Income Tax Appellate Tribunal - Bangalore
Isg Novasoft Technologies Limited, ... vs Deputy Commissioner Of Income Tax ... on 20 January, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SMT. BEENA PILLAI, JUDICIAL MEMBER
IT(TP)A No. 804/Bang/2022
Assessment Year : 2018-19
M/s. ISG Novasoft
Technologies Ltd.,
The Deputy
496/4, 2nd floor,
Commissioner of
10th cross, Near
Income Tax,
Bashyam Circle,
Circle 3 (1)(1),
Sadashivanagar,
Vs. Bangalore.
Bengaluru - 560 080.
PAN: AABCI2488Q
APPELLANT RESPONDENT
Assessee by : Shri Chavali Narayan, CA
Shri K. Sankar Ganesh, JCIT
Revenue by :
DR ITAT
Date of Hearing : 22-11-2022
Date of Pronouncement : 20-01-2023
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:
Page 2 IT(TP)A No. 804/Bang/2022 Page 3 IT(TP)A No. 804/Bang/2022 Page 4 IT(TP)A No. 804/Bang/2022
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 Page 5 IT(TP)A No. 804/Bang/2022 consideration on 29.11.2018 declaring total income of Rs.6,13,03,703/-. The case was selected for scrutiny and notice u/s. 143(2) was issued in response to which assessee filed its reply on 10.01.2020. The Ld.AO noted that assessee had international transactions exceeding Rs. 15 crores and accordingly, the case was referred to the transfer pricing officer for computing the arms length price of the international transaction that assessee had with its associated enterprise. The Ld.TPO on receipt of the reference, called upon assessee to file the economic details in Form 3CED. The Ld.TPO from the details filed by assessee observed that assessee is providing software support services relating to SWD segment catering mainly to the mortgage lending industry in USA. It was observed that assessee also operated as an offshore hub along with the affiliates in USA, assessee delivers solutions and services to the customer based consisting primarily of mortgage banks and financial institutions. 2.2 The Ld.TPO observed that following were the international transactions that assessee had during the year with its associated enterprises.
Amount (in Particulars INR) Provisions of software development 359,727,122 services Provision for unbilled revenue 696,354,391 receivable Provision for trade receivable 2,485,341 Provision for other receivable 5,873,441 2.3 The Ld.TPO observed that assessee computed its margin by using OP/OC as the PLI at 15% and applied TNMM as the most appropriate method.
Page 6 IT(TP)A No. 804/Bang/2022 2.4 The Ld.TPO noted that assessee had used 5 comparables which had median of 9.95% and thus concluded the transaction to be at arms length.
Weighted average
Name of comparable
Sl.No. unadjusted
company
margin
1. E-Zest Solutions Ltd. 10.19%
2. Nelito Systems Ltd. 5.12%
3. Tejora Technologies Ltd. 4.42%
CG-VAK Software &
4. 9.95%
Exports Ltd.
R Systems International
5. 18.40%
Ltd.
Count 5
Arithmetic Mean 9.61%
Median 9.95%
2.5 The Ld.TPO dissatisfied with the analysis carried out by the assessee, applied following filters and selected a set of final 20 comparables, the details of which are as under:
Filters applied by the TPO Sl.No. Description Companies whose SDW income is less than 75% of its total operating
1.
revenues were excluded
2. Companies whose income was less than 1 Crore were excluded Companies who have more than 25% related party transaction of
3. sales/ expenses were rejected Companies who have export service income less than 75% of sales
4. were rejected Companies with employee cost less than 25% of turnover were
5. rejected
6. Companies with negative net worth were excluded Companies with persistent losses (losses in any 2 out of the last 3
7. years) were excluded
8. Companies with insufficient descriptive information
9. Companies engaged in non-comparable functions/ activities
10. Companies engaged in non-comparable services Page 7 IT(TP)A No. 804/Bang/2022 Comparables selected by TPO Weighted average Sl. No. Name of comparable company 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. 36.58% Ltd.
19 Infosys Ltd. 37.38% 20 Cybage Software Pvt. Ltd. 56.81% 35 Percentile th 20.19% 20.19% Median 23.61% 23.61% 65th Percentile 26.83% 26.83% 2.6 The Ld.TPO also recomputed assessee's margin at 11.16%. Thereafter, the margin median applied by the Ld.TPO of the comparables was 23.61%. The Ld.TPO thus proposed an adjustment of Rs.4,03,00,000/- to be the shortfall as an adjustment. On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order by incorporating the adjustment proposed by the Ld.TPO and computed a proposed addition of Rs.10,16,03,730/- in the hands of the assessee. Against the draft assessment order, the assessee preferred objections before the DRP. Assessee had raised various challenges in respect of the comparables that was selected by the Ld.TPO. The DRP in its direction rejected the contentions of Page 8 IT(TP)A No. 804/Bang/2022 assessee with respect to inclusion / exclusion of most of the comparables however, accepted the CG-VAK Software and Exports Ltd. to be a good comparable from the TP study. DRP also excluded Tech Mahindra and Thirdware Solutions Ltd. from the set of comparables. On receipt of the DRP directions, the Ld.AO in the final assessment order, reduced the adjustment to Rs.3,39,60,000/-.
2.7 Aggrieved by the final assessment order, the assessee is in appeal before this Tribunal.
3. At the outset, the Ld.AR submitted that assessee wish to argue the applicability of turnover filter as a criteria raised in ground no. 5.2(b), ground no. 5.2(f) wherein certain comparables were rejected by applying persistent loss filter. It is submitted that assessee also wish to argue following comparables for inclusion.
i) Batchmaster Software Pvt. Ltd. ii) Extentia Information Technology Pvt. Ltd. iii) Orangespace Technologies Ltd. iv) Yudiz Solutions Pvt. Ltd. v) Celstream Technologies Pvt. Ltd.
3.1 The Ld.AR submitted that assessee has filed an addition ground by way of petition under Rule 11 wherein forex loss has been doubly considered while considering the margin of the assessee by the Ld.TPO thereby reducing the actual margin earned by assessee. It is submitted that all other grounds are not pressed by assessee for the reason that either they are academic in nature or they are consequential to the other grounds. Assessee is also seeking correction of the margins of the left over comparables in ground no. 5.5. Based on the above, Page 9 IT(TP)A No. 804/Bang/2022 we are adjudicating only the grounds that has been argued 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 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 assessee is a legal issue that does not require investigation of any facts.
Page 10 IT(TP)A No. 804/Bang/2022 4.5 Considering the submissions and respectfully following the decisions of Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee. Accordingly, the application filed under Rule 11 for admission of additional ground by assessee stands admitted.
5. The primary contention of the assessee in ground no. 5.2 is applicability of turnover filter in respect of the comparables sought for exclusion.
6. Before we analyse the comparability analysis, it is sinequa non to understand the functions performed, assets owned and risks assumed by the assessee.
Functions performed Pertaining to the international transaction of provision of software support services, the FAR analysis is outlined below:
Strategic management functions Strategic management functions such as corporate strategy, treasury etc., involves decision making on business strategy, selecting lines of business, choosing organization structure, operating procedures, analysing and undertaking acquisitions and disinvestments, responding to competitors and to market forces. These functions are mainly taken care by the AE. ISGN India primarily performs the required general administration and management functions to carry out its day to day business operations in India.
Corporate services functions Corporate service functions assist in the day-to-day management of the organization (e.g. finance, human resources, information systems etc.) With respect to human resources, financial management, routine administration etc., ISGN India is responsible for arranging the necessary resources. It is responsible for managing its own cash flows, accounts payable, accounts receivables, employee management, management information system and training and hiring employees. The AE is not involved in the day to day corporate services functions of INGN India. For achieving the above mentioned activities, ISGN India drafts its policies and receives support from its entities in terms of guidance and implementation of those policies.
Page 11 IT(TP)A No. 804/Bang/2022 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 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 the US. ISGN India plays a very limited role in the functional specifications and confirms its understanding of the operational procedures and processes to be followed before commencing the work. The work done by ISGN India is monitored by ISGN US periodically and necessary QA checks done by ISGN US. Servicing The end users for most of the mortgage processing support services are banks and financial institutions. It is generally the customers who make a decision with respect to whether a particular service can be offshored, owing to strict mortgage and privacy laws in the US. While the critical portion of the service is delivered to the customer by ISGN US directly, only the custom development of the products are carried out by ISGN India. Software support services ISGN US has some registered legacy products which are end-to-end mortgage platforms. The main customers for these products are banks, financial institutions, valuators etc. ISGN US also undertake customisation of these products according to customers' specifications. ISGN India is responsible for providing custom development services to customers using such products. The maintenance consists of trouble shooting activities and product enhancements.
The trouble shooting activity consists of the following phases: LI (Helpdesk): This serves as the first point of contact for customers facing problems with ISGN products. There are various channels through which the customers can get in touch with the technical support services team. A substantial portion of the issues get resolved at this level and in cases where the helpdesk is not able to knock down the issue, then the issue is pushed to a higher level of troubleshooting termed as `L2'.
Page 12 IT(TP)A No. 804/Bang/2022 L2 (Escalation): The escalation team consists of experienced professionals who are in a position to pin point the problem more effectively. The team performs an in depth analysis of the issue at hand and deploys various tools to determine the exact nature of the issue and then troubleshoot the same. Upto about 90% of the total issues get resolved at the first two levels. In very few cases where the issue is still not resolved or the escalation 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 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 its activities. Intangibles play a significant role in the functioning of a business and are accordingly more important. An understanding of the assets employed and owned by ISGN India provides an insight into the resources deployed by it and its contribution to the business processes/economic activities. ISGN India does not own any non-routine valuable tangible / intangible assets.
Table: Assets owned by ISGN India as on 31 March 2018 Net Block as on March 31, 2018 Percentage Tangible Assets (Amount in (%) Lakhs) Computers & accessories 14 48.28% (owned) Office equipment 7 24.14% Leasehold improvements 7 24.14% Furniture and fixtures 1 3.45% Page 13 IT(TP)A No. 804/Bang/2022 Total 29 100.00% Net Block as on March 31, 2018 Percentage Intangible Assets (Amount in (%) Lakhs) Computer Software 2 100.00% Total 2 100.00% From the above, it can be concluded that ISGN India does not own any non-
routine valuable tangible / intangible assets. ISGN US owns all the Intellectual Properties on the products and the same are reviewed by them periodically.
Risks Borne The following sections provide an overview of the significant risks borne by ISGN India vis-à-vis it's AE for the transactions discussed above Table: Risk Profile Risk Category and Description Exposure of ISGN US and ISGN India Market Risk: The market risk ISGN US is responsible for comprises the risk caused by a approaching and marketing the shortfall in demand for the services/ solutions to final products and services offered by the customers company, which could lead either to a and therefore bears the market loss of market risk. ISGN US is responsible for shares or a decrease in the marketing its products and company's profit margin. In this services worldwide. It bears regard, it is distinguished between significant risks of the customer short-term effects resulting in a contracts, faces the competition certain level of market volatility as and is responsible for penetrating well as long-term effects requiring an newer markets and introducing adjustment of the market strategy new services to widen its customer including, e.g., product types and base. Accordingly, ISGN US bears features as well as the scope of the market risk. services. 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.
Page 14 IT(TP)A No. 804/Bang/2022 Credit Risk: A credit risk occurs when a customer is not able to settle an ISGN US bills to the third party invoice for delivered goods or rendered customers and bears the credit risk services. The payment default could be for non-payment of dues.
caused either by illiquidity or Since the software support services insolvency of a customer as well as a are provided to the AEs hence ISGN limited willingness to pay. The risk India bears limited risk due to inter-
could, for example, materialize by
company receivables.
means of allowances for bad debt or
costs in connection with legal actions.
ISGN India does not bear any service liability risk for the services Service Liability Risk - Service liability provided by them is to the AE.
risk arises when the services rendered However, the AE bears the risk of fails to perform at accepted or any indirect or consequential loss or advertised standards.
damage, arising in connection with the services rendered by ISGN India.
ISGN India raises invoices in USD while its operational currency is Indian Rupee. Any loss incurred by ISGN India on account of foreign exchange fluctuation between the Foreign Exchange Risk: The foreign Indian Rupee (operational currency) exchange risk becomes relevant if the and USD (invoicing currency) forms sourcing of, e.g., materials, resources part of its cost base for mark-up. and services or if sales is performed in a Hence, ISGN India does not bear currency different from the tested any risk in relation to foreign party's functional currency. The risk exchange fluctuation between the could be mitigated by hedging. Indian Rupee and USD.
ISGN US bears the direct foreign exchange risk as any loss incurred by IGSN India on account of exchange rate fluctuation forms part of cost base for billing to AE.
Table: Summary of risks
Risks undertaken ISGN India AE
Market risk No Yes
Foreign exchange risk No Yes
Service liability risk No Yes
Credit and collection risk Yes Yes
Characterisation
Based on the results of the functional, risk and asset analysis, ISGN India could be characterized as a limited risk service provider, bearing Page 15 IT(TP)A No. 804/Bang/2022 insignificant risks as compared to the risks typically borne by a service provider operating in a similar industry.
7. Based on the above, we shall carry out the necessary analysis to Ground no. 5.2(b). The Ld.AR submitted that the authorities have excluded companies having turnover of less than Rs. 1 crore however, the upper limit to turnover for exclusion of comparable companies has not been applied. The assessee relied on following decisions in which companies having turnover greater than 200 crores were rejected. It is submitted that in the present facts of the case, assessee has a turnover of Rs.35.97 crores under the software development service segment. Galax - E - Solutions in IT(TP)A No. 389/Bang/2021 for A.Y. 2016-17 Pentair Water India Pvt. Ltd., Tax Appeal No. 18 of 2015 (High Court of Bombay at Goa) for A.Y. 2007-08 M/s. Blue Coat Network (India) Ltd. in IT(TP)A No. 2623/Bang/2019 for A.Y. 2015-16 MWYN Tech Pvt. Ltd. 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.
Page 16 IT(TP)A No. 804/Bang/2022
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 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, Page 17 IT(TP)A No. 804/Bang/2022 ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:-
"9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more 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 the Assessee Page 18 IT(TP)A No. 804/Bang/2022 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 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 Page 19 IT(TP)A No. 804/Bang/2022 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 application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra)."
Page 20 IT(TP)A No. 804/Bang/2022
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."
10. Based on the above observations, we are of the view that the companies listed hereinabove that has turnover exceeding Rs. 200 crores deserves to be excluded from the final set of comparables. Accordingly, Ground no. 5.2(b) raised by assessee stands allowed.
11. Ground no. 5.2(f) 11.1 The Ld.AR submitted that the Ld.TPO modified the application of persistent loss filter by rejecting the companies which incurred loss in two out of three previous years instead of incurring losses in all the three previous AYs. 11.2 The Ld.AR relied on the following precedence in support of his arguments.
Mindteck India Ltd. in IT(TP)A No. 252/Bang/2021 for A.Y. 2016-17 KBACE Technologies Pvt. Ltd. in ITA No. 3189/Bang/2018 for A.Y. 2014-15 11.3 We have perused the submissions advanced by both sides on this issue.
11.4 We note that the TPO has applied the filter and rejected companies with loss in any two out of three preceding AYs. We notice that Hon'ble Pune Tribunal in case of Affinity Express India Pvt. Ltd. in ITA No. 107/PN/2012 by order dated 09.03.2016 on similar 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 Page 21 IT(TP)A No. 804/Bang/2022 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 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 Holdings Advisors vs. DCIT. In sum and substance, all the above cases is that the company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to Page 22 IT(TP)A No. 804/Bang/2022 international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly."
14. The contention of the Revenue is that results of the aforesaid two comparable entities are on the extreme negative side. Therefore, they should not be considered. The Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT (supra) after considering various decisions of the Tribunal and the judgment of division bench of the Hon'ble Delhi High Court in the case of CIT Vs. Mentor Graphics (Noida) (P.) Ltd. reported as 354 ITR 586 concluded as under:
"44. a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 108(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable."
15. In the case of Cummins Turbo Technologies Limited Vs. DDIT (International Taxation) (supra) the Co- ordinate 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 Page 23 IT(TP)A No. 804/Bang/2022 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 submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose."
Following the above ratio laid down in Affinity Express India Pvt. Ltd. (supra), we hold that companies should not be excluded for the purpose of comparability and computation of ALP, merely because there is loss in two out of three preceding A.Ys. The Ld.AO should verify whether such companies were consistent loss making companies. The Ld.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.
12. Ground no. 5.3 - wherein assessee is seeking inclusion of following comparables that were additionally introduced.
a) Batchmaster Software Pvt. Ltd.
b) Extentia Information Technology Pvt. Ltd.
c) Orangespace Technologies Ltd.
d) Yudiz Solutions Pvt. Ltd.
e) Celstream Technologies Pvt. Ltd.
Page 24 IT(TP)A No. 804/Bang/2022 The Ld.TPO is directed to verify the FAR of the above comparables with that of assessee.
All these comparables are thus remanded to Ld.AO to consider for inclusion afresh.
Accordingly, this ground raised by assessee stands allowed for statistical purposes.
13. Additional ground no. 8 13.1 The Ld.AR submitted that the Ld.TPO committed arithmetic error in computing the operating margin of the assessee while passing the order u/s. 92CA. He submitted that the Ld.TPO added the forex loss / gain to the total expenses which was already considered. He thus submitted that the Ld.TPO considered the forex loss / gain in the operating expenses twice resulting in the reduction of assessee's margin to 11.16%. The Ld.AR demonstrated the computation error in the synopsis which is reproduced as under:
13.2 The Ld.DR submitted that the above issue may be remanded to the Ld.AO/TPO for verification.
Page 25 IT(TP)A No. 804/Bang/2022 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 academic and open to be argued in an appropriate circumstances.
In the result, the appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 20th January, 2023.
Sd/- Sd/-
(CHANDRA POOJARI) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 20th January, 2023.
/MS /
Page 26
IT(TP)A No. 804/Bang/2022
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore