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TMI Blog2021 (11) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, the transaction of providing SWD Services to Capco Group companies 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 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, the any income arising from an international transaction shall be computed having regard to the arm's length price. In this appeal by the assessee, the dispute is with regard to determination of Arms' Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 3. As far as the provision of Software Development services are concerned, the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of adjustment to ALP as follows: "21.4. Computation of Arm's Length Price: 21.4.1 The median of the weighted average Profit Level Indicators is taken as the arm's length margin. Please see Annexure A for details of computation of PLI of the comparables. Based on this, the Arm's Length Price of the services rendered by the Taxpayer to its AE(s) is computed as under: SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 93,02,61,671 Taxpayers Operating Cost OC 79,98,02,919 Taxpayers Operating Profit OP 13,04,58,752 Taxpayers PLI PLI=OP/OC 16.31% 35th Percentile Margin of comparable set 24.83% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 28.20% Arm's Length Price ALP=(1+M)*OC 1,02,53,47,342 Price Received OR 93,62,61,671 Shortfall being adjustment ALP-OR 9,50,85,671 21.4.2 The above shortfall of Rs.9,50,85,671/- is treated as Transfer Pricing adjustment u/s 92CA in respect of software development segment of the Taxpayer's International Transactions." Thus, a sum of Rs.9,50,85,671/- was added to the total income of the assessee on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified 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 subclause (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 arrive at an arm's length price in relation to the international trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: * None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) which the assessee seeks exclusion is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the assessee's turnover is only Rs.93,02,61,671/-. The TPO excluded from the list of comparable companies chosen by the assessee in its TP study companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld 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 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 cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh 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 issue, the view favourable to the Assessee has to be adopted, we respectfully follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing 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). 14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) in paragraph 7 (i) above, which the assessee seeks exclusion and whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 15. We shall now deal with the remaining two companies listed as Sl. No. (h) and (i) in paragraph-7(i) of this order, which the assessee seeks exclusion from the list of comparable companies,viz., (a) Inteq Software Private Limited and (b) Infobeans Technologies Ltd. 16. As far as exclusion of Inteq Software Private Limited is concerned, the first objection of the learned counsel for the Assessee was that this company is functionally not comparable because it is engaged in the business of computer programming, consultancy and related activities. The objections of the assessee in this regard are based on contents in the website of this company. The DRP has d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is owing to factors which can affect the functional comparability of this company with the assessee. 18. As far as the plea of the assessee for exclusion of Infobeans Technologies Ltd., is concerned, the first plea of the learned counsel for the assessee is that this company is functionally dissimilar to a SWD service provider and there are no segmental details available for varied activities carried out by this company. As far as AY 2016-17 is concerned, the DRP has observed that this company was in the business of rendering SWD services in para 2.4.21.3 of its order, which reads thus: "2.4.21.3 In this regard, it is relevant to note that as per information submitted by this company in response to 133(6), this company is engaged in customized software development services and has not earned revenue from any service activity other than customized software development services. The relevant extract of the reply submitted is as under: That our company is engaged in the Customized Software Development Services and the expertise/qualifications of the employees belongs to the same field of software development. That the company has not earned from any services other than from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is with regard to the grievance of the assessee that no adjustment towards working capital has been allowed to the assessee. In this regard though the ground of appeal makes a reference to risk adjustment also, the point that was pressed for adjudication was only with regard to grant of working capital adjustment. On the issue of non granting of working capital adjustment, the DRP gave its decision by observing that (i) The Assessee has not demonstrated with any data or information as to the impact of working capital on the costs, price or profit. (ii) working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. 15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording the Assessee opportunity of being heard. 24. The next issue that requires adjudication is the grievances of the assessee with regard to non-inclusion of 4 companies in the list of comparable companies viz., Sasken Communication Technologies Ltd., Sagarsoft (India) Ltd., Akshay Software Technologies Ltd. and Evoke Technologies Ltd., 25. As far as Sasken Communication Technologies Ltd., is concerned, the turnover of this company is more than 200 Crores and therefore this company cannot be included by reason of application of turnover filter. As far as Sagarsoft (India) Ltd., is concerned, the claim of the Assessee was that this company passes all filters applied by the TPO and is functionally comparable. Detailed submissions (Page 182 to 194 were filed by the Assessee before the DRP. The DRP however held that since the TPO has not selected this company as a comparable company and since the accept and reject matrix had not been placed by the Assessee, the company cannot be regarded as a comparable. We are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment is one such adjustment which is to be applied in order to adjust for the differences between the risk undertaken by the tested party vis-a-vis the comparable companies. Being a low risk service provider, the Assessee is devoid of any significant risks relating to its business operations whereas the comparable companies operate under uncontrolled conditions bearing risks, as a result of which the companies earn a risk premium which is not earned by a contract service provider like the assessee. Therefore, the profits of a contract service provider would be lesser than the companies selected as comparables, and in that view of the matter, it is humbly submitted that an adjustment to minimise the risk differential would be warranted. Reliance in this regard was placed on this Hon'ble Tribunal's decisions in Analog Devices India P. Ltd. v. DCIT [TS-816- ITAT-2016-Bang] and Intellinet Technologies India P. Ltd. v. /TO [TS-228-ITAT-2012(Bang)] where, in the cases of similar placed assessees, this Hon'ble Tribunal directed that a risk adjustment be granted. The Assessee has prayed for a direction to the TPO/AO to recompute the margins of the companies selected as comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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