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Income Tax Appellate Tribunal, ‘A’ BENCH : BANGALORE
Before: SHRI. B. R. BASKARAN & SMT. BEENA PILLAI
IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE BEFORE SHRI. B. R. BASKARAN, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No.2234/Bang/2016 Assessment Year : 2012-13
M/s Trident Microsystems The Dy. Commissioner of India Pvt. Ltd., Income Tax, #2924, Third Floor, 14th Circle-7(1)(1), Cross, K.R Road, Vs. Bengaluru. BSK II Stage, Bengaluru-560 070.
PAN : AADCN 1384L APPELLANT RESPONDENT
Appellant by : Shri Suresh Muthukrishna, C.A Respondent by : Ms. Neera Malhotra, CIT (DR)
Date of Hearing : 22-06-2020 Date of Pronouncement : 14-08-2020
ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessee against order passed by Ld.AO under section 143 (3) read with section 144C (13) of the Act on following grounds of appeal: “The appellant craves your Honour's leave to urge the undermentioned amended grounds of appeal that is being urged in substitution of the original grounds of appeal to bring out the issues under challenge in a pointed and precise manner and it therefore prayed that the following grounds of appeal may kindly be considered in place of the original grounds of appeal urged in the appeal memo:-
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The assessment order passed by the learned Assessing officer is bad in law and void ab-initio. 2. The reference made by the [earned AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. Transfer Pricing officer ("TPO"/ "Ld. TPO") for computation of the arm's length price("ALP") as is Required under section 92CA(1 )of the Act. 3. The Ld. AO/ Ld. TPO has erred on facts and in law in enhancing the income of the eligible Assessee by Rs 9,42,35,339/- by holding that the international transactions do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 4. The order of the Learned AO/TPO is violative of the principles of natural justice and void ab-initio and needs to be cancelled in as much as the eligible assessee as not provided with the mandator, Show cause Notice or an opportunity of being heard as required under the provisions of Section 92C(3) of the Act; 5. The Ld AO/Ld. TPO has erred on facts and in law by disregarding multiple year/ prior years' data as used by the Assessee in the Transfer Pricing ("TP") documentation and holding that current year (i.e. FY 2011- 12) data for comparable companies should be used despite the fact that the same was not necessarily available to the Assessee at the time of preparing its TP documentation, and interpreting the requirement of 'contemporaneous' data in the Rules to necessarily imply current/ single year (i.e. FY 2011-12) data; 6. The learned TPO erred in law and on facts by not appreciating that the eligible assessee had prepared the detailed contemporaneous Transfer pricing documentation bonafide and in compliance with the provisions of the Act and Income tax rules, 1962 [the Rules"] and had selected the set of uncontrolled companies based on a detailed Functional, Asset and Risk ("FAR') analysis following a methodical benchmarking process by rejecting such uncontrolled comparable companies identified and instead proceeding to undertake a fresh search for identifying comparable companies; 7. Without prejudice to the above, the learned TPO has erred on facts and in law and thereby contradicting his own stand in the earlier year, in re-computing the segmental results of margins earned by the eligible assessee on Software R&D Services by treating the depreciation on intangible assets as operating in nature; 8. Without prejudice to the above, the learned TPO has erred on facts and in law, in re-computing the segmental results of margins earned by the eligible assessee on Software R&D Services by treating the income earned on foreign exchange fluctuation as non-operating in nature; 9. Without prejudice to the above, it is submitted that the learned TPO while conducting a fresh search for comparabtes has chosen to apply a filter for rejecting Companies whose Employee costs are less than 25%,
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which is arbitrary and necessarily does not capture the varied business models of the comparable companies. 10. Without prejudice to the above, it is submitted that the learned TPO has erred in including comparables which were having Related Party transactions in excess of 25%, which fail his own filter and thereby contradicting his stand; 11. Without prejudice to the above, the learned TPO has erred on facts and in law by introducing / retaining certain companies in the final comparable set which were functionally/ qualitatively dissimilar to the Assessee; 11.1 Introducing Genesys International Corp. Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.2 Introducing Infosys Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.3 Introducing Larsen Et Toubro Infotech Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 11.4 Introducing Spry Resources India Pvt. Ltd., in the final comparable set which comparable is functionally/qualitatively dissimilar to the appellant. 12. Without prejudice to the above, the learned TPO has erred on facts and in law by rejecting certain companies in the final comparable set which were functionally/ qualitatively similar to the Assessee and hence ought to have been included in the final list of comparables; 12.1 Excluding Akshay Software Technologies Ltd., from the final comparable set which comparable is functionally/qualitatively comparable to the Appellant on an erroneous conclusion that its Functions not clear. 12.2 Excluding Blue Star Infotech Limited from the final comparable set which comparable is functionally/ qualitatively comparable to the Appellant on an erroneous conclusion that its Functions not clear. 12.3 Excluding Cigniti Technologies Ltd., from the final comparable set which comparable is functionally/qualitatively comparable to the Appellant on an erroneous conclusion that its Functions not clear. 12.4 Excluding Goldstone Technologies Limited, from the final comparable set which comparable is functionally/qualitatively comparable to the Appellant on an erroneous conclusion that its Functions not clear. 12.5 Excluding Thinksoft Global Services Limited, from the final comparable set which comparable is functionally/qualitatively comparable to the Appellant on an erroneous conclusion that its Functions not clear. 13. On the facts and in the circumstances of the case and in law, the Ld.AO has erred in initiating penalty under section 271 (1)(c) of the Act.
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The appellant craves Leave of this Hon'ble Tribunal to add, alter, amend, delete or substitute such ground as may be necessary at the time of hearing. 15. Wherefore the Appellant prays that this Hon'ble Tribunal be pleased to allow the appeal and set-aside the orders passed by the authorities below to the extent which is against the appellant and pass such other order as this Hon'ble Tribunal deem fit and proper on the facts and circumstances of the case in the interest of justice and equity.” Brief facts of the case are as under: 2. Assessee is a company engaged in the business of providing sales, marketing, research and development support services relating to whom business unit and its group company. It filed its return of income declaring total income of Rs.3,47,37,750/-. The case was selected for scrutiny and notice under section 142(1) was issued to assessee. In response to statutory notices authorised representative of assessee at attended from time to time and the case was discussed. Ld.AO observed that, assessee entered into international transaction, and as the value exceeded the prescribed limit the case was referred to Transfer Pricing officer for computation of arms length price. 3. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction entered into by assessee in Form 3CEB. Ld.TPO observed that, assessee entered into following international transactions:
Assessee computed its margin under software R&D segment to be 9.73%. Ld.TPO noted that, assessee in TP
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documentation considered 25 comparables with average margin of 12.79%. Assessee used TNMM as most appropriate method and OP/TC as PLI and arrived at the weighted average margin of 3 years data. Ld.TPO noted that assessee used earlier year data pertaining to FY 2009-10, 2010-11 besides the year ending on 2012 wherever available. 5. Ld.TPO objected use of multiple year data. Ld.TPO selected new set of 10 comparables which assessee objected on filters. Ld.TPO however finalised a set of comparables having average margin of 22.63%. Ld.TPO also used current year data for computing arm’s length price of the transaction. SI. No. Name of the taxpayer OP/OC Datamatics Global Services Ltd. 1. 14.57% 30.09% 2. Genesys International Corpn. Ltd. 17.24% 3. I C R A Techno Analytics Ltd. Infosys Ltd. 43.10% 4. 25.47% Larsen & Toubro Infotech Ltd. 5. 6. Mindtree Ltd. 1501% 7. Persistent Systems Ltd. 27,23% 8. R S Software (India) Ltd. 15.34% 9. Sasken Communication Technologies Ltd. 12.13% 10. Spry Resources India Pvt, Ltd. 26,1S% Average 22.63%
Ld.TPO denied risk adjustment to assessee for the reason that accurate adjustment cannot be made. Proposed adjustment was computed being difference between arms length computed by assessee and Ld.TPO being Rs.9,42,35,339/-.
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Aggrieved by proposed adjustment, assessee raised objections before DRP. 8. Assessee objected some comparables on turnover filter, and some comparables on functional dissimilarities. Assessee had argued before DRP that following comparables cannot be compared with assessee who has operating margin of 12% approximately; Infosys Ltd., Larsen and Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., RS Software India Ltd. It was submitted that these comparables have huge turnover which cannot be compared to a contract company like assessee. 9. DRP while considering objections raised by assessee, deleted 2 comparables being Datametics Global Services Ltd., and ICRA Techno Analytics Ltd. DRP rejected assessee’s objections in respect of remaining comparables selected by Ld.TPO. 10. Ld.AO thereafter passed final assessment order on receipt of DRP directions thereby making addition in the hands of assessee at Rs.8,61,19,385/-. 11. Aggrieved by addition made in the hands of assessee, appeal has been filed before this Tribunal. 12. At the outset, Ld.AR submitted that, amongst amended grounds raised by assessee, Ground 11, Additional Ground and Ground 12.4 are only pressed. Application of Additional Ground : 13. Ld.AR submitted that a specific ground has been raised by assessee by an application of additional ground wherein these comparables have been challenged for exclusion due to
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excessive turnover. Ld.AR submitted that these comparables were challenged before DRP on having high turnover, however a specific ground was inadvertently missed out to be raised before this Tribunal in original grounds of appeal. He submitted that Ground No.11 is General, challenging the functional dissimilarity. Assessee thus has raised following Additional Ground: “1. The assessment order passed by the learned Assessing officer is bad in law and void ab-initio. 2. The reference made by the [earned AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the draft assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Ld. Transfer Pricing officer ("TPO"/ "Ld. TPO") for computation of the arm's length price("ALP") as is Required under section 92CA(1 )of the Act.” 13.1 He placed reliance upon decision of Hon’ble Supreme Court in case of NTPC Ltd vs CIT reported in 229 ITR 383 and Jute Corporation of India vs CIT reported in 53 taxman 85, submitted that comparables specified in additional grounds may be admitted. 13.2 Ld.CIT DR, opposed admission of additional ground. It was submitted that turnover filter was not alleged by assessee before DRP. 14. We have perused details relied upon by both sides 14.1 We have perused the directions of DRP in respect of these comparables and we note that argument advanced by assessee on turnover filter has been incorporated therein. Therefore we reject the argument of revenue that this issue was not raised before DRP.
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14.2 Considering inadvertent mistake on behalf of assessee in raising these grounds before this Tribunal, we allow additional ground raised. Accordingly, we admit additional ground raised by assessee. 15. Assessee challenged inclusion of following comparables in Ground 11 for functional dissimilarity. In the Additional Ground these comparables have been challenged for having high turnover. Infosys Ltd Larsen and Toubro Infotech Ltd Mindtree Ltd Persistent Systems Ltd RS Software India Ltd Assessee challenged Genesis International Corp Ltd on functional incompatibility in Ground 12.4. 16. Before carrying out comparability analysis, it is sine qua non to understand functions, assets, risk assumed by assessee under this segment. Functions: 16.1 It has been submitted in Transfer Pricing study that, assessee entered into agreement for provision of software R&D services with its AE on 08/02/2010 for providing services including R&D services and all relevant or ancillary services relating to R&D services provided to AE. 16.2 It has been submitted in, Transfer Pricing study that, assessee performs functions like management functions, corporate service functions, marketing/business
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development function, conceptualisation and design of the product, functional specifications and requirement analysis, coding and documentation, project management, quality control, testing, integration. 16.3 It has also been submitted in TP study that, assessee has limited participation in conceptualisation and design as well as functional specifications and requirement analysis. 16.4 It has been submitted that AE determined is a functional specifications and requirement analysis of the products deliverable to the customer and approves the PRD prepared by assessee. 16.5 Further it is also been mentioned that assessee receives technical assistance coupled with regular reviews and feedback from AE both on chip designing and software development function. Also that the AE undertakes chip designing and coding of software in respect of modules/solutions not being developed by assessee. it has been submitted that, assessee and AE jointly undertake project management to ensure close coordination, quality control and minimal rework in the development process. Assets: 16.6 It is submitted that, all rights entitled including all rights in copyrights and other intellectual property rights for courts, documentation, software, test programs and other materials to be delivered to AE shall be owned by AE. 16.7 It has been submitted that assessee owns tangible assets like computer equipment, office lab equipment
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vehicles etc. Assessee also possesses trained and organised workforce which it uses for providing software R&D services to its AE. Risks: 16.8. It has been submitted that assessee undertakes Ltd market risk and foreign exchange risk. Apart from that service liability risk, product risk and R&D risks are owned by the AE. 17. Based on the above we shall analyse the comparables alleged by assessee for exclusion as well as inclusion. (Ld.AR restricted his arguments to Ground 11 Additional Ground and Ground 12.4. We are therefore considering comparables alleged in these grounds. However, assessee is at liberty of raising other issues in appropriate years.) Ground No.11 and Additional Ground 18. These grounds are raised by assessee, challenging, inclusion of following comparables for functional/qualitative dissimilarities and excessive turnover. Infosys Ltd Larsen and Toubro Infotech Ltd Mindtree Ltd Persistent Systems Ltd RS Software India Ltd
18.1 At the outset Ld.AR submitted that these comparables have been excluded in assessee’s own case for assessment year 2010-11 by this (Tribunal) in IT(TP)A No.192/Bang/2015 for having huge turnover. As we are
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considering these comparables on turnover limit criteria, functional dissimilarity becomes academic. 18.2 We note that this (Tribunal) has analysed these comparables on turn over files as under: “11. The ld. counsel for the assessee brought to our notice the observations of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. v. Dy. CIT [IT Appeal No. 1338/Bang/2010, dated 30-4-2013] for assessment year 08-09, on the application of turnover filter and how the said filter is a valid filter in choosing comparables. It was therefore argued that the learned CIT(A) was fully justified in applying the aforesaid filter and excluding comparable companies chosen by the TPO which did not pass the test as laid down in the aforesaid decision. The learned DR reiterated the stand of the revenue as reflected in the grounds of appeal of the revenue. 12. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: '(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of RS. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on
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this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:— "Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: "Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs 1,000 crore company cannot be compared with the transaction entered into by a Rs 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate." 13. It was further submitted that the TPO's range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v.DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of RS. 1 crore to RS. 200 crores 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
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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." 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited v. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited v. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than RS. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec. 92B provides that "international transaction"
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means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:— (1) that 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, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price.
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(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:" 18. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:— "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) to (d) (e) transactional net margin method, by which,— (i) the net profit margin realised 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 realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed
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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 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. (2) For the purposes of sub-rule (1), the comparability of an international 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 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
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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. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 19. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is RS. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v.CDIT, ITA No.1231/Bang/2010). Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores
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(7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores.' 13-14. The aforesaid decision clearly sets out the reason with reference to Rule 10B(2) of the Rules which provides that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India (P.) Ltd. (supra), we uphold decision of the CIT(A), to exclude the aforesaid companies from the list of comparable companies on the basis of turnover and size. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. Besides the above, the Bangalore Benches of the Tribunal have being taking a consistent view as laid down in the aforesaid decision. We are therefore of the view that there is no merit in this appeal by the Revenue. Accordingly the same is dismissed.” 18.2 We note that, before us assessee alleged exclusion RS software India Pvt. Ltd. for year under consideration, on turnover filter, as this company has huge turnover of 2472.08%.
18.3 Ld. CIT,DR relied on orders passed by authority below. 18.4 We note that international transaction for year under consideration and asst. year 2010-11 are similar. There is nothing on record placed by revenue that brings out any factual differences.
Respectfully following above view, we direct Ld.AO/TPO to exclude all these comparables, for having excessive turnover.
Accordingly Additional Grounds stands allowed.
Assessee challenged Genesis International Corp Ltd., for being functionally not similar.
19.1 Ld. AR submitted that, this company owns intangible assets, which are peculiar to software products. According to
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Ld. AR this company is engaged in providing geographical information services comprising of photogrammetry, remote sensing, cartography, data conversion, state of the art terrorist real and 3-D geo-content including location-based and other computer-based related services.
19.2 Ld. TPO considered to be a comparable with assessee by observing that it developed software for mapping and Geo spatial services.
19.3 On the contrary Ld.DR placed reliance on observations of authorities below.
19.4 We have perused submissions advanced by both sides in light of records placed before us.
19.5 We note that this company renders mapping and Geo spatial services in the process of which it develops software. We refer to the observations of this (Tribunal) in case of (CGI Information Systems and Management Consultants Pvt. Ltd. vs ACIT) reported in [(2018) 94 Taxmann.com 97] which is as under:
“35. We have given a careful consideration to the rival submissions. It is clear from the material brought to the notice of the TPO by the Assessee that this: company renders mapping and geospatial services. In rendering such services it develops software. But that does not mean that this company is in the business of software development. The business profile of this company as per the annual report does not show that this company is into software development service. The only line of business that this company carries on is rendering GIS based services and this is clear from the annual report which specifies that since the company carries on only one line of business viz., GIS based services there is no need to give any segmental results. In the circumstances, we are of the view that there is no basis for the TPO to conclude that this company is predominantly into software-development services. The presence of
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intangible assets is indicative of the fact that this company is not in software development services business. The TPO has overlooked this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 1013(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule lOB, the comparability of an international 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; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly.” 19.6 We note that this Tribunal expressed above observations for assessment year 2010-11 and 2012-13. Present year under consideration before us is assessment year 2012-13.
19.7 There is nothing on record brought by revenue to counter above observations of this Tribunal. Respectfully following the same, we direct Ld.AO/TPO to exclude all these comparable.
Accordingly we direct Ld.AO/TPO to exclude this alleged comparables from final list.
Accordingly, Ground 12.14 raised by assessee stands allowed.
20 . We now note that, out of 10 comparables finally selected by ld.TPO, two have been already excluded by DRP. Amongst the balance 8 comparables, 7 comparable stand
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excluded by applying turnover filter by following view taken by coordinate bench in assessee’s own case for asst. year 2010-11 (Supra) and one comparable for functional dissimilarity. We note that only one comparable remains for determining arms length price of international transaction. Under such circumstances we are of the view that, entire issue should be restored to the file of Ld. AO/TPO for undertaking exercise afresh by selecting fresh set of comparable companies in respect of software R & D segment. Accordingly, we set aside the order passed by Ld. AO on this issue and restore the same to his file for examining the issue afresh in the light of discussions made supra.
20.1 We note that similar direction was issued to Ld.AO/TPO for assessment years 2011-12 and 2013-14 in assessee’s own case reported in [2020] 117 taxmann.com 304.
20.2 Under such circumstances ground No. 12.4 is not adjudicated by us leaving it open to be considered by learnt AO/TPO afresh.
20.3 We direct learnt Ld.TPO to undertake fresh search analysis having regards the above observations and the view taken by this (Tribunal) in assessee’s own case for immediately preceding and succeeding assessment years. Assessee is directed to file all relevant information/details to assist Ld. AO/TPO for determining arms length price of the transaction in accordance with law.
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In the result appeal filed by assessee stands allowed for statistical purposes.
Order pronounced in the open court on 14th August, 2020.
Sd/- Sd/- (B. R. BASKARAN) (BEENA PILLAI) Accountant Member Judicial Member
Bangalore, Dated, the 14th August, 2020.
/Vms/
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file
By order
Assistant Registrar, Income-Tax Appellate Tribunal. Bangalore.
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Date Initial On Dragon 1. Draft dictated on Sr.PS -08-2020 2. Draft placed before Sr.PS author -08-2020 3. Draft proposed & placed JM/AM before the second member -08-2020 4. Draft discussed/approved JM/AM by Second Member. -08-2020 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS -08-2020 6. Kept for pronouncement Sr.PS on -08-2020 7. Date of uploading the Sr.PS order on Website -- 8. If not uploaded, furnish Sr.PS the reason -08-2020 9. File sent to the Bench Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. No 13. Draft dictation sheets are Sr.PS attached