M/S VERIFONE INDIA TECHNOLOGY PVT LTD ,BANGALORE vs. INCOME TAX OFFICER WARD-12(2), BANGALORE

The learned AO/ learned TPO/ Hon'ble CIT(A) erred in rejecting the Transfer Pricing ("TP") documentation maintained by the Appellant by invoking provisions of sub-section (3) of section 92C of the Act.

The learned AO/ learned TPO/ Hon'ble CIT(A) erred in disregarding multiple year data and they ought to have accepted the use of contemporaneous data due to non-availability of current year data in the public domain at the time of preparing the documentation.

The Ld.AO noted that assessee for the year under consideration has entered into international transaction with its associated enterprise exceeding Rs.15 crores and therefore the matter was referred to the Transfer Pricing officer for computing the arm’s length price of the international transaction.

Upon receipt of the reference, Ld. TPO called upon assessee to file economic details of the international transaction in Form 3 CD. 5. The Ld.TPO noted that assessee entered into following international transaction: Type of transaction Amount (Rs) Sl no 1 R & D Services 19,19,57,973 2 Tech Support Services 3,81,89,551 Total 23,01,47,524 5.1 The Ld.TPO observed assessee carried out following functions as per TP document: “Verifone India Operations: Currently Verifone India is carrying out R & D Services as per requirement of Verifone Singapore. Verifone India currently employs over 156 employees. Verifone India has basic strengths in software development and rendering technical support for the various requirements of Verifone Singapore in the Payment solutions. Verifone India operations are funded by Venfone Singapore. The details of R & D services that Verifone India currently provides to Verifone Singapore are: a) Software development projects as agreed from time to time between Verifone Singapore and Verifone India. b) Assisting with research and development project/program issues in coordination with Verifone Singapore personnel or personnel of verifone Singapore Subsidiaries or affiliates worldwide; c) Testing and documenting the results of the research and development work undertaken pursuant to agreement d) Providing such other research and development services reasonably requested by Verifone Singapore that are related to the above services

The Ld.TPO rejected the comparables selected by assessee by applying following filters:

Thereafter, the Ld.TPO applied following filters and selected following set of 11 comparables which included 8 new comparables and 3 comparables selected by assessee in the TP document:

While considering the working capital adjustment that the Ld.TPO took the view that, working capital adjustment is to be restricted to the average working capital component of the comparables which is 1.98%. However while computing the margin the Ld.TPO failed to grant such adjustment and computed the shortfall being Rs.1,54,34,883/-.

Upon receipt of the order under section 92CA, the Ld.AO while passing the draft assessment order was passed making following additions in the hands of assessee: • deduction under section 10 B disallowed-Rs. 29,581,804/- • expenditure towards software purchased to be capital in nature- Rs.26,90,426/- • disallowance of income from other sources being interest- Rs.67,321/-

Aggrieved by the draft assessment order, assessee preferred appeal before the Ld.CIT(A).

The Ld.CIT(A) while considering the comparables alleged by assessee for exclusion, upheld exclusion of Infosys Ltd., Kals Information Systems Ltd. (seg.), Persistent Systems Ltd., Tata Elxsi Ltd.(seg.) As these comparables were excluded in assessee’s own case by this Tribunal for assessment year 2008-09 on basis of functionality. However upheld the other comparables. 12. In respect of deduction claimed under section 10 B by assessee, the Ld.CIT (A) directed the Ld.AO to consider the claim in accordance with the ruling of Hon’ble Karnataka High Court in case of Tata Elxsi Ltd. reported in (2012) 349 ITR 98. As regards the software expenses disallowed amounting to Rs.26,90,426/-it was submitted that TDS was deducted by assessee which the Ld.CIT(A) directed Ld.AO to verify the claim and allow the payment, if TDS is found to be deposited. 13. Aggrieved by the order of the Ld.CIT(A), assessee as well as revenue are in appeal before us. 14. At the outset the Ld.AR submitted that amongst the grounds raised

The Ld.AR placed reliance on the decision of coordinate bench of this Tribunal in case of DCIT vs Northern Operating Services reported in (2019) 108 taxmann.com 451 in support of its contention. He submitted that for the same year under consideration this Tribunal excluded the comparables for having high turnover. He submitted that, this coordinate bench of this Tribunal in case of Genesis Integrating systems vs.DCIT reported in (2012) 20 taxmann.com 715, suggested guideline in the matter of turnover filter and the categorisation of software companies in the Dunn and Bradstreet study to be adopted as a method of classification of companies by size. It was submitted that the 3 categories of firms were identified that is small with turnover less than 200 crore, medium with turnover Rs. 200 to 2000 crore and large with turnover greater than 2000 crore. The Ld.AR further submitted that ITAT Mumbai Tribunal in case of Capgemini India Pvt.Ltd., vs ACIT reported in (2015) 58 taxmann.com 175, held that, the concept of economic upscale cannot be applied to service delivering companies and that there is no empirical

The Ld.AR submitted that, even otherwise these comparables are not functionally similar with that of assessee as they are involved in software products as has been observed by coordinate bench of this Tribunal in case of DCIT vs Electronics for Imaging India Pvt.Ltd., reported in (2016) 70 Taxmann.com 299 for assessment year 2010-11, and various other decisions in support of this contention.

On the contrary, the Ld.Sr.DR relied on orders passed by the Ld.CIT(A).

We have perused submissions advanced by both sides in light of records placed before us.

Decision of coordinate bench of this Tribunal in case of Autodesk India Pvt. Ltd., vs DCIT reported in (2018) 96 Taxmann.com 263 has analysed every conflicting view and concluded that the law laid down in case of Genesis Integrating Systems India Pvt. Ltd. (supra) has to be followed. The relevant observations of this Tribunal are as under: “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 Systems (I) (P.) Ltd. (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 Page 12 of 17 & 3119/Bang/2018 Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating Systems (I) (P.) Ltd. (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 Systems (I) (P.) Ltd. (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 (P.) 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 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).”

For the above reasons we direct Ld. AO/TPO to exclude Larsen and Toubro Infotech Ltd., Mindtree Ltd., Sasken Communications Technologies Ltd. on the issue of application of upper turnover filter from the finalist. Accordingly grounds 6-7 stands allowed.

Ground No. 9 raised by assessee is on working capital adjustment not having granted by Ld. AO.

The Ld.AR submitted that the Ld.AO while discussing working capital adjustment made an observation that assessee is Page 13 of 17 & 3119/Bang/2018 to be given working capital adjustment on the average margin at 1.98%.

We have considered the rival submissions advanced by both sides on this issue in the light of records placed before us.

We note that the Ld.TPO restricted the working capital adjustment to be at 1.98%. However while computing the adjustment the same was not granted.

Rule 10B(3) of the Income-tax Rules, 1962, supports the said action of the TPO in granting a working capital adjustment. In the following decisions rendered by coordinate bench of this Tribunal in case of, TNT India (P.) Ltd. reported in (2011) 10 Taxmann.com 169 (para 13), B earing Point Business Consulting (P.) Ltd. reported in (2013) 33 Taxmann.com 92 (para 5.4) and Apigee Technologies (India) (P.) Ltd. reported in (2015) 63 Taxmann.com 129 (paras 17 to 19) it has been held that adjustment towards working capital differences between the assessee and the comparables should be considered and appropriate adjustment granted in arriving at the profit margins of comparable companies for the purpose of comparison.

Respectfully following the same, we direct the Ld.AO/TPO to grant working capital adjustment in actuals for determined in the profit margin of comparables. Accordingly this ground raised

While considering the comparables for exclusion in assessee’s appeal on turnover filter we have made categorical observation regarding applicability of upper turnover filter based on the suggestions rendered by coordinate bench of this Tribunal in case of Genesis Integrating (supra); 37. The observations by us in the paragraphs hereinabove are applicable for these comparables as these comparables have turnover more than 200 crores and therefore cannot be considered with a captive service provider like assessee that works on cost plus basis. 38. Further it is also observed by is that, functionally this comparable are not similar with that of assessee as it has huge intangibles, and carries out services in diversify date areas which is not akin to the services rendered by assessee to its AE. 39. We therefore uphold the observation of the Ld.CIT(A) in excluding these comparables from the finalist. Accordingly the grounds raised by revenue in its appeal stands dismissed. In the result appeal filed by revenue stands dismissed. Order pronounced in the open court on 12th February, 2021 Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 12th February, 2021. /Vms/