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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 ..... s. AO 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... with employee cost less than 25% of turnover were rejected 6. Companies 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 Cyba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before us. We shall first proceed to analyse the petition filed by assessee under Rule 11 seeking admission of additional grounds that reads as under: 4. Additional 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance and implementation of those policies. Business development and Marketing ISGN US formulates the overall marketing strategy and is responsible for marketing the products/ services offered. As ISGN US 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calation team feels a further review may be warranted, the issue moves to the next level of troubleshooting. - L3: Only a very few of the total queries logged, reach to this level. The team at this level consists of highly qualified and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arket risk. Since the services provided by ISGN India are for the AE's internal use only (i.e., not sold as a service to third party customers), ISGN India does not bear any market risk. ISGN India bears market risks to a limited extent, since it provides services only to its AE and does not approach third 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 stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . in IT(TP)A No. 753/Bang/2022 for A.Y. 2018-19 8. The Ld.AR submitted that in the event the turnover filter is applied, following comparables will have to be excluded that has huge turnover as compared to that of assessee. Comparable Turnover (in crores) Exilant Technologies Pvt. Ltd. 332.10 Larsen & Toubro Infotech Ltd. 6906.40 Nihilent Ltd. 280.06 Mindtree Ltd. 5325.00 Persistent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar issue held as under: "13.2 The contention of the assessee is that the said companies cannot be rejected merely on the ground that in a particular year, the companies have incurred losses. We find merit in the contention of the ld. AR of the assessee. A comparable can be rejected only if it is a consistent loss making company and the consistent loss making company is one which sustains losses in the three consecutive financial years. The Pune Bench of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable." 15. In the case of Cummins Turbo Technologies Limited Vs. DDIT (International Taxation) (supra) the Coordinate Bench of the Tribunal observed that where the assessee has taken super loss making companies in the list of comparables. The burden is on the TPO to prove that such comparable companies are consistent loss making companies. The relevant extract of the findings of Tribunal are as under: "14. We find that in respect of the selection of the comparables, the Tribunal has taken the consistent 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, rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld.AR demonstrated the computation error in the synopsis which is reproduced as under: Particulars Amount in Lakhs Operating margins as calculated by the TPO Corrected operating Margins of the Appellant Revenue from operations 3597 3597 Operating Revenue Total expenses 3211 3211 Less : Finance costs 29 29 Less : CSR 31 31 Add: Forex Loss** 85 - Operating Expenses 3236 3151 Operating Profit 361 446 OP/OC 11.16% 14.15% ** Forex Loss (gain) erroneously added to the losses 13.2 The Ld.DR submitted that the above issue may be remanded to the Ld.AO/TPO for verification. 13.3 We have considered the submissions advanced by both sides. 13.4 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. The Ld.AO/TPO shall verify the computation and consider the claim in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 14. Apart from the above grounds and selected comparables in ground no. 5.3, no other issue has been argued by the assessee. any issue that may arise are left acad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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