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TMI Blog2023 (4) TMI 674X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessment dated 25.8.2022 of ACIT, Circle 1 (1)(1) Bangalore, (hereinafter referred to as the Assessing Officer, AO in short) passed u/s.143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2018-19. 2. The Assessee in engaged in the business of provision of Software Development Services (SWD services) and Information Technology Enabled Services (ITeS), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ( AEs ). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an international transaction i.e., a transaction between two or more associated enterprises, either or both of whom are non-residents, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being heard, shall by order in writing determine the ALP in relation to the international transaction in accordance with provisions of section 92CA(3) and send a copy of his order to the Assessing Officer (AO) and to the assessee for finalization of assessment order. Section 92C(2) provides that the variation between the ALP and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been under taken shall be deemed to be the ALP. The AO passes a draft order of assessment against which, the Assessee has a right to file objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. Under section 144C(5), the Dispute Resolution Panel (DRP) shall issue the directions, as it thinks fit, for the guidance of the AO to enable him to complete the assessment after considering report of TPO. The AO passes a final assessment order on the basis of directions of the DRP. 3. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86 11.06 8.64 9.69 2 Harbinger Systems Pvt.Ltd. 12.69 12.80 9.46 11.65 3 Exilant Technologies Pvt. Ltd. 25.82 17.27 8.50 17.17 4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 5 Larsen Toubro Infotech Ltd. 20.78 19.21 17.14 18.94 6 Great Software Laboratory Pvt. Ltd., 17.88 23.87 17.31 19.73 7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19 8 Black Pepper Technologies Pvt. Ltd. 9.63 13.84 24.83 20.62 9 Mindtree Ltd. 26.11 20.12 18.41 21.21 10 Aptus Software Labs Pvt. Ltd. 27.67 24.83 15.16 22,70 11 AcewinAgriteck Ltd. 26.54 23.23 22.73 24.51 12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 13 Wipro Ltd. 27.27 26.38 27.03 26.83 14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 15 lnfobeans Technologies Ltd. 34.98 23.89 27.82 28.52 16 Nihilent Ltd. 24.46 30.8 35.11 30.17 17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18 Three sixty Logica Testing Services Pvt. Ltd. 48.46 36.63 26.2 36.58 19 Infosys Ltd. 38.29 38.79 35.27 37.38 20 Cybage Software Pvt. Ltd. 62.04 61.40 47.78 56.81 35th percentile 20.19 Median 23.60 65th percentile 26.83 7. The TPO computed the Addition to total income on account of adjustment to ALP as follows: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fobeans Technologies Ltd. 35 23.89 27.82 28.52 23 Nihilent Ltd, 24.5 30.2 35.11 30.17 24 Three sixty Logica Testing Services Pvt. Ltd. 48.5 36.63 26.2 36.58 25 Infosys Ltd. 38.3 38.79 35.27 37.38 26 Cybage Software Pvt. Ltd. 62 61.4 47.78 56.81 35th percentile 18.57 Median 20.41 65th percentile 22.7 10. The learned counsel for the Assessee prayed for exclusion of the following 9 companies out of the final list of 26 comparable companies that remain after DRP directions and in this regard raised ground No.10.5.1 of the original grounds of appeal, which reads as follows: 10.5.1. The Lower Authorities are not justified in failing to adopt the upper turnover filter of Rs. 200 crores that resulted in wrongful selection of following 9 companies selected by the TPO: 1) Tech Mahindra Ltd. 2) Larsen Toubro Infotech Ltd. 3) Mindtree Ltd. 4) Nihilent Ltd. 5) Persistent Systems Ltd. 6) Wipro Ltd. 7) Tata Elxsi Ltd. 8) Infosys Ltd. 9) Cybage Software Pvt. Ltd. 11. As far as Ground No.10.5.1 is concerned, 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: Dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if (i) none of the differences, if any, between the transactions being 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 (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 12. 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 interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 92CA(2) dated 01.03.2021. The TPO did not doubted the correctness of the said figures. The TPO apportioned non-AE revenue of Rs.103,25,71,529 between SWD AE (Rs.97,11,28,696) and ITES AE Segments (Rs.6,14,42,833). It is not in dispute that the revenue of Rs.103,25,71,529/- was earned from sale of software products of Rs.95,53,63,296/-, software services of Rs.6,88,88,808/-, sale of hardware of Rs.76,62,758/- and training services of Rs.6,56,667/-. These transactions were with non-AEs. The revenue from sale of software products of Rs.95,53,63,296/- and revenue from sale of hardware of Rs. 76,62,758/- are not related to either SWD AE segment or ITES AE segment. The international transaction of purchase and allied activities of software products from AEs have been accepted to be at ALP by the TPO. Thus, not having doubted the same, the TPO was not justified in allocating revenue from resale of the same to Non- AEs [sale of software products of Rs. 95,53,63,296/- and sale of hardware of Rs. 76,62,758/-] between SWD AE and ITES AE segments. 15. After apportioning non-AE revenue to AE revenue, the TPO apportioned the entire expenditure from P L Account except finance cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout adducing any reasons for the same. The segmental margins as computed by the Assessee was as follows: Particulars Margin Software Development Segment [SWD AE] - 16.18% ITES Segment [ITES AE] 9.37% The TPO did not accept the Assessee's margins and has recomputed the margins of the said segments incorrectly in paragraph 2.1.2 of the impugned TP order dated 29.07.2021 as under: Particulars Margin Software Development Segment [SWD AE] - 11.32% ITES Segment [ITES AE] 11.32% From the perusal of the impugned TPO order dated 29.07.2021, it is evidently clear that the Learned TPO has recomputed the margins by making certain apportionments as per his whims and fancies without adducing any reasons or basis for the same. From the perusal of the margins computed by the Learned TPO, it is clear that the TPO has apportioned Non-AE revenue of Rs. 103,25,71,529 to SWD AE and ITES AE Segments without adducing any reasons as to the same. The TPO has erred in apportioning non-AE revenue of Rs.103,25,71,529 between SWD AE (Rs.97,11,28,696) and ITES AE Segments (Rs.6,14,42,833), which is against the mandate of the provisions of Chapter X. We agree with the submission of the Assessee in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein 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 Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other 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 himsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-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 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 Integrating (supra). 20. In view of the aforesaid decision, we hold that companies listed in Ground No.10.5.1 of the original grounds of appeal whose turnover in the current year is admittedly more than Rs.200 Crores should be excluded from the list of comparable companies. 21. The other comparable company inclusion of which was challenged by the Assessee before us is Three sixty Logica Testing Services Pvt.Ltd. On inclusion of this company by the revenue authorities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and it s related party. After all the entire exercise of determining ALP is to compare margins in transactions between unrelated parties. Yahoo Software Development India P. Ltd. vs. JCIT [2020] 115 taxmann.com 60 (Bang) Infineon Technologies India (P.) Ltd. vs. DCIT [2020] 117 taxmann.com 821 (Bang) ITO vs. Sabre Travel Technologies (P.) Ltd., [2020] 120 taxmann.com 362 (Bang) Atlas Healthcare Software India (13.) Ltd. vs. ACIT [2020] 117 taxmann.com 839 (Kol) Mentor Graphics (Sale Service) (P.) Ltd. vs. DCIT [2020] 120 taxmann.com 117 (Delhi - Trib.) JAS Forwarding Worldwide (P.) Ltd. vs. DCIT [2020] 113 taxmann.com 390 (Delhi - Trib.) In view of the above decisions, we hold that this company fails RPT filter and hence should not be regarded as a comparable company. 24. No other ground was pressed for adjudication except exclusion of the aforesaid 10 comparable companies. The TPO is directed to computed ALP in SWD services Segment as per directions in this order after affording Assessee opportunity of being heard. 25. ITeS Segment : As far as ITeS segment is concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35th Percentile Margin of comparable set 20.95% Adjustment Required (if PLI 35th Percentile) Yes Median Margin of comparable set M 26.34% Arm's Length Price ALP=(1+M)*OC 146,237,218 Price Received OR 128,848,604 Shortfall being adjustment ALP-OR 17,388;614 Thus, a sum of Rs.1,73,88,614/- was added to the total income of the Assessee on account of determination of ALP for provision of ITeS by the Assessee to its AE. 28. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment to ALP was added to the total income of the Assessee by the AO. The Assessee filed objections before the DRP and the DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 29. Pursuant to the directions of the DRP, the final list of comparable companies became 11. 30. The learned counsel for the Assessee prayed for exclusion of the following 7 companies out of the final list of 11 comparable companies that remain after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival submissions. We find that in the decision cited by the learned DR, Tribunal has held that this company is not comparable with an ITeS company owing to those companies being in the field of KPO which cannot be equated or compared with a company rendering ITeS. 34. In so far as comparability of Domex E Data Pvt. Ltd., is concerned, the argument was that this company is engaged in providing KPO and therefore cannot be compared with an ITeS such as the assessee. On this objection, the DRP again held that ITeS and KPO have to be regarded as one and the same. Learned Counsel has pointed out that in the following decisions, Tribunal has taken the view that companies rendering KPO services cannot be regarded as a comparable company with an ITeS company. Transperfect Solutions India Pvt. Ltd vs ACIT [[TS-497-ITAT- 2022(PUN)-TP]] AY 2016-17 Schlumberger India Technology Centre (P.) Ltd. Vs DCIT [TS-473- ITAT- 2022(PUN)-TP] AY 2016-17 Credence Resource Management (P.) Ltd vs ACIT [2022] 138 taxmann.com 543 (Pune - Trib.), for AY 2016-17 35. In the light of the aforesaid decisions, we are of the view that Domex E Data Pvt. Ltd., should be excluded from the list of comparable companies. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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