Income Tax Appellate Tribunal - Bangalore
M/S. Altair Engineering India Private ... vs Assistant Commissioner Of Income Tax, ... on 9 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND
SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
IT(TP)A No.1025/Bang/2022
Assessment Year : 2018-19
M/s. Altair Engineering India Pvt. Ltd., Vs. ACIT,
No.46, First Floor, Prestige Trade Tower, Circle - 1(1)(1),
Palace Road, Municipal Ward No.77, Bengaluru.
Sampangiramanagar,
Bengaluru - 560 001.
PAN : AABCA 1860 A
ASSESSEE RESPONDENT
Assessee by : Shri. Tata Krishna, Advocate
Revenue by : Shri. Sreenivas T Bidari, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 03.01.2023
Date of Pronouncement : 09.01.2023
ORDER
Per N. V. Vasudevan, Vice President :
This appeal by the Assessee is directed against the final order 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 IT(TP)A No.1025/Bang/2022 Page 2 of 33 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 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. The Finance Act. 2001 had introduced a legislation with respect to transfer pricing by substituting the erstwhile section 92 of the Act with a new and separate code or sections, namely sections 92 to 92F, with effect from 1st April. 2002. i.e. the assessment year 2002- 2003. The salient features of the legislation with respect to transfer pricing, to the extent material for the purpose of deciding the question referred to the special bench, are as follows: -
• Section 92(l) of the Act provides that any income arising from an "international transaction" shall be computed having regard to the arms length price. The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price.
IT(TP)A No.1025/Bang/2022 Page 3 of 33 • The term "international transaction' has been defined in section 92B(1) or the Act to mean a transaction between two or more "associated enterprises" either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of 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.
• Section 92A of the Act defines the term "associated enterprise" in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterprise.
• The term "arm's length price" (ALP) has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C( 1) of the Act provides that the arm's length price in relation to an international.
By virtue of the provisions of section 92CA(1), the Assessing Officer, with the previous approval of the Pr Commissioner / Commissioner is empowered to refer to the Transfer Pricing Officer (TPO) the computation of the arm's length price of an international transaction or specified domestic transaction entered into by an assessee over whom the Assessing Officer exercises jurisdiction. The TPO, after due enquiry and opportunity of 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 IT(TP)A No.1025/Bang/2022 Page 4 of 33 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 the Finance Act, 2001, was as follows.
"The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation or reasonable fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181].
4. 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 and ITeS to its AE.
5. SOFTWARE DEVELOPMENT SERVICES SEGMENT: As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost IT(TP)A No.1025/Bang/2022 Page 5 of 33 (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 11.32% by the TPO. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length.
6. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO on his own identified 20 companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows:
Wt.
F.Year wise OP/OC (%) Average
SI. No. Company Name
2015-16 2016-17 2017-18
1 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69
Harbinger Systems Pvt.
2 12.69 12.80 9.46 11.65
Ltd.
Exilant Technologies Pvt.
Ltd.
3 25.82 17.27 8.50 17.17
4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57
IT(TP)A No.1025/Bang/2022
Page 6 of 33
Larsen & Toubro Infotech 20.78
5 19.21 17.14 18.94
Ltd.
Great Software Laboratory Pvt.
6 23.87 17.31 19.73
Ltd.,
17.88
7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19
Black Pepper
8 9.63 13.84 24.83 20.62
Technologies Pvt. Ltd.
9 Mindtree Ltd. 26.11 20.12 18.41 21.21
Aptus Software Labs Pvt.
10 27.67 24.83 15.16 22,70
Ltd.
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
ThreesixtyLogica Testing
18 48.46 36.63 26.2 36.58
Services Pvt. Ltd.
19 Infosys Ltd. 38.29 38.79 35.27 37.38
IT(TP)A No.1025/Bang/2022
Page 7 of 33
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 Operating Revenue OR 2,036,504 020 Taxpayers Operating Cost OC 1,829,458 659 Taxpayers Operating Profit OP 207,045,361 Taxpayers PLI PLI=OP/OC 11.32% 35th Percentile Margin of comparable set 20.19% Adjustment Required (if PLI< 35th Yes Percentile) Median Margin of comparable set M . 23.60% Arm's Length Price ALP=(1+M)* OC 2,261,210,903 IT(TP)A No.1025/Bang/2022 Page 8 of 33 Price Received OR 2,036,504,020 Shortfall being adjustment ALP-OR 224,706,883 Thus a sum of Rs.22,47,06,883/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE.
8. 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.
9. Pursuant to the directions of the DRP, the final list of comparable companies became 26 and the list of those companies and the profit margins of those companies was as follows:
IT(TP)A No.1025/Bang/2022 Page 9 of 33 F.Year wise OP/OC (%) Sl. Wt.
Company Name
No. Average
2015-16 2016-17 2017-18
1 Inteq software pvt ltd 7.08 -15.3 12.16 1.38
2 Ace Software exports Ltd 7.5 7.5 4.13 6.32
3 Maveric Systems Ltd 3.31 6.1 10.42 6.82
4 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69
5 Yudiz solutions P Ltd 7.24 8 15.33 10.64
orangescape
6 6.92 9.3 13.41 10.64
Technologies
7 Harbinger Systems Pvt. Ltd. 12.7 12.8 9.46 11.65
CG-VAK software and exports
8 18.6 10.23 11.86 13.41
Ltd
9 Exilant Technologies Pvt. Ltd. 25.8 17.27 8.5 17.17
10 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57
11 Larsen & Toubro Infotech Ltd. 20.8 19.21 17.14 18.94
12 Great Software
17.9 23.87 17.31 19.73
Laboratory Pvt. Ltd.
IT(TP)A No.1025/Bang/2022
Page 10 of 33
13 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19
Black Pepper
14 9.63 13.84 24.83 20.62
Technologies Pvt. Ltd.
15 Mindtree Ltd. 26.1 20.12 18.41 21.21
16 Sagar Soft India Ltd 10.6 8.68 34.43 21.92
17
Aptus Software Labs Pvt.-Ltd. 27.7 24.83 15.16 22.7
18 AcewinAgriteck Ltd. . 26.5 23.23 22.73 24.51
19 Persistent Systems Ltd. 23.9 24.44 26.94 24.98
20 Wipro Ltd. 27.3 26.38 27.03 26.83
21 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24
22 Infobeans Technologies Ltd. 35 23.89 27.82 28.52
35.11
23 Nihilent Ltd, 24.5 30.2 30.17
Threesixty Logica Testing
24 48.5 36.63 26.2 36.58
Services Pvt. Ltd.
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
IT(TP)A No.1025/Bang/2022
Page 11 of 33
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:
Determination of arm's length price under section 92C .
10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :--
(a) to (d)......
(e)transactional net margin method, by which,--
IT(TP)A No.1025/Bang/2022 Page 12 of 33
(i) the net profit margin realised by the enterprise from an international transaction [or a specified 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 sub-clause
(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 transaction [or the specified domestic transaction];
(f)......
(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:--
IT(TP)A No.1025/Bang/2022 Page 13 of 33
(a) the specific characteristics of the property transferred or services provided in either transaction;
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks 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 international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
IT(TP)A No.1025/Bang/2022 Page 14 of 33
13. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter 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.
14. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee 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.106,29,01,011/-. In this regard we have to mention that the Assessee's operating revenue was only Rs.106,29,01,011/-. The TPO computed operating revenue of Rs.203,65,04,020/-. In this regard, it is seen that the Assessee had revenues from transactions with AE as well as non-
AE. The break-up of the Revenue from operations between AE and Non-AE is as under as given by the Assessee in its submission dated 29.06.2021, before the TPO:
IT(TP)A No.1025/Bang/2022 Page 15 of 33 Non-AE Total Particulars AE Sale of Software 95,53,63,296 95,53,63,296 Products Software and other 106,29,01,011 6,88,88,808 113,17,89,819 related services [SWD] ITES Services [ITES] 6,72,49,222 - 6,72,49,222 Sale of hardware 76,62,758 76,62,75 8 Training Services 6,56,667 6,56,667 Total 113,01,50,233 103,25,71,529 216,27,21,762 The said figures were furnished the TPO vide submissions dated 29.06.2021 in response to notice under 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 IT(TP)A No.1025/Bang/2022 Page 16 of 33 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 Rs. 21,85,350 and Corporate Social Responsibility (CSR) expenditure of Rs. 63,44,357 between SWD AE and ITES AE. The segment wise expenditure as per P&L Account is as follows:
Particulars SWD AE ITES AE Commission Domestic Total Employee 791,858,665 52,343,125 - 223,015,472 1,067,217,262 benefits expense Other 83,303,674 8,467,698 130,258,993 592,926,764 814,957,129 expenses Depreciation 39,718,204 677,692 - 27,199,862 67,595,758 and amortization expense Finance - - 2,185,350 2,185,350 costs Total 91,48,80,543 6,14,88,515 13,02,58,993 84,53,27,448 195,19,55,499
16. As may be seen from the above table, the expenditure has been incurred for the following segments:
IT(TP)A No.1025/Bang/2022 Page 17 of 33 Total Expenditure Segment SWD AE 91,28,80,543 ITES AE 6,14,88,515 Commission 13,02,58,993 Domestic 84,53,27,448 Total Expenditure as 195,19,55,499 per P&L Account The above breakup of the total expenditure was furnished before the TPO on 29.06.2021 in response to notice under section 92CA(2) dated 10.03.2021. The TPO did not doubt the aforementioned figures furnished by the Asessee. The TPO without any basis has however proceeded to allocate entire P&L expenditure to just SWD AE and ITES AE on the basis of operative revenue. This has the following material flaws:
a) The expenses relating to non AE segments were also allocated between SWD AE and ITES AE
b) The expenses relating to SWD AE and ITES AE segments were allocated on the basis of operating revenue irrespective of whether they are direct or indirect.
c) The operating revenue which is taken as the allocation key itself is incorrectly as stated in paragraph 10.2.5 [supra] As a result of the above material flaws, the OP/ OC is worked at 11.32% for both SWD AE and ITES AE thus giving absurd result.
Further, the operating costs as worked out above are artificially inflated by more than 100% thus resulting in applying the TPO's ALP margin on such artificially enhanced operating cost. This has translated into huge IT(TP)A No.1025/Bang/2022 Page 18 of 33 artificial addition. The aforesaid actions of the TPO are against the mandate of the provisions of Chapter X. As we have already seen the transactions with the AE has to be compared with identical transaction between unrelated parties to arrive at Arm's length price. The TPO has erred in recomputing Assessee's margin relating to software segment and ITES' segment in contravention of the provisions of Chapter X of the IT Act, without adducing any reasons for the same. The segmental margins as computed by the Assessee was as follows:
Particulars Margin
Software Development 16.18%
Segment [SWD AE] -
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 11.32%
Segment
[SWD AE] -
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 IT(TP)A No.1025/Bang/2022 Page 19 of 33 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 regard and hold that the recomputation of segmental margins of the Assessee as done by the TPO (which was objected by the Assessee before DRP and not adjudicated by the DRP) is incorrect and the margins as computed by the Assessee in its TP study has to be accepted. Nevertheless for the purpose of applying turnover filter, the revenue of the Assessee in the SWD segment before apportionment is alone relevant.
17. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The DRP primarily relied on the decision rendered by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt. Ltd., Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such IT(TP)A No.1025/Bang/2022 Page 20 of 33 high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP.
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 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 IT(TP)A No.1025/Bang/2022 Page 21 of 33 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 customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose 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 IT(TP)A No.1025/Bang/2022 Page 22 of 33 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 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 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 IT(TP)A No.1025/Bang/2022 Page 23 of 33 Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee.
17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision 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) 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 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 IT(TP)A No.1025/Bang/2022 Page 24 of 33 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 Threesixty Logica Testing Services Pvt.Ltd. On inclusion of this company by the revenue authorities, the argument advanced before us was that the Related Party Transaction (RPT) that this company had was 28.57% of its total revenue and therefore since as per the accepted RPT filter norm of RPT being less than 25% of the total comparable transaction that the comparable company had with related parties fails, this company should be excluded as a comparable company. The TPO and DRP do not dispute the 25% RPT filter but the dispute is with regard to computation of 25% limit. The DRP concluded on this issue as follows:
"2.7.37.3 A plea was raised that this company fails the RPT filter of 25% and hence has to be excluded. On verification of the information in the annual report_ we note that this company does not fail the RPT filter adopted by the TPO. We noted that the assessee has computed by aggregating the transactions, on the revenue and expense side, without taking corresponding parity in the denominator. Such a computation is totally skewed. The RPT if the revenue is considered on both numerator and denominator the percentage comes to 20.33% (Rs. 5.57 cr. / Rs. 27.41 cr.). On the other hand, the expenses are taken which comes to 12.65% (Rs. 2.76 cr. / Rs. 21.85 cr.) (page 190 of the annual report). Thus, the company satisfies the IT(TP)A No.1025/Bang/2022 Page 25 of 33 RPT filter adopted by the TPO. Thus, we do not find merit in the plea raised and accordingly rejected."
22. In this regard the factual aspect to be noticed that there are other transactions between the comparable company and its AE on the expense side besides revenue side. The table given below will show the true picture in this regard. The combined RPT filter of both sub-expenses and revenue was computed by the Assessee at 25.87%, as follows:
S1. Company Sub- contract Total Cost RE/TC Services Revenue RPT/ % No. expenses (RPT (excluding [A] to from ROP RPT expenses) finance, Related operation [B] [A] + (RE) (in cost) (TC) Parties (ROP) (in [B] (in (RPT) (in millions) millions) millions) 1 1.8 mil 218.54 8.23% 55.74 274.1 mil 20.34 - 28.57% Threesixty % Logica mil mil Testing Services Pvt.
23. In the following decisions rendered by the various benches of the Tribunal, the methodology adopted by the Assessee has been held to be correct, i.e., RPT of all transactions whether it is on the expense side or revenue side has to be considered to see whether there would be impact owing to related party transactions between the comparable company and it's related party. After all the entire exercise of determining ALP is to compare margins in transactions between unrelated parties.
IT(TP)A No.1025/Bang/2022 Page 26 of 33 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 Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the Assessee was arrived at 11.32% by the TPO. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the IT(TP)A No.1025/Bang/2022 Page 27 of 33 Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length.
26. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO on his own identified 17 companies as comparable with the Assessee company and worked out the average arithmetic mean of their profit margins as follows:
Sl. No. Name of the Comparable 2017-18 2016-17 2015-16 Wt.Avg 1 Jindal Intellicom Ltd. -5.35 8.66 2.78 , 7.41 2 Microland Ltd. 9.83 5.85 10.17 8.58 3 Datamatics Business Solutions Ltd. 3.19 8.88 34.85. 13.41 4 Fuzen Software Pvt. Ltd 16.1 15.07 16.06 15.75 5 Tech Mahindra Business Services Ltd. -18.95 18.51 19.09 18.85 6 Infosys B P M Services Pvt. Ltd. 16.65 22.35 24.41 20.95 7 CES Ltd. (seg) 12.50 26.48 31.90 21.77 8 Manipal Digital Systems Pvt. Ltd. 20.93 28.91 21.04 23.54 9 Domex E Data Pvt Ltd 35.61 35.97 13.77 26.34 Vitae International Accounting Services Pvt 10 26.35 26.63 28.75 27.35 Ltd IT(TP)A No.1025/Bang/2022 Page 28 of 33 11 A G S Health Pvt. Ltd. 30.19 36.06 14.7 27.64 12 'Ultramarine & Pigment Ltd. (Seg.) 24.61 46.63 30.27 33.28 Fails 13 Access Healthcare Services Pvt. Ltd 37.37 41.27 39.03 RPT filter 14 Inteq B P 0 Services Pvt. Ltd. 31.68 36.64 48.47 39.15 15 Motif India Infotech Pvt. Ltd. 47.89 48.99 38.8 45.72 16 Eclerx Services Limited 39.94 49.55 55.38 46.85 17 MPS Ltd 56.89 62.2 66.53 61.83 35th 20.95 Median 26.34 65th 33.28
27. The TPO computed the Addition to total income on account of adjustment to ALP as follows:
ITeS SEGMENT Particulars Formula Amount (in INR) Taxpayers operating revenue OR 128,848,604 Taxpayers operating cost OC 115,748,946 IT(TP)A No.1025/Bang/2022 Page 29 of 33 Taxpayers operating profit OP 13,099,658 Taxpayers PLI PLI=OP/OC 11.32% 35th Percentile Margin of comparable set 20.95% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 26.34% 146,237,218 Arm's Length Price ALP=(1+M)*OC 128,848,604 Price Received OR 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.
IT(TP)A No.1025/Bang/2022 Page 30 of 33
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 DRP directions and in this regard raised ground No.11.5.2 of the original grounds of appeal, which reads as follows:
"11.5.2. 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 7 companies selected by the TPO:
1) Microland Ltd.;
2) Tech Mahindra Business Services Ltd;
3) Infosys B P M Services Pvt. Ltd;
4) Access Healthcare Services Pvt. Ltd
5) Motif India Infotech Pvt. Ltd;
6) Eclerx Services Limited;
7) MPS Ltd."
31. We have already seen that the Assessee's turnover in the ITeS was only Rs. 12,88,48,604 after adjustment of revenue by the TPO. We have also seen while deciding the application of turnover filter in SWD services Segment that companies with turnover of Rs.200 crores or more cannot be compared with companies having turnover of less than Rs.200 crores. For the reasons stated therein, we direct exclusion of the companies listed in ground No.11.5.2 whose turnover is admitted above Rs.200 crores from the list of comparable companies.
32. Learned Counsel for the assessee submitted that out of the remaining 4 comparable companies Manipal Digital Systems Pvt. Ltd., and Domex E Data Pvt. Ltd., should be excluded for the reason that these 2 companies are functionally different and cannot be compared to an ITeS company such as the assessee. In so far as Domex E Data Pvt. Ltd., is concerned, it is the IT(TP)A No.1025/Bang/2022 Page 31 of 33 stand of the assessee that this company performs diversified functions like ITeS premedia work and e-book/other boom distribution. It was submitted that no segmental information of the various segments or atleast ITeS segment is available. Reliance was placed on the following decisions of the ITAT whereby Tribunal has held that this company cannot be compared with ITeS company.
Global E-business Operations Pvt Ltd vs DCIT [TS-796-ITAT- 2022(Bang)-TP] AY 2016-17 M/s. Schlumberger India Technology Centre Private 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
33. The plea of the assessee was however rejected by the DRP on the ground that ITeS includes BPO and KPO services and that the contentions of the assessee were based on website information which cannot be regarded as correct. Learned DR relied on the order of the DRP. We have carefully considered the 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 IT(TP)A No.1025/Bang/2022 Page 32 of 33 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.
36. Learned Counsel also made a prayer that Datamatics Business Solutions Pvt. Ltd., fails the export turnover filter for Assessment Year 2015-16 and therefore the profit margin of that year should not be considered while working out the 3 years average profit. In this regard, our attention was drawn to the fact that for Financial Year 2015-16, the export turnover of this assessee was only 73.62% and fall short of the threshold limit of 75% of the total turnover to be from export. This aspect of export turnover filter was not raised by the assessee before the lower authorities and therefore we are of the view that this aspect requires verification at the TPO/AO's angle. Accordingly, we set aside the issue to the TPO/AO to verify the claim of the assessee in this regard or exclude the profit margin of this company for Financial Year 2015-16 if the contention is found to be correct.
IT(TP)A No.1025/Bang/2022 Page 33 of 33
37. The TPO is directed to compute the ALP in the ITeS segment as per the directions contained in this order after affording the assessee opportunity of being heard. None of the other grounds in the ITeS segment was pressed for adjudication.
38. In the result, appeal of the assessee is treated as partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(CHANDRA POOJARI) (N. V. VASUDEVAN)
Accountant Member Vice President
Bangalore,
Dated: 09.01.2023.
/NS/*
Copy to:
1. Appellants 2. Respondent
3. CIT 4. CIT(A)
5. DR 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.