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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. O R D E R Per N.V. Vasudevan, Vice President IT(TP)A.No.1410/Bang/2015 is an appeal by the Assessee while IT(TP)A.No.1520/Bang/2015 is an appeal by the Revenue. Both these appeals are directed against the final order of assessment dated 26.10.2015 of the ITO Ward 2 (1)(2), Bangalore now assessed with Deputy Commissioner of Income Tax, Circle- 2(1)(1), Bangalore, passed u/s. 143(3) r.w.s. 144C of the Income-Tax Act, 1961 [“the Act”] in relation to AY 2011-12.
The Assessee is engaged in providing software development services (SWD services) to its Associated Enterprises (AE). The transaction of providing SWD services to its AE by the Assessee was an international transaction and the price received for rendering such services by the Assessee from its AE has to pass the Arm’s Length Price (ALP) test as provided u/s.92 of the Income Tax Act, 1961 (Act). In this appeal the disputes is with regard to addition made consequent to determination of ALP and consequent upward revision and adjustment made to the price at which international transaction was carried out by the Assessee with its AE in respect of Software development Services(SWD services).
TP ADJUSTMENT RELATING TO IT SERVICES (Software Development Services:
There is no dispute that the Most Appropriate Method chosen for the purpose of comparison of the profit margin of the Assessee with that of the comparable companies was the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) chosen for the purpose of such comparison was Operating Profit to Operating Cost (OP/OC). The OP/OC of the Assessee in the SWD services segment was as follows:-
Description Amount Operating Revenue Rs.27,41,16,163/- Operating Cost Rs.23,93,94,023/- Operating Profit (OP) Rs.3,47,22,140/- Operating Profit to Cost(OP/OC) 14.50 % IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd.
The TPO rejected the Transfer Pricing Study of the Assessee and arrived at a set of 13 comparable companies with that of the Assessee and arrived at arithmetic mean of the profit margin of those 13 companies at 24.82% before working capital adjustment. The following chart will show the list of 13 comparable companies ultimately chose by the TPO and the arithmetic mean of the profit margin of those companies and the manner in which the TPO determined the ALP of the international transaction:
Sl. No. Name of the Company
1 Acropetal Technologies Ltd. (seg) 31.98 2 eZest Solutions Ltd. 21.03 3 E-Infochips Ltd. 56.44 4 Evoke Technologies Pvt. Ltd. 8.11 5 ICRA Techno Analytics Ltd. 24.83 6 Infosys Ltd. 43.39 7 Larsen & Toubro Infotech Ltd. 19.83 8 Mindtree Ltd.(seg) 10.66 9 Persistent Systems & Solutions Ltd. 22.12 10 Persistent Systems Ltd. 22.84 11 R S Software R.S.Software (India) Ltd. 16.37 12 Sasken Communication Technologies Ltd., 24.13 13 Tata Elxsi Ltd.(seg) 20.91 AVERAGE MARK-UP 24.82 Determination of ALP:
Arm’s Length Mean Margin on cost 24.82% Less: working capital Adjustment -0.48% (As per Annex -C) Adjusted margin 25.30% Operating cost Rs. 23,93,94,023/- Arms Length Price (ALP) Rs.29,99,60,711/- 125.30% of Operating cost) Price Receive Price Received Rs.27,41,16,163 3
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. Shortfall bei Shortfall being adjustment u/s. 92CA Rs.2,58,44,548
The Assessee objected to the manner of determination of ALP by the TPO before the DRP. The DRP excluded some of the comparable companies chosen by the TPO and also held that foreign exchange gain has to be considered as part of the operating profit for the purpose of computing OP/OC PLI. Aggrieved by the exclusion of one of the comparable chosen by the TPO by the DRP viz., Evoke Technologies Pvt.Ltd. both the Assessee and the Revenue are in appeal. The revenue is in appeal also against considering foreign exchange gain as operating profit for the purpose of computing OP/OC. The Assessee is aggrieved by not excluding some of the comparable companies chosen by the TPO and retained by the DRP. At the time of hearing however he restricted his grounds only to exclusion of three comparable companies retained by the DRP viz., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd.
As far as the appeal of the revenue is concerned, the tax effect in the said appeal is less than Rs.50 lacs and in view of the CBDT Circular No.17 of 2019 dated 8.8.2019, the appeal by the revenue is liable to be dismissed as not maintainable.
As far as the appeal of the Assessee is concerned, on the issue with regard to inclusion of Evoke Technologies Pvt.Ltd., as comparable company, the admitted factual position is that both the Assessee and the Revenue want its inclusion. The Assessee had chosen this company as comparable company in its TP study and the TPO accepted this company as comparable company. The DRP suo motto excluded this company from the list of comparable companies. The reasons assigned by the DRP for excluding this company was (i) that the margin of this company was abnormally low as compared to other comparable companies and (ii) Expenses on consultancy
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. charges increased by 1,118% which indicated that the low margins during the relevant period was due to peculiar circumstances. It is the plea of the Assessee before us that this company is functionally comparable as it was also a SWD service provider and that low margins cannot be the basis to exclude this company. It was submitted that the DRP has not spelt out as to how increase in consultancy charges resulted in peculiar circumstances prevailing in the case of this company. Our attention was drawn to a decision of the ITAT Bangalore in the case of M/S.Applied Materials India Pvt.Ltd. IT(TP) A.No.17/Bang/2016 & IT(TP)A.No.39/Bang/2016 order dated 21.9.2016 for AY 2011-12 wherein this company was regarded as comparable and include as comparable. The learned DR relied on the order of the DRP.
We are of the view that the reasons for exclusion of this company are not sound. When both the Assessee and the revenue seek inclusion of this company, there was no valid basis for the DRP to suo motto exclude this company from the list of comparable companies. In the decision cited by the learned counsel for the Assessee in the case of a SWD service provider such as the Assessee, this company was held to be a valid comparable company and included in the list of comparable companies. We therefore direct inclusion of this company in the list of comparable companies.
By way of additional ground No. 16, the Assessee has sought exclusion of the following three companies from the list of comparable companies viz., Larsen & Toubro Infotech Ltd., Persisten Systems Ltd., and Sasken Communication Technologies Ltd. Before we deal with exclusion of these 6 companies, we have to mention that the Assessee has in its Transfer Pricing study chosen Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd., as comparable companies. Further the Assessee has not chosen to challenge inclusion of these companies in the final list of comparables by the TPO. However, for the first time, the Assessee seeks to agitate before the Tribunal, exclusion of these three companies from the list of 5
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. comparable companies. The reason for doing so has been explained as non- availability of more details in public domain and subsequent available of details in public domain which renders these companies as not comparable with Assessee engaged in SWD services such as the Assessee. The learned counsel for the Assessee has relied upon the decision of the Special Bench in the case of DCIT v. Quark Systems P. Ltd, [42 DTR 414] wherein the functionally comparability of these companies have been examined by this Tribunal and pleaded that the additional ground raised by the assessee may be admitted for adjudication on merits. Ld. AR has submitted that in a series of decisions, the Tribunal has held that there cannot be estoppel against the law and the non-comparable companies even if selected by the assessee in TP study, the same should be rejected. On the other hand, Ld. DR has vehemently objected to the admission of the additional ground raised by the assessee.
We have considered the rival submissions. Though the assessee included these three companies in the list of comparables as part of the TP study analysis, however, mere inclusion of the companies in the list of comparables does not operate as estoppel against the assessee, if on examination of the relevant facts it is found that these companies are functionally not comparable with that of assessee. Therefore, the selection of the companies by the assessee itself is not the finality of the comparability of the entities when the TPO has to examine the functional comparability as well as the other filters for inclusion or exclusion of the companies in the list of comparables for determination of ALP. We find that prima facie assessee has made out a case that in a series of decisions of this Tribunal, these three companies are held to be not comparable on various reasons and therefore it necessitates the functional examination of these companies for the purpose of inclusion or exclusion in the list of comparables. The Special Bench of this Tribunal at Chandigarh in the case of Quark Systems P. Ltd, (supra) has held that if a company is otherwise not found to be comparable with the assessee then simply it is included in the list of comparables in the TP study would not be considered as estoppel for raising an objection by the assessee for exclusion of such company for the purpose of determination of ALP. We therefore accept the plea of the Assessee, for admission of exclusion of the aforesaid three companies.
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd.
As far as exclusion of the aforesaid three companies from the list of comparable companies is concerned, the plea of the Assessee was that these three companies have turnover of more than Rs.200 Crores (Larsen & Toubro Infotech Ltd. Rs.2,331 Crores; Persistent Systems Ltd. Rs.610.12 Crores and Sasken Communication Technologies Ltd. Rs.394.19 Crores). The Assessee’s turnover is only Rs.27.50 crores and thereby the aforesaid three companies cannot be considered as comparable to the Assessee. The learned DR submitted that turnover is not material if the companies are functionally comparable.
We have heard the rival submissions. As far as ground No.2 raised by the Revenue is concerned the question boils down on application of turnover filter in choosing comparable companies.
As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 & 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:-
“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 IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. 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 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).”
Respectfully following the aforesaid decision, we hold that the aforesaid three companies viz., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd., should be excluded from the list of comparable companies. We hold and direct accordingly. No other grounds raised in the grounds of appeal as well as the additional grounds were pressed for adjudication as in the 8
IT(TP)A No.1410/Bang/2015 & 1520/Bang/2015 Sterling Commerce Solutions India Private Ltd. opinion of the counsel for the learned counsel for the Assessee, those grounds would become academic. We direct the AO/TPO to compute the ALP in the light of the directions given in this order after affording opportunity of hearing to the Assessee.
In the result, appeal by the Assessee is partly allowed and that by the revenue is dismissed. Order pronounced in the open court on 26th Feb.2020.