TPO excluded companies with low turnover, whereas he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The TPO excluded the companies with less than Rs.1 crore turnover is 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 DRP rejected the contention of the assessee by analyzing the turnover vs the profitability of one of comparables Infosys Ltd for prior years, to conclude that there is no direct impact on margin on account of turnover. The DRP also relied on several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits 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 classi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fully following the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks India Private Limited (supra) we hold that the companies whose turnover in the current year is more than Rs.200 crores needs to be excluded for the purpose of comparable companies. 16. The assessee is seeking exclusion of R S software (India) Ltd vide Ground No.4.12.1. In this regard the ld AR submitted that the company, during the financial years 2013-14 and 2014-15 had realised turnover of Rs. 351.88 crores and 345.51 crores, and profit margin of 24.14% and 32.75%, respectively. However, during the financial year 2015-16, the company realised a turnover of Rs. 171.41 crores, leading to loss of 2.09%. Therefore it was submitted that there is an apparent wide fluctuation in the margin of the company. The relevant details as computed by the TPO is extracted hereunder: *figures in crores FY 2015-16 FY 2014-15 FY 2013-14 Operating revenue 171.41 345.50 351.89 Operating cost 175.07 260.26 283.47 Operating profit -3.66 85.24 68.42 OP/OC -2.09% 32.75% 24.14% The ld AR argued that the wide fluctuations in profit suggest the existence of a peculiar economic circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and 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 Income tax Rules, 1962 ('Rules') via Notification 83 of 2015 which is the 16th amendment to the originally dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in subrule (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able uncontrolled transaction. Clause (i) to 1st proviso to Sec.10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled 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 Sec.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 Sec.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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) 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 sub-clause (iii); (v) the net profit margin thus established is then taken into account to arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing compared: A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual bad debts which were written off, and only an amount of Rs. 2,96,713/- represents the provision. The Assessing Officer proposed a disallowance of the entire sum of Rs. 19,22,610/- as being a mere provision. The DRP upheld the disallowance stating that (i) the Assessee has not written off the amount and the same is still outstanding; and (ii) the Assessee has not established that the amounts were disclosed as income in the previous years as required under Section 36(2) of the Act. 23. The ld AR reiterated the submissions made before the lower authorities. The ld AR also submitted that the amount of Rs. 16,25,897/- which is the actual write off done during the year under consideration was created as a provision in books of accounts for the assessment year 2014-15 and the same was also disallowed in the computation of income for the said assessment year. The ld AR drew our attention to the partywise list of actual bad debts as submitted before the DRP and the computation of income of the assessment year 2014-15. As regards the balance amount of Rs. 2,96,713/-, the ld AR submitted that the amount was inadvertently not added back while computing the taxable income. 24. The ld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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