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TMI Blog2023 (1) TMI 1417X X X X Extracts X X X X X X X X Extracts X X X X ..... is therefore directed to reconsider the comparable afresh that were rejected by applying the persistent loss making filter in the light of these above referred decision by Hon ble Pune Tribunal. Accordingly, this ground raised by the assessee stands allowed for statistical purposes. TPO committed arithmetic error in computing the operating margin of the assessee while passing the order u/s. 92C - In our view this needs to be verified by the Ld.AO/TPO. In the event, the forex loss has already been considered while computing the total expenses, the same deserves to be excluded. - Shri Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : Shri Chavali Narayan, CA. For the Revenue : Shri K. Sankar Ganesh, JCIT DR ITAT. ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 14.07.2022 for A.Y. 2018-19 on following grounds of appeal: 2. Brief facts of the case are as under: 2.1 Assessee is a company rendering software development services and filed its return of income for year under consideration on 29.11.2018 declaring total income of Rs. 6,13,03,703/-. The case was selected for scrutiny and notice u/s. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anies with negative net worth were excluded 7. Companies with persistent losses (losses in any 2 out of the last 3 years) were excluded 8. Companies with insufficient descriptive information 9. Companies engaged in non-comparable functions/ activities 10. Companies engaged in non-comparable services Comparables selected by TPO Sl. No. Name of comparable company Weighted average unadjusted margin 1 Infomile Technologies Ltd. 9.69% 2 Harbinger Systems Pvt. Ltd 11.65% 3 Exilant Technologies Pvt. Ltd. 17.17% 4 Tech Mahindra Ltd. 18.57% 5 Larsen Toubro Infotech Ltd. 18.94% 6 Great Software Laboratory Pvt. Ltd 19.73% 7 Elveego Circuits Pvt. Ltd. 20.19% 8 Black Pepper Technologies Pvt. Ltd 20.62% 9 Mindtree Ltd. 21.21% 10 Aptus Software Labs Pvt. Ltd. 22.70% 11 Acewin Agriteck Ltd. 24.51% 12 Persistent Systems Ltd. 24.98% 13 Wipro Ltd. 26.83% 14 Tata Elxsi Ltd. 28.24% 15 Infobeans Technologies Ltd. 28.52% 16 Nihilent Ltd. 30.17% 17 Thirdware Solution Ltd. 30.94% 18 Threesixty Logica Testing Services Pvt. Ltd. 36.58% 19 Infosys Ltd. 37.38% 20 Cybage Software Pvt. Ltd. 56.81% 35th Percentile 20.19% Median 23.61% 65th Percentile 26.83% 2.6 The Ld.TPO also recomputed assessee s margin at 11.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground Ground No- 8 That the learned AO/TPO has erred, in law and in fact, by incorrectly adding the Forex loss of the Appellant to the total expenses which already contains the component of Forex loss in the computation of operating margin of the Appellant in the impugned TP Order / Final Assessment Order; 4.1 It has been submitted that no new facts needs to be considered in order to dispose of the additional grounds raised by the assessee. It is submitted that the additional grounds is a legal issue that goes to the root cause of the proceedings. The Ld.AR, thus prayed for the admission of additional grounds so raised by assessee. 4.2 On the contrary, the Ld.CIT.DR though opposed admission of the additional ground, could not bring anything on record which would challenge such a right available to assessee under the Act. We have perused the submissions advanced by both sides in light of records placed before us. 4.3 The Ld.DR did not object for the additional grounds being admitted. 4.4 We note that the additional ground is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same. Another issues alleged by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the front-end contact for the customers, they undertake lead generation, marketing and sales activity for the products/ services provided to the customers. ISGN US enters into contracts directly with customers in the US for the sale of software products and is also responsible for price negotiations. ISGN US is responsible for maintaining and developing relationship with its customers and is therefore responsible for expanding the business. The marketing team in ISGN India is primarily involved only in the website support. The activity of business development and front end marketing is done by the ISGN US. Based on whether the client specifies an onshore/offshore support services, work is assigned to the offshore entity being ISGN India. Functional specification and requirement analysis Functional specification and requirement analysis relate to design, development and mapping of the processes capable of outsourcing. ISGN US prepares the operational procedures and processes for the services based on interactions with customers and market assessment. The specification of the services is arrived at taking into consideration factors such as customer requirements, mortgage laws in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... experienced personnel who possess a high level of technical expertise. The issues at this level are high level issues and generally require the team to liaise with the programming team and look into the source code and fix bugs which might have crept into the program resulting in certain issues at the user end. Performance/ Quality control Quality control activities involve establishing and enforcing minimum standards to ensure that inferior services are not sold to consumers. This process involves testing and analysing the service. Quality control can be pursued by employing a combination of automated quality control equipment and qualified inspectors. ISGN US determines the standard quality checks and review process for the product development and software support services provided by ISGN India. ISGN India is required to adhere to the quality standards set by ISGN US while performing such services. ISGN India is responsible for ensuring that the requisite quality/ performance standards are met, the output is free of error and conforms to specifications provided/ agreed upon. Assets Utilized Any business requires assets (tangible or intangible) without which it cannot carry out i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird parties to render similar services. Nevertheless, ISGN India bears the market risk to an extent, associated with a downturn in the mortgage processing industry. Credit Risk: A credit risk occurs when a customer is not able to settle an invoice for delivered goods or rendered services. The payment default could be caused either by illiquidity or insolvency of a customer as well as a limited willingness to pay. The risk could, for example, materialize by means of allowances for bad debt or costs in connection with legal actions. ISGN US bills to the third party customers and bears the credit risk for non-payment of dues. Since the software support services are provided to the AEs hence ISGN India bears limited risk due to intercompany receivables. Service Liability Risk - Service liability risk arises when the services rendered fails to perform at accepted or advertised standards. ISGN India does not bear any service liability risk for the services provided by them is to the AE. However, the AE bears the risk of any indirect or consequential loss or damage, arising in connection with the services rendered by ISGN India. Foreign Exchange Risk: The foreign exchange risk becomes rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsistent Systems Ltd. 1732.75 Wipro Ltd. 44710.00 Tata Elxsi Ltd. 1386.30 Infosys Ltd. 61941.00 Cybage Software Pvt. Ltd. 737.16 9. In a recent decision by this Tribunal in case of M/s. Altair Engineering India Pvt. Ltd. vs. ACIT in IT(TP)A No. 1025/Bang/2022 by order dated 09.01.2023 for A.Y. 2018-19, identical companies have been excluded by applying the turnover filter by placing reliance on the decisions referred to by the Ld.AR. This Tribunal observed and held as under: 18. 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 case of Sysarris Software Pvt. Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chryscapital (supra) and the decision to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to correct and such action does not call for any interference. 19. The Tribunal in the case of Autodesk India Pvt. Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Bangalore-Tribunal), took note of all the conflicting decision on the issue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in the case of M/s. Bobst India Private Limited Vs. DCIT (supra) has held as under: 5.4 Further, we find in the case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai IC Bench, wherein the TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. The Tribunal looked into the business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / operative cost at 27.25%. Since the nature of services rendered by comparable were exactly on similar lines as that of the assessee, though, during the year, it was in the loss could not be disqualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT, Mumbai K Bench in the case of Temasek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s. 92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed. 16. Thus, in view of the fact that the comparables F 1 Sofex Limited and Fortune Informatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after considering the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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