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TMI Blog2022 (7) TMI 1512X X X X Extracts X X X X X X X X Extracts X X X X ..... rms length price on the basis of the order of the Transfer Pricing Officer u/s. 92CA of the Act, dated 30.10.2019, the direction of the Dispute Resolution Panel, dated 16.02.2021 and the consequential order giving effect passed by the TPO on 24.03.2021. ii) not appreciating the fact that, the DRP has erroneously upheld rejection of TP study of the appellant by the TPO despite the fact that, the alleged defects relied upon by the TPO to reject the TP study did not exist and therefore the DRP also could not have rejected the TP study and under the circumstances, the question of a fresh search process and selection of comparable did not arise. iii) not appreciating the fact that, the DRP has not accepted the specific objection of the appellant that, the turnover of the company should also be a criteria and ignoring the ratios laid down by various tribunals and high courts has retained the giants in the field such as M/s. Larson & Toubro Infotek Ltd, M/s. Infosys Ltd, Cybage Software Ltd, Nihilent Ltd, Persistent Systems ltd, Thirdware Solutions Ltd, Aspire systems (India) Pvt Ltd AND Tata Elxsi Ltd as a part of the final list of comparables. iv) not appreciating the fact that, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Solutions Ltd for the alleged reason that, no segmental data was available ignoring the fact that, it was within the powers of the TPO to call for such information under the provisions of section 133(6) of the act, before rejection and in the absence of any such effort the comparable could not have been rejected. x) not appreciating the fact that, in the case of the comparable M/s. ASM Technologies Ltd the DRP has given specific directions to verify the claim of the appellant that the company does not fail the export turnover criteria and the TPO has passed the final order on 24.03.2021 without any verification and rejecting the comparable, thereby the order of the TPO is bad in law and not as per the directions of the DRP. xi) not appreciating the fact that, the DRP has not considered specific objections in regard to the issues such as functionality, diversified activity, presence of intangibles, peculiar economic circumstances etc., in respect of each of the comparables selected by the TPO including Integ Software Pvt Ltd and Infobeans Technologies Ltd and rejecting objections with general unsubstantiated remarks. Details of company wise objections included in the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an order u/s. 92CA(3) of the act, on the basis of the results of a faulty search process in as much as information u/s. 133(6) of the act, have been called for from the proposed comparables in an arbitrary manner wherein the comparables have been selected first and the information u/s. 133(6) of the act, has been called for only from such comparables to justify a selection which was already concluded and the DRP has erred in confirming such search process. " 1.1. Facts of the case are that the assessee M/s. Meritor CVS India (P) Ltd is in the business of computer radiated designing and development of commercial vehicle systems. The company is developing specific software for Associate Enterprise, which is also subsidiary of the ultimate holding company. The software developed is used in house, integrating the same with the main product. Finally, what is being marketed is the final product by the ultimate holding company. The role of the company has been that it is a contract software development support service provider. 1.2 The assessee company filed return of income for the A.Y. 2016-17 on 28.11.2016 declaring total income of Rs. 2,34,69,700/-. The company is eligible for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee wants exclusion of the following comparables was only pressed. (i) L&T Infotech Ltd. (ii) Infosys Ltd. (iii) Tata Elxi Ltd. 3.2 The Ld. A.R. submitted that the turnover of assessee is only Rs. 37.17 Crores, however, the turnover of these companies are as follows:- (i) L&T Infotech Ltd. Rs. 5568.05 crores (ii) Infosys Ltd. Rs. 54,035 crores (iii) Tata Elxi Ltd. Rs. 1041.46 crores. 3.3 Thus, he submitted that high amount of turnover companies cannot be compared to the assessee company as assessee's turnover is very low compared to those companies. He relied on the various decisions specifically Barracuda Networks India Pvt. Ltd. in IT(TP)A No.229/Bang/2021 dated 25.10.2021. "12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang- Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 42. The Assessee's turnover was around Rs. 110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs. 200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon'ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs. 200 crores from the list of comparable companies is held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S. NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in ground No.1(iii). Persistent Systems Ltd. 4.3 The Ld. A.R. submitted that this company is functionally different with the diverged business and lack of segmental results and it is also engaged in R&D activities and existence of high brand value. 4.8 We have heard the rival submissions and perused the materials available on record. In this case, assessee's turnover was Rs. 37.17 crores as against the turnover of Persistent Systems Ltd. At Rs. 147.64 crores. This company having less than turnover 10 times of the assessee's turnover and has to be considered as a comparable company. Hence, turnover filter cannot be applied to exclude this company. 4.9 On the other hand, assessee also submitted that the functionality of Persistent Systems Ltd. Is different from the assessee's company. On going through the Ld. DRP's order, we observe that M/s. Persistent Systems Ltd. was engaged in rendering product development services i.e. providing services to business enterprises to develop software products. It reported income from software services of Rs. 14,232 millions and software license of Rs. 238.8 millions aggregating to Rs. 14,471.36 millions. Thus, the income from software license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT enabled services i.e. business process management, HR and Payroll, commerce 6. No segmental details are available. 7.1 He relied on various decisions of ITAT including the decision in ITA No. 2233/Hyd/2018 for AY 2014-15 wherein this company is excluded as comparable. 7.2 The Ld. DR, on the other hand, submitted that this company is engaged in rendering of software services and, hence, functionally comparable to assessee company. 7.3 We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The coordinate bench. of this Tribunal in ITA No. 2233/Hyd/2018 for AY 2014-15, directed the AO/TPO to exclude this company from the list of comparables for determining ALP by observing as under: 21. Having regard to the rival contentions and the material on record, we find that the Coordinate Bench of the Tribunal in the following case has considered similar objections of the assessee therein to direct exclusion of this company from the final list of comparables. For the purpose of ready reference, the relevant paragraph is reproduced below: "18. We have heard the rival contentions and perused the record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à-vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity visà-vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. 4.14 In view of the above orders of the Tribunal, we direct the AO/TPO to exclude this company from the list of comparables. Thirdware Solutions:- 4.15 The Ld. A.R. submitted that margin as per order do not match margin as provided in software development PLI computation. He relied on the order of Tribunal in the case of Barracuda Networks India Pvt. Ltd. and also order of the Tribunal in the case of BORQS Software Solutions Ltd. ACIT (2021) 135 Taxmann.com 37 (Bang Trib.) 4.16 We have carefully gone through the above order of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Besides, such information pertains to the activities of the entire group. Further, the information in website arc dynamic and cannot be related to a particular period. The information in the website in the-year 2018-19 or 2019-20 will show the functionality for the current period, which may be very much different from that existing in 2015-16, the year scrutiny. There is no way to verify whether the said information have relevance for the year under scrutiny. Therefore, as a principle. this ['Act strictly goes by the information in the annual report, which is based on audited financial statements, which categorical mentions that the. company is engaged in software services. Therefore, we reject the pleas raised arid uphold the selection of this company as functionally comparable to the assessee. 4.20 Ld. DRP was of the view that high profitability as such cannot be criteria for exclusion of companies, when it is found to he functionally comparable in terms of Rule 10B. The Hon'ble ITAT Spl. Branch Mumbai in the case of Maersk Global Centres (India) Private Limited held that comparables with high profit margins cannot be discarded per se and it has to be examined whether t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, this issue is remitted to the AO/TPO for fresh consideration. 7. Ground No.1(ix) is reproduced as under:- "1(ix) not appreciating the fact that, the DRP could not have rejected the comparable M/s. 8k Miles Software Solutions Ltd for the alleged reason that, no segmental data was available ignoring the fact that, it was within the powers of the TPO to call for such information under the provisions of section 133(6) of the act, before rejection and in the absence of any such effort the comparable could not have been rejected." 7.1 The Ld. A.R. wants to include M/s. S.K. Mile Software Solutions Pvt. Ltd. and stated that the segmental data may be obtained by TPO after calling information u/s 133(6) of the Act. We accede to the request of assessee's counsel and set aside the matter to the file of AO/TPO to procure the relevant data by issuing notice u/s 133(6) of the Act and decide it afresh. Ordered accordingly. 8.. Ground No.1(x)is reproduced as under:- "1(x) not appreciating the fact that, in the case of the comparable M/s. ASM Technologies Ltd the DRP has given specific directions to verify the claim of the appellant that the company does not fail the export tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details of realization with reference to each of the invoices were to be produced before the Assessing Officer/Transfer Pricing Officer who were directed to compute interest for the period of delay and in the absence of any such opportunity provided to produce the details as directed no adjustment could have been made and hence the adjustments are against a directions of the DRP. 1(xv) making an adjustment to the extent of Rs. 14,79,713/- towards interest receivable on average of net receivables at an arbitrary interest rate of 5.39% with an alleged period of delay of 335 days ignoring the fact that, the receivables as on the last day of the accounting year were bills of the last of the months and hence there was no delay in recovery and therefore no interest could have been charged. 10.1 After hearing both the parties, we are of the opinion that similar issue came up for consideration in the case of MetricStream Infotech (India) Pvt. Ltd. In IT(TP)A No.2347/Bang/2019 for the assessment year 2015-16 dated 24.4.2020, wherein it was observed as under: 17. Ground No.7 alleged by assessee against adjustment of notional interest on outstanding receivables. From TP study, it is ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction and the transfer pricing adjustment is warranted. He stated that Finance Act, 2012 inserted Explanation to Section 92B, with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i)of this Explanation provides that: (i) the expression "international transaction" shall include- ..........(c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;....' . 17.5. Ld.CIT DR submitted that expression 'debt arising during the course of business' refers to trading debt arising from sale of goods or services rendered in course of carrying on business. Once any debt arising during course of business is an international transaction, he submitted that any delay in realization of same needs to be considered within transfer pricing adjustment, on account of interest income short charged or uncharged. It was argued that insertion of Explanation with retrospective effect covers assessment year under consideration and hence under/non-payment of interest by AEs on debt ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of invoices is akin to loan advanced by assessee to foreign AE., hence it is an international transaction as per explanation to section 92 B of the Act. We also perused decision relied upon by Ld.AR. In our considered opinion, these are factually distinguishable and thus, we reject argument advanced by Ld.AR. 17.8. Alternatively, it has been argued that in TNMM, working capital adjustment subsumes sundry creditors. In such situation computing interest on outstanding receivables and lones and advances to associated enterprise would amount to double taxation. Hon'ble Delhi Tribunal in case of Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in ITA No. 6570/Del/2016 vide its order dated 15.2.2018 has observed that: "There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-& ..... X X X X Extracts X X X X X X X X Extracts X X X X
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