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TMI Blog2021 (11) TMI 1144X X X X Extracts X X X X X X X X Extracts X X X X ..... said company is strictly not into software development services, ITES etc. Moreover Tech Mahindra Limited is having turnover far exceeding Rs.200 crore. Therefore, this company gets excluded by application of upper turnover limit also. ICRA Techno Analytics is excluded from the final list of comparables on account of functional dissimilarity. The said company is engaged in multifarious activities such as web development and engineering services etc. and the segmental details of the company is not available. Therefore, we hold that the CIT(A) is justified in excluding the above company. Negative Working Capital - HELD THAT:- Since the assessee in this case does not have working capital loans / borrowings and entails no working capital risks, the ratio decidendi in the case of e4e Business Solutions India Private Limited [ 2020 (12) TMI 1255 - ITAT BANGALORE] directly applies to the assessee and no working capital adjustment should be made. Therefore, the CIT(A) s conclusion that no negative working capital adjustment is to be made is correct and no interference is called for. - IT(TP)A No.128/Bang/2018, IT(TP)A No.331/Bang/2018 - - - Dated:- 16-11-2021 - Shri George Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,10,34,798 OP/OC 19.3% OP/OR 16.14% 4. In the TP study of the assessee, the ALP of the international transaction representing SWD services provided to the AEs is determined by applying Transaction Net Margin Method (TNMM) stated to be the Most Appropriate Method (MAM). The operating profits to total cost ratio is taken as a Profit Level Indicator (PLI) in TNMM analysis. The assessee by applying various filters, selected 11 companies as comparables at arithmetical means of 12.45%. Thus, the assessee sought to justify the price of of the SWD segment at arm s length since the assessee s margin was 17.39%. However, the Transfer Pricing Officer (TPO) rejected the TP study of the assessee. The TPO rejected some of the filters of the assessee and included some others. The TPO selected seven companies as comparables at the average margin of 20.90%. By adopting arithmetical means margin on cost at 20.90% and after providing for negative working capital adjustment of minus 3.02%, the TPO proposed ALP adjustment of Rs.2,20,43,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.56.38 crore whereas the turnover of L T Infotech Limited is Rs.3609.32 crore and Persistent Systems Limited is Rs.965.75 crore. The learned AR relied on the following orders of the Bangalore Bench of the Tribunal for exclusion of the above companies on account of application of upper turnover filter:- (i) Autodesk India Pvt. Ltd. (2018) 96 taxmann.com 263 (Bangalore) (ii) IGEFI Software India Pvt. Ltd. v. ACIT [IT(TP)A No.2614/Bang/2017 (order dated 04.09.2019) 7. The learned Departmental Representative, on the other hand, supported the orders of the TPO / CIT(A). 8. We have heard rival submissions and perused the material on record. The AO / TPO had excluded companies having turnover of less than Rs.1 crore, however, the AO / TPO has not put upper limit to turnover for exclusion of companies having high turnover. The company having very high turnover cannot be compared to the company like the assessee, whose turnover is only Rs.56.38 crore. This proposition has been accepted by the Hon ble Bombay High Court in the case of CIT v. Pentair Water Private Limited in ITA No.18/2018 (judgment dated 16.09.2015). The recent orders of the Bangalore Bench of the Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-jurisdiction 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 Pentair Water India (P.) Ltd. (supra) 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 Systems (I) (P.) Ltd. (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection raised by revenue cannot withstand the test of law. Accordingly 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 Technologies Ltd., Infosys Ltd., Cybage software Pvt.Ltd. for having high turnover as compared to a captive service provider like assessee. 8.1 As mentioned earlier, the turnover of the assessee is Rs.56.38 crore whereas the turnover of L T Infotech Limited is Rs.3609.32 crore and the turnover of Persistent Systems Limited is Rs.965.75 crore. Therefore, in view of the aforesaid reasoning, we direct the AO / TPO to exclude L T Infotech Limited and Persistent Systems Limited from the list of comparables. 8.2 In the result, ground No.11 is partly allowed. IT(TP)A No.331/Bang/2018 (Revenue s appeal) 9. Two issues are raised in this appeal, namely exclusion of two companies, i.e., (i) ICRA Techno Analytics, (ii) Tech Mahindra Limited, and Negative Working Capital Adjustment. We shall adjudicate the above issues as under: Tech Mahindra Limited 10. The above company has been excluded by the CIT(A) after detailed analysis o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consolidated report, it can be seen that the said company is strictly not into software development services, ITES etc. Moreover Tech Mahindra Limited is having turnover far exceeding Rs.200 crore. Therefore, this company gets excluded by application of upper turnover limit also. Hence, we see no reason to interfere with the order of the CIT(A) in excluding the above company from the list of comparables. It is ordered accordingly. ICRA Techno Analytics 12. The CIT(A) has excluded this company by holding that it is functionally not similar after detailed analysis of the annual report. The relevant finding of the CIT(A) in this regard reads as follow:- 9.1 ICRA Techno Analytics: The appellant has argued against inclusion of ICRA Techno Analytics.Ltd in the list of comparables by the TPO. The appellant has made detailed submissions to support Its ground of appeal that this company should not be considered as a comparable in its case for determination of ALP. The submission of the appellant is that the said company is functionally different as it is engaged in software development consultancy, engineering services, web development hosting as well as business ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding the above company from the list of comparables. Negative Working Capital 14. The CIT(A) has given a finding that the assessee is captive service provider and is operating on cost plus basis. Since the entire revenue of assessee was from its AE s, the CIT(A) held that negative working capital adjustment is not appropriate by relying on the order of the Bangalore Bench of the Tribunal in the case of Lam Research India Pvt. Ltd. v. DCIT in IT(TP)A No.1437 1385/Bang/2014 (order dated 30.04.2015). The relevant observation of the CIT(A) reads as follows:- 11.1 In relation to working capital adjustment, it is observed that the appellant is a captive service provider in the Software Development Segment. It is operating on cost plus basis and the entire revenue in this segment is from AE. So the decision of Bangalore Bench of ITAT in the case of Lam Research India Private Limited (supra) is squarely applicable to its case. This ground of appeal of the appellant is allowed. 15. Revenue being aggrieved, has raised this issue before the Tribunal. The learned DR had submitted that the financials of the assessee had mentioned borrowing during the year and therefor ..... 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