M/S. ATMECS TECHNOLOGIES PRIVATE LIMITED,HYDERABAD vs. INCOME TAX OFFICER, WARD-1(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER IT(TP)A No.187/Bang/2021 Assessment Year : 2016-17 M/s. Atmecs Technologies Private Limited, Vs. The Income Tax Officer, Flat No.301, M J Towers, H-No.8-2-698, Ward -1(1)(1), Road No.12, Bengaluru. Banjara Hills, Hyderabad, Telangana – 500 034. PAN : AAMCA 0792 J APPELLANT RESPONDENT Appellant by : Shri. P.V.S.S.Prasad, CA Respondent by : Shri. Arunkumar, CIT(TP-2)(DR)(ITAT), Bengaluru Date of hearing : 14.12.2021 Date of Pronouncement : 20.12.2021 O R D E R Per N. V. Vasudevan, Vice President: This appeal by the assessee is directed against the final Order of Assessment dated 30.3.2021 by the National E-Assessment Centre, Delhi, (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 2016-2017.

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("AE") M/S/Atmecs Inc., USA (Atmecs US). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services to AE was an “international transaction”. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm’s length price. 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 to the AE.

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Summary of margins of comparable companies in North America engaged in software distribution Comparable Companies OM PLI Summary Sl. Company 2016 2015 2014 2014-2016 No. Name Weighted Average 1. Tech Data 1 01% 0.92% 1.02% 1.12% Corp 2. Ingram 1.29% 1.35% 1.44% 1.33% Micro Inc 3. Wayside 2.95% 2.51% Technology 2.23% 2.43% Group Inc 4. Synnex Corp 2.73% 2.31% 2.54% 2.54% 5. Scansource 3.73% 3.60% NA 3.49% Inc 6. Eplus Inc 6.47% 6.41% 5.90% 6.27% 7. Rand Worldwide 8.15% 8.91% Inc. NA 9.71% Data Count Lower Quartile 3 2.51% Median 4 2.54% Upper Quartile 5 3.60%

ATMECS US – Segmental data for the period April 2015 to March 2016 Particulars Off-shore On-site Others Total Remarks business business Consulting - Income 54,95,070 93,86,612 Note 1 Rental Income 3,361 3,361

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Other -9,104 -9,104 Difference is a due to credit memos % of segment revenue on 58.54% 41.46% total revenue Operating Income 54,95,070 38,91,542 -5.743 93,80,869 Cost of Sales - - 36,08,444.90 36,08,445 Note 2 Onsite - Expenses - 20,75,030 20,75,030 Note 3 Payroll for employees working onsite and vendor payments onsite Other - Operating costs 16,94,298 13,53,551 30,47,849 Business Tax - - 1,071 1,071 Federal taxes Operating Expenses 53,02,743 34,28,581 1,071 87,32,395 Operating profit 1,92,327 4,62,961 -6,814 6,48,474 OP/OR 3.50% 11.90%

The Off-Shore business segment of the Atmecs US is the services provided by the Assessee to Atmecs US. The OP/OR earned by Atmecs US who was chosen as a tested party was compared with

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the OP/OR range of the aforesaid 7 comparable companies and it was claimed that since Atmecs US margin were within the range of comparable companies, the Price paid in the International transaction has to be regarded as at Arm’s Length. 4. The Transfer Pricing Officer (TPO) to whom the question of determination of ALP was referred by the AO u/s.92C of the Act, issued a show cause notice dated 24/9/2019 wherein he proposed to reject TP study as the taxpayer had chosen its parent company as a foreign tested party and had benchmarked the international transaction relating to software company by applying TNMM. In response to this notice, the taxpayer has given a detailed reply dated 11/10/2019 stating that the assessee objects to the TPOs proposed rejection of choice of foreign AE as tested party by citing various reasons supported by several case laws. 5. The TPO rejected the TP study of the assessee choosing foreign AE as tested party. According to the TPO, the OECD transfer pricing guidelines and the UN transfer pricing manual provide guidance on selection of tested party. The tested party is the party to the transaction which is least complex and for which reliable data is available without requiring significant adjustments. The taxpayer is engaged in providing information technology consultation service, software development and testing services. The assessee is an offshore resource provider helping businesses to accurately determine the technical, business and team composition, while supporting them

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through a variety of team project models that range from contract staffing to project-based staffing. The TPO made a examination of the relevant statutory provisions of the Act and the Income Tax Rules, 1962 (Rules) He referred to the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to Avoidance of Tax" dealing with the computation of income from international transactions having regard to ALP. He referred to the provisions of Section 92(1) of the Act provides that: 'Any income arising from an international transaction shall be computed having regard to the arm's length price'. The term "international transaction" has been defined in section 92B to mean 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase... of tangible.. property..... The, methodology for computation of arm's length price of an international transaction has been set out in section 92C(1) of the Act to be as per any of the prescribed methods, including the TNMM method. He referred to the provisions of Rule 10B of the Rules, dealing with the determination of arm's length price under section 92C which provides through sub-rule (1) that for the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method. The mechanism for determining ALP under the TNMM method has been enshrined in clause ( e) of rule 10B (1) which reads as under :

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(i) the net profit margin realized by the enterprise from an international 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 realized 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 (i) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international 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: (i) 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) (ii) 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. According to the TPO a cursory look at the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such an international transaction is required to be determined at ALP: thirdly, the ALP in respect of such an international transaction should be determined by one of the prescribed methods, which also includes the TNMM. The term 'enterprise' under the TNM method, and for that matter all other

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methods, has been used to indicate the assessee in whose hands the benchmarking of the international transaction is done and the term associated enterprise' has been used to denote the foreign/AE, being the other related party to the international transaction. As regard to the TNM method, rule 10B(1)(e)(i) provides that the net profit margin realized by the enterprise from an international 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, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining the ALP of an international transaction under this method is that, firstly, the profit rate realized or earned by the assessee from a transaction with its AE is determined (say. profit A). which is then compared with the adjusted rate of profit of comparable cases (say, profit B) so as to ascertain if profit A' is at arm's length vis-à-vis profit B' If it is not, then, an addition on account of transfer pricing adjustment, subject to other provisions, is made in the hands of the assessee having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit 8) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus, the calculation of profit B' may undergo change with the

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varying set of comparable cases. However, insofar as calculation of profit A' is concerned, the same has to necessarily result in the hands of the assessee-enterprise (Indian entity) only from the transaction between two or more associated enterprises, as it is the mandate of section 92 read with section 92B in juxtaposition to rule 10B. The natural corollary which, ergo, follows is that under no situation can the calculation of profit' A be submitted with anything other than the profit realized by the assessee-enterprise from the international transaction. So, under the TNM method, it is the net profit margin realized by the Indian assessee-enterprise from the transaction with its foreign/AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise with the profit realized by the foreign/AE for the purpose of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign/ AE. He held that profit realized by the foreign/AE cannot be relevant, when the profit of the Indian enterprise is sought to be ensured at ALP. He therefore rejected the TP study of the assessee holding that the foreign/AE cannot be considered as a tested party for determining the ALP of the international transaction, as it has no statutory sanction. He also drew support for his conclusions as above from the decisions of ITAT Mumbai Bench of the Tribunal in Onward Technology Ltd. Vs. DCIT

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(2013) 36 CCH 46 (Mumbai) holding that Foreign/ Associated Enterprise cannot be a tested party. Similar view has been taken in Aurionpro Solutions Ltd. Vs. ACIT (TS-75-I TA T- 2013 (Mum)-TP) - (2013) 27 ITR (Trib) 276 (Mumbai). In the light of the foregoing discussion, the TPO rejected the foreign/Associated Enterprises as a tested parties. 6. The TPO also referred to Rule 10B 2(d) which specifies that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to condition prevailing in market in which the respective parties to the transaction operate including the geographic location and the size of the market, laws and government order in force, cost of labour and capital in the market. overall economic development and level of competition and whether the market are retail or wholesale. Thus as per the above rule following important factors shall be looked into for comparability test- Conditions prevailing in the market. Geographic location Size of the market Laws and government order in force. Cost of labour Capital in the market Overall economic development and level of competition - Retail/wholesale market

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He held that if the assessee is taken as tested party then all the above factors in relation to the comparables in uncontrolled transactions can be judged. However. in case the foreign AE is taken as tested party the above factors being entirely different cannot be judged into. Based on the above discussion, the taxpayer has been considered as tested party. The TPO accordingly rejected the selection of foreign AE as tested party and considered the taxpayer as a tested party for benchmarking the international transactions. The TPO also held that in view of section 92C(3)(c), it is relevant to hold that the data used in computation of the arm's length price is not reliable or correct. The TPO thereafter proceeded to determine arm's length price by conducting an independent search for comparables considering the functions of the taxpayer, the assets employed and the risks taken and the results of the search is given in the following paras.

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“2.1.2 The P&L account as computed by the TPO Particular SWD Revenue from operations 236484177 Expenditure 230252330 Employee benefit expenses 182295434 Finance cost 2042322 Depreciation and Amortisation expense 5213634 Other expenses 40700940 Profit before taxes 6338492 OP/OC 2.75%

“10. The final list of comparables along-with year wise OP/OC margins are as follows:

Financial Year wise OP/OC (%) Sl.No. Company Name 2015- 16 201415 2013-14 Average

Kals Information Systems 1 4.33 5.77 16.94 8.73 Pvt. Ltd.

2 Rheal Software Pvt. Ltd. 3.29 3.02 36.38 14.54

CG-V A K Software & 3 20.16 19.87 13.81 18.05 Exports Ltd.

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4 Inteq Software Pvt. Ltd. 7.64 32.95 45.36 20.47

5 Tata Elxsi Ltd. 26.69 20.55 13.16 20.60

6 R S Software (India) Ltd. -1.96 32.66 24.14 20.87 Larsen & Toubro 7 21.12 24.24 23.07 22.69 Infotech Ltd. 8 Nihilent Ltd. 15.94 29.19 33.12 25.64

9 Cigniti Technologies Ltd. 27.27 4.99 27.59 27.34

10 Persistent Systems Ltd. 23.95 30.40 35.10 29.25 Infobeans Technologies 11 35.19 20.92 42.60 32.71 Ltd Aspire Systems (India) 12 33.63 30.45 37.21 33.55 Pvt. Ltd. 13 Infosys Ltd. 38.62 41.38 36.16 38.74

14 Thirdware Solution Ltd. 30.18 42.46 48.17 39.86

15 Cybage Software Pvt. Ltd. 62.06 68.30 68.97 66.03

35th Percentile 20.87

Median 25.64

65th Percentile 33.55

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* For FYs 2013-14 & FY 2014-15, if the comparable fails one of the quantitative filters or is found to be not carrying out similar functions, then margin for that year was not included.”

“24 Computation of Arm's Length Price: 24.1 The median of the weighted average Profit Level indicators is taken as the arm's length margin. Please see Annexure A & B for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: (computation has to be included) SWD SEGMENT Particulars Formula Amount (in Rs.Lacs) Taxpayers operating revenue OR 236484177 Taxpayers operating cost OC 230252330 Taxpayers operating profit OP 6338492 Taxpayers PLI PLI=OP/OC 2.75% 35th Percentile Margin of comparable set 20.87 Adjustment Required (if PLI< 35th Percentile) yes Median Margin of comparable set M 25.64 ALP=(1+M)x Arm's Length Price 28,92,89,028 0C Price Received OR 23,64,84,177 Shortfall being adjustment ALP-OR 5,28,04,851

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24.2 The above shortfall of Rs.5,28,04,8511- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions.”

The Learned (Ld) Assessing Officer (AO)/Ld 1 . Dispute Resolution Panel (DRP) are erroneous in law and on the facts of the case. The Ld. DRP/AO failed to understand and 2 . appreciate the operating vertical of the assessee company and further erred in classifying the services of the Assessee as "software development" and not "contract staffing"; The Ld DRP/AO erred in not considering 3 . ATMECS USA as a foreign tested party in the

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process of benchmarking the transactions between the Assessee and ATMECS USA. The Ld DRP/AO erred in rejecting the transfer 4 . pricing study maintained by the Assessee, thereby rejecting ATEMCS USA, our AE as tested party at the threshold. The Ld DRP/AO erred in not appreciating the 5 . fact that selection of foreign AE as a tested party is in line with the OECD TP guidelines and UN TP Manual. The Ld DRP/AO erred in not providing certain 6 . capacity utilization adjustments, risk adjustments and working capital adjustments in accordance with Rule 10B of the Act. The Ld DRP/AO are not justified in law in 7 . considering wrong comparables and consequently arriving at a high operating profit margin of 25.64% as a ratio of OP/OC. The Ld DRP/AO is not justified in law in making 8 . an adjustment u/s 92CA of Rs 5,28,04,851/- to the price received by the appellant. The Ld. TPO, while including the Companies as 9 . comparables has erred in applying the appropriate filters. Without prejudice to the above grounds, the Ld 1 0 . DRP/AO erred in selecting the below companies as comparables on the grounds of functional comparability, super profit, high turnover or other appropriate filter etc. S.No. Name of the Company 1 Kals Information Systems Pvt. 2 Rheal Software Pvt. Ltd. 3 C G-V A K Software & Exports 4 Inteq Software Pvt. Ltd. 5 Tata Elxsi Ltd. 6 R S Software (India) Ltd. 7 Larsen & Toubro Infotech Ltd. 8 Nihilent Ltd.

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9 Cigniti Technologies Ltd. 10 Persistent Systems Ltd. 11 Infobeans Technologies Ltd. 12 Aspire Systems (India) Pvt.Ltd. 13 Infosys Ltd. 14 Thirdware Solution Ltd. 15 Cybage Software Pvt. Ltd. 11. Without prejudice to the above grounds, the Ld TPO, while including the Companies as comparables has erred in computations of the margins and has considered wrong margins of the companies in the final list of comparables. 12. The Ld AO erred in levying interest u/s 234B and 234C of the Act against legally untenable adjustments. 13. Any other ground that may be urged at the time of hearing with the prior approval of the Hon'ble Tribunal. 12. At the time of hearing, the learned Counsel for the assessee did ot press for adjudication of Grd.No.2. Grd.No.1 is general and calls for no particular adjudication. Grd.No.12 is purely consequential and Grd.No.13 is general and does not call for any specific adjudication.

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(g) Nihilent Ltd. (h) Tata Elxsi Ltd. (i) R.S.Software (India) Ltd. In Grds.6, 7, 9 and 11, the Assessee has challenged inclusion of comparable companies by the TPO. Besides, the above, the learned counsel for the Assessee prayed for adjudication of ground with regard to not allowing risk adjustment, working capital adjustment projected in Grd.No.8 of the grounds of appeal. The other grounds that calls for adjudication is Grds.3 to 5 with regard to the grievance of the Assessee in not accepting the TP study of the Assessee choosing the foreign AE as a tested party.

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(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)......

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(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:— (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. 15. 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

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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.

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“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 as comparable with each other was held to be

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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.”

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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

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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 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

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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). 20. In view of the aforesaid decision, we hold that the 8 companies listed in Sl.No.(a) to (i) in paragraph -13 of this order, which the assessee seeks exclusion and whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. This Tribunal in the case of Barracuda Networks India Private Limited Vs. DCIT in IT(TP)A No.229/Bang/2021 has also reiterated the application of turnover filter on the same lines as indicated above.

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above 15%. Following the said decision, we direct exclusion of R.S.Software (India) Ltd. from the list of comparable companies.

22A. As far as grant of risk adjustment is concerned, though the assessee has given a general note with regard to assessee’s right to claim

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risk adjustment while computing ALP, no specific details have been given with regard to allowing risk adjustment. In this scenario, we are of the view that it would be just and appropriate to remand the issue to AO/TPO with a direction to the assessee to furnish computation of risk adjustment and the basis of claim for deduction on account of risk adjustment. The TPO will consider the same after affording the assessee opportunity of being heard and allow adjustment on account of risk, in accordance with law. In this regard, we find that the DRP has not called for the computation of manner of risk adjustment and has merely proceeded to hold that the risk adjustment cannot be granted unless it is established that differences has a material effect on the margin of the comparable companies and computation can be made on reliable data without calling for working of risk adjustment. Such conclusions in our view cannot be sustained.

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selected by the i.e. ATMECS India has incurred high costs in its profit and loss account as the capacity of the asset, building, employee, etc., had remained under-utilised. However, where the TPO applied TNMM mechanically, the margin of the Company is lower at the net margin level compared to the comparables in public databases which generally have stable operations and hence mean margin of-comparables is positive. This is due to the extra ordinary conditions that the comparables do not face. To offset the extra ordinary conditions, the assesee humbly submits to resort to the capacity utilisation adjustment. Rule 10B(3) of the Rules specifically states that an uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if 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 transaction in the open market. He submitted that `Difference' between tested party and comparables are significant when tested party is a newly established entity and the differences are likely to materially affect the profit from such transactions in the open market. Thus, a transfer pricing analysis 'done without accounting for capacity utilization adjustment would not bring out the correct result. He therefore submitted that in determining the arm's length price for the international transaction entered into by the assessee, the difference for the risks borne, capacity utilized by the assessee vis-à-vis the comparable companies needs to be factored

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into. Reference was made by him to the following decisions in support of the contention that adjustment on account of under utilization of capacity has to be allowed. i) M/s SAP Labs India (P.) Ltd. [2012] 17 taxmann.com 16 (Bang.) ii) M/s Meritor LVS India Pvt. Ltd. [ 2015] 64 taxmann.com 136 (Bangalore - Trib.) iii) M/s. Symantec Software Solutions Pvt. Ltd. Vs ACIT (2011) 46 SOT 48 (Mumbai). 24. The Learned DR relied on the order of the DRP and submitted that the Assessee has not given any calculation of capacity utilization details nor has he requested the TPO for obtaining such details from the comparable companies chosen by the TPO.

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capacity underutilisation for the reason that the Rules do not provide for any adjustment in the hands of the tested party. The assessee also failed to demonstrate that these factors are unique and peculiar to the assessee's case and does not exist in the case of the comparable.”

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the data and method of computation of under utilization capacity adjustment, the tribunal held that the claim depends on acceptability of such adjustments being concerted, being reasonably accurate in mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. The tribunal held that once it is accepted that the assessee has under- utilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same, such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case, would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) of the Act. The Tribunal gave the following directions in this regard, viz., the TPO to exercise powers under section 133(6) of the Act to call for information on capacity utilization of the comparable companies such as -- • Installed Capacity, • Actual Production in Units, • Break-up of Fixed Cost and Variable Cost; • Segmental/ product wise information, if any. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obtained, and accordingly, grant the adjustment for capacity under-utilized.

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2017, UN Practical Manual on Transfer Pricing for developing countries 2013 ("UN TP Manual") and the US regulations have provided some guidance for selecting the tested party. He drew our attention to the relevant extracts of OECD Guidelines, have been provided below for your Honour's reference and UN TP Manual: (i) Para 3.18 of the OECD Guidelines, which states the following:

3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. Further, the OECD Guidelines indicate that, the tested party ought to be the enterprise that offers a higher degree of comparability, with uncontrolled companies. Consequently, the enterprise that requires the least amount of adjustments as compared to potentially comparable companies should be the tested party. Accordingly, the tested party should be the participant in a transaction which would have higher degree of comparability or would require lesser adjustment. Thus, for the

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purpose of undertaking a rational transfer pricing comparability analysis, tested party has to be the enterprise which would be the least complex and assumes lesser risk amongst the transacting parties.

(ii) separate 'India' section of the UN TP Manual which states as under: "...10.3.1.3. The regulation prescribes mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpayer in case international transactions between associated enterprises cross a threshold and contains stringent penalty implications in case of noncompliance. The primary onus of proving arm's length price of the transaction lies with the taxpayer. Indian transfer pricing administration prefer Indian comparables in most of the cases and also accept foreign comparables in cases where foreign associated enterprises is less or least complex entity and requisite information are available about tested party and comparables." Based on the above, he submitted that even the Indian Government's stated / declared position on the issue is that the foreign AE can be considered as the tested party when the foreign AE is the less / least complex entity and requisite informati:-available about the tested party and the comparable. He submitted that based on the above, the following four conditions that need to be evaluated while concluding upon a party as 'tested party':

The party that is the least complex in terms of functions  performed, assets employed and risks undertaken should be

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selected as the 'tested party' i.e., the party to the international transaction whose functions are simpler to evaluate, which does not own valuable non routine intangible assets and does not undertake substantial business risks. Reliable information about the 'tested party' must be  easily and readily available and should be capable of being verified independently. Reliable information about the 'comparable companies'  must be easily and readily available and should be capable of being verified independently. The available information on 'tested party' and  'comparable companies' shall be sufficient to carry out reliable adjustments for material differences, if any. 29. He submitted that the assessee in the present case satisfies all the parameters and was right in law to have chosen foreign AE ATMECS US as a tested party in its Transfer Pricing Analysis.

ATMECS US is engaged in provision of software  development support and other services. The operations of ATMECS US are divided into two segments i.e., onsite and offshore. While onsite services are being handled by ATMECS US, ATMECS India is responsible for the management of the off-shore projects relating to software development services undertaken by it.

With regard to the offshore segment of ATMECS US,  the role of ATMECS US is limited to acting as a distributor of the services of ATMECS India in the US region. ATMECS US undertakes lead generation of services to be distributed and once agreed, it contracts with the third-party customers. There ends the role of

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ATMECS US in the supply chain of services. Hence, with respect to the offshore services, ATMECS India undertakes the end-to-end delivery of the project to the customers as primary instructions are received from customers. In relation to the services sub-contracted/ distributed  by ATMECS US, the clients provide their functional requirement and specifications. ATMECS India is involved in understanding the clients' requirements. The engineers supporting and providing the services in ATMECS India interact directly with the third-party customers, understand the requirements, modifications, alterations or any additional features required in the services delivered. Thus, ATMECS India is primarily responsible for the assessment of client requirements. ATMECS India is responsible for the management of  the off-shore projects undertaken by it. ATMECS India's software development team undertakes software coding according to the functional specifications and requirement analysis agreed with the client. Further, ATMECS India is responsible for the quality of the services rendered by it. ATMECS India undertakes the initial testing during the development process, and also on completion of the development, to ensure that the service meets the specification/ requirements of the project as agreed with the client. ATMECS India recruits, trains and retains skilled  technical professionals and is responsible for reviewing and approving the overall plan/ strategy of resource allocation/ utilization. Retaining the talent and resources is a significant driver to maintain the quality of delivery.

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Further, the Intellectual Property Rights ('IPR')  developed is generally owned by the client. ATMECS India perform functions as per requirements of clients, using its IPR. ATMECS US involvement in the performance and  execution of the service and delivery is very negligible. It acts as a client facing entity for contracting purposes and helps ATMECS India establish its business in the US region. It merely acts as a distributor/ marketer for the offshore services delivered and does not have any valuable, unique contribution in relation to the transaction. As evident from the functional profile, most of the  functions in the entire supply chain of the services are rendered by ATMECS India with respect to the offshore business. Accordingly, ATMECS India also bears majority of the risks associated with the business such as market risk, underutilization of resource risk, rework risk, service liability risk, etc. The contracts entered by ATMECS US with the third-  party customers also provide that ATMECS India will perform all tasks and duties assigned by the Customer Stakeholder and shall be managed by the "Contractor Manager — Project Management" on a day-to-day basis. Hence, once a contract is signed, ATMECS US shall have no further role to play in delivery of the project. 30. The learned counsel for the Assessee submitted that the term 'Enterprise' and 'associated enterprise' under TNMM and all other methods, in absence of any specific legal provision,

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restrictive interpretation of the term 'Enterprise' and 'associated enterprise' is uncalled for. The Indian TP regulation postulate/envisage construing both Indian Assessee as well as overseas AE as a tested party as may be suitable in fact and circumstances of the case. Sub rules (2) and (3) of Rule 10B of the Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. As per Rule 10B(2), the factors prescribed for inclusion or exclusion of comparables to determine the ALP are based on the comparison of the Assessee with the chosen entities. It was submitted that the operative word used in the said rule is respective parties to transaction rather than Assessee. A construction, which interprets respective parties to transaction to mean “Assessee”, is prima-facie inappropriate, and it would be rationale to consider that legislation by design, by using an open-ended phrase (i.e respective parties to the transactions), has kept the possibilities of considering both parties to transactions as tested parties alive. It was submitted that the Indian TP legislation has been consistent in using such open ended or generic phrase (i.e enterprise, respective parties to the transactions), across the relevant rules and provisions, basis which considering only party (i.e Assessee) as the relevant party would tantamount to reading

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something which is neither written nor intended by the legislation. The Indian TP regulation could be constructively construed to allow considering both Indian Assessee as well as overseas AE in the periphery of tested party. Even if Indian TP regulations were silent on this issue, it would be in line with common judicial position that international guidelines (such as OECD & UN TP Guidelines) could be restored to for interpreting local regulation unless they are expressly repugnant to each other. Thus, the term 'Enterprise' under TNMM and all other methods could include both the Assessee as well the AE being the other related party to the international transaction.

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determine ALP of its international transactions and also submitted relevant evidences and documents to establish functional profile and risks assumed by its AEs and the TPO rejected same and undertook a fresh search for external comparables, the TPO himself had not attached any sanctity to TP documentation as submitted by assessee, he could not foreclose assessee from canvassing issue that subsidiaries were least complex entities which should be taken note of and matter was remanded back to TPO.

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“24. Before doing so, we may point out the following. The assessee in ground Nos.6 to 8 before the Tribunal had contested the issue relating to consideration of the foreign AE as tested party. The assessee has submitted evidences and documents relating to the assessee's transfer pricing documentation, global transfer pricing reports of the foreign AE at United Kingdom, Australia and German; extracts of inter-company service agreement, reconciliation of operating credits earned by the overseas subsidiaries. etc. So far as the risks assumed by the assessee, the same has been elaborately brought out in the TP documentation as could be seen from paragraph 4.03.3 under the sub heading Risks Assumed and paragraph 4.06 under the sub heading Associates Employed. This vital material has not been considered by the TPO but the assessee has been precluded from canvassing the said issue on the ground that the stand taken during the course of TP proceedings was not what was the subject matter of the TP documentation/TP study of the assessee. The question would be whether this could be the reason for rejecting the assessee's plea. This issue has been considered by the Tribunal in several decisions. 25. In Yamaha Motor (P.) Ltd., the question arose as to whether the word 'Associated Enterprise' can be given a restrictive meaning to mean the other party to whom the assesee has sold or purchased goods. It was held that under the Act and the Rules, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably and the arguments that the Enterprise will mean the assessee and the Associated Enterprise will mean the other party to whom the assessee has sold or purchased goods is incorrect. As could be seen from the definition of Enterprise given in section 92F(iii) and Associated Enterprise as defined in section 92A of the Act, it is evidently clear that the statute does not indicate that 'Enterprise' shall mean the assessee and the 'Associated Enterprise' will mean the other party. As pointed out earlier, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably. Therefore, the conclusion of the Tribunal in this regard is not sustainable.

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responsible to ensure sufficiency of information/data and accordingly cannot be precluded to conduct a fresh search. However, when such is the legal position, as rightly understood by the TPO, the assessee should not have been foreclosed. Therefore, we are of the clear view that the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee's claim to refer to the foreign AEs as tested party is legally not sustainable.”

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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 : 20.12.2021. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

ANNEXURE Atmecs India Kals Rheal CG-V A K R S Software Inteq Infobeans Information Software Software (India) Ltd. Software Technologie Systems Pvt. Ltd., & Exports Pvt. Ltd. s Ltd. Operating Sales i 23,65,77,214 8,46,00, 000 21,57,49,6 58 30,23,00,0 00 8,68,80,00,0 00 62,94,75,7 84 1,30,03,44, Pvt. Ltd., Ltd. 049 - 00 49,10,07,1 85 98,19,63,048 Operating Costs ii 20,13,16,814 7,79,00,000 25,64,00,0 00 7,18,80,50,0 18,84,35,8 iii 3,52,60,400 67,00,000 2,73,13,831 4,59,00,000 1,49,99,50,0 00 13,84,68,5 99 31,83,81,001 Operating Profit (i-ii) OP/OC (iii/ii) iv 17.51% 8.60% 14.50% 17.90% 20.87% 28.20% 32.42% 80,11,005 1,08,09,938 2,70,15,618 36,67,34,333 3,28,41,616 9,38,68,816 Receivables & Inventories v 66,500 40,91,946 Payable (trade) vii 28,43,023 1,10,000 45,10,518 14,80,189 12,22,72,333 79,01,005 62,99,420 2,55,35,429 24,44,62,000 3,28,41,616 8,97,76,870 Working Capital (v-vii) ix -27,76,523

79,01,005 62,99,420 2,55,35,429 24,44,62,000 3,28,41,616 8,97,76,870 (27,76,523) 6.69% 9.14% Comparables Working x -1.38% 10.14% 3.34% 9.96% 3.40% Capital/ OC (ix/ii) -1.38% xi -1.38% -1.38% -1.38% 1.38% -1.38% Taxpayer Working Capital/ OC (ix/ii) -10.52% -4.78% -8.07% Difference (A) (xi-x) xii -11.52% -4.72% -11.34% 14.60% Interest rate benchmark (PLR) xiii 14.60% 14.60% 14.60% 14.60% 14.60% -1.18% -1.54% -1.66% -0.70% Working Capital adjustment xiv -1.68% -0.69% (xii*xiii) Net OP/OC (iv+xiv) xv 6.92% 13.81% 16.25% 20.17% 27.02% 30.89% Atmecs OP/OC 17.51% 35th percentile 2.1 3rd place 16.25% 65th percentile 3.9 4th place 20.17% Hence, transactions entered by ATMECS India are at arm's length as the OP/OC is 17.51 which is within the range i.e 16.25% to 20.17