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TMI Blog2020 (8) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... ile of Ld. AO/TPO for undertaking exercise afresh by selecting fresh set of comparable companies in respect of software R D segment. Accordingly, we set aside the order passed by Ld. AO on this issue and restore the same to his file for examining the issue afresh in the light of discussions made supra. We direct learnt Ld.TPO to undertake fresh search analysis having regards the above observations and the view taken by this (Tribunal) in assessee s own case for immediately preceding and succeeding assessment years. Assessee is directed to file all relevant information/details to assist Ld. AO/TPO for determining arms length price of the transaction in accordance with law. Appeal filed by assessee stands allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... 962 [the Rules"] and had selected the set of uncontrolled companies based on a detailed Functional, Asset and Risk ("FAR') analysis following a methodical benchmarking process by rejecting such uncontrolled comparable companies identified and instead proceeding to undertake a fresh search for identifying comparable companies; 7. Without prejudice to the above, the learned TPO has erred on facts and in law and thereby contradicting his own stand in the earlier year, in re-computing the segmental results of margins earned by the eligible assessee on Software R&D Services by treating the depreciation on intangible assets as operating in nature; 8. Without prejudice to the above, the learned TPO has erred on facts and in law, in re-computing the segmental results of margins earned by the eligible assessee on Software R&D Services by treating the income earned on foreign exchange fluctuation as non-operating in nature; 9. Without prejudice to the above, it is submitted that the learned TPO while conducting a fresh search for comparabtes has chosen to apply a filter for rejecting Companies whose Employee costs are less than 25%, which is arbitrary and necessarily d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the Appellant on an erroneous conclusion that its Functions not clear. 13. On the facts and in the circumstances of the case and in law, the Ld.AO has erred in initiating penalty under section 271 (1)(c) of the Act. 14. The appellant craves Leave of this Hon'ble Tribunal to add, alter, amend, delete or substitute such ground as may be necessary at the time of hearing. 15. Wherefore the Appellant prays that this Hon'ble Tribunal be pleased to allow the appeal and set-aside the orders passed by the authorities below to the extent which is against the appellant and pass such other order as this Hon'ble Tribunal deem fit and proper on the facts and circumstances of the case in the interest of justice and equity." Brief facts of the case are as under: 2. Assessee is a company engaged in the business of providing sales, marketing, research and development support services relating to whom business unit and its group company. It filed its return of income declaring total income of Rs.3,47,37,750/-. The case was selected for scrutiny and notice under section 142(1) was issued to assessee. In response to statutory notices authorised representative of assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover which cannot be compared to a contract company like assessee. 9. DRP while considering objections raised by assessee, deleted 2 comparables being Datametics Global Services Ltd., and ICRA Techno Analytics Ltd. DRP rejected assessee's objections in respect of remaining comparables selected by Ld.TPO. 10. Ld.AO thereafter passed final assessment order on receipt of DRP directions thereby making addition in the hands of assessee at Rs.8,61,19,385/-. 11. Aggrieved by addition made in the hands of assessee, appeal has been filed before this Tribunal. 12. At the outset, Ld.AR submitted that, amongst amended grounds raised by assessee, Ground 11, Additional Ground and Ground 12.4 are only pressed. Application of Additional Ground : 13. Ld.AR submitted that a specific ground has been raised by assessee by an application of additional ground wherein these comparables have been challenged for exclusion due to excessive turnover. Ld.AR submitted that these comparables were challenged before DRP on having high turnover, however a specific ground was inadvertently missed out to be raised before this Tribunal in original grounds of appeal. He submitted that Ground No.11 is Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been submitted in, Transfer Pricing study that, assessee performs functions like management functions, corporate service functions, marketing/business development function, conceptualisation and design of the product, functional specifications and requirement analysis, coding and documentation, project management, quality control, testing, integration. 16.3 It has also been submitted in TP study that, assessee has limited participation in conceptualisation and design as well as functional specifications and requirement analysis. 16.4 It has been submitted that AE determined is a functional specifications and requirement analysis of the products deliverable to the customer and approves the PRD prepared by assessee. 16.5 Further it is also been mentioned that assessee receives technical assistance coupled with regular reviews and feedback from AE both on chip designing and software development function. Also that the AE undertakes chip designing and coding of software in respect of modules/solutions not being developed by assessee. it has been submitted that, assessee and AE jointly undertake project management to ensure close coordination, quality control and minimal rework i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal of the revenue. 12. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: '(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of RS. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v.DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of RS. 1 crore to RS. 200 crores 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 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. Sec.92A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) to (d) (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international 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 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is RS. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v.CDIT, ITA No.1231/Bang/2010). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on observations of authorities below. 19.4 We have perused submissions advanced by both sides in light of records placed before us. 19.5 We note that this company renders mapping and Geo spatial services in the process of which it develops software. We refer to the observations of this (Tribunal) in case of (CGI Information Systems and Management Consultants Pvt. Ltd. vs ACIT) reported in [(2018) 94 Taxmann.com 97] which is as under: "35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X
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