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Income Tax Appellate Tribunal, “C’’ BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R.BASKARAN
O R D E R Per N.V.VASUDEVAN, Vice-President
IT(TP)A.No.59/Bang/2016 is an appeal by the Revenue against the final order of assessment dated 24.11.2015 passed by the ITO, Ward-
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 2 of 25 2(1)(1), Bangalore u/s 143(3) r.w.s 144C(13) of the Income-tax Act 1961 (the Act) for the asst. year 2013-14. The Assessee has filed Cross objection against the very same order.
The Revenue has raised the following grounds of appeal:-
1. Whether the Hon'ble DRIP was justified in allowing relief to assessee by excluding M/s RS Software, M/s Acropetal Technologies Ltd, M/s Mindtree Ltd and M/s L&T Infotech Ltd on the ground that these companies are having significant onsite revenue and that they are functionally dissimilar, when software development activity comprises of both on site and offshore development activities and the nature of activity remains the same. The Hon'ble DRIP ought to have appreciated the fact that these Comparable have qualified the qualitative and quantitative filters applied by the TPO.
2. Whether the Hon'ble DRP was justified in excluding the M/s Ezest Solutions on the ground of functionally dissimilar when the company has qualified all quantitative filters applied by the TPO. The Hon'ble DRP ought to have considered the fact that computer software services is considered as sector of business and both TPO and the taxpayer has not gone into verticals of the business.
3. Whether the Hon'ble DRIP was justified in excluding the M/s ICRA Techno Analytics Ltd as a comparable on the ground that it is into diversified activity and no segmental data is available when the TPO has not gone into the verticals of the industry of operation. The Hon'ble DRP has failed to appreciate the fact that the company has qualified all quantitative filters applied by the TPO.
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4. Whether the Hon'ble DRP was justified in excluding M/s lnfosys Technologies Ltd on the ground that it is functionally different. The Hon'ble DRP ought to have decided the comparability of this company on the basis of specific facts brought on record by the TPO. The Hon’ble DRIP has failed to appreciate the fact the comparable has qualified all the qualitative and quantitative filters applied by the TPO.
5. The Hon'ble DRIP failed to appreciate the fact that M/s Tata Elxsi as a comparable when the comparable is functionally similar to that of the taxpayer as seen from its websites.
6. The Hon,ble DRP has erred in allowing relief to assessee for delayed payment of employee's monthly contribution towards PF/ESI, which are required to be considered as income u/s 36(1)(va) and thë amendment to the provisions of section 431B-including the deletion of the second proviso by the Finance Act, 2003 w.e.f. 2004 has no relevance in this regard.
7. Leave may be granted to add, alter, delete or modify any of the grounds during the appeal stage.”
The assesse has raised the following grounds in its cross-objection: On the facts and circumstances of the case and in law and without prejudice to the directions passed by the Dispute Resolution Panel:
“1. The Dispute Resolution Panel ('DRP") has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming the action of the learned Assessing Officer ("AO)/Transfer Pricing Officer ('TPO") of not accepting the economic analysis undertaken by IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 4 of 25 the Respondent in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and conducting a fresh economic analysis for the determination of the arm's length price of the international transaction entered by the Respondent
2. The Hon’ble DRP has erred, in law and in facts, by upholding the action of AO/TPO in rejecting comparable companies by applying arbitrary quantitative and qualitative filters, inter- alia including the following:
a) rejecting the use of multiple year data for determination of arm's length margin/price b) upholding application of only lower turnover filter for the purpose of comparability. c) rejecting companies having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). d) rejecting companies having employee cost less than 25% of the total revenues. e) rejecting companies using related party transactions more than 25% of total value of transactions. f) rejecting comparable companies using export sales less than 75% of the operating revenues as a comparability criterion. g) rejecting companies with income from software development and related services less than 75% of the total operating revenue.
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3. Hon’ble DRP has erred, in law and in facts in accepting certain invalid comparable companies / rejecting certain valid comparable companies.
4. The Leaned AO/learned TPO/Honble DRP has erred, in law and in facts, for not allowing suitable adjustments to be made to account for differences in the risk profile of the Assessee vis-à-vis the comparables.
5. The Hon'ble DRP erred in not adjudicating claim for enhanced section 1 O benefit and treating it as academic.
The Respondent submits that each of the above ground is independent and without prejudice to one another. The Respondent craves leave to add, alter, vary, omit, amend or delete one or more of the above grounds of Cross-objections at any time before, or at the time of, hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law.”
The issue that arises for consideration in Gr.No.1 to 5 of the revenue’s appeal and the grounds of appeal raised in the cross objection are with regard to determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering Software Development services (SWD services) by the Assessee to it’s Associated Enterprise (AE). . It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transaction has to be determined having regard to Arms Length Price (ALP).
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As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs.17,56,78,482/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction is at Arm’s Length, the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs.17,56,78,482. The Operating cost of the Assessee was Rs.15,27,63,874/-. The operating profit was thus Rs.2,29,14,608 and thus OP/OC was 15%. The Assessee in its TP Study had chosen 13 companies as comparable companies. The arithmetic mean of the profit margin of the 13 companies so selected by the Assessee was 13.71%. Since the Asssessee’s profit margin was 15%, the Assessee claimed that the price charged in the international transaction was at Arm’s Length and therefore no addition by way of adjustment to ALP should be made.
The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. Out of the above 13 comparables, the TPO accepted some of the comparable companies chosen by the Assessee and chose some other companies on his own and arrived at a set of 13 comparable companies. The average arithmetic profit margin of the 13 comparable companies chosen by the TPO was as follows:
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5. The TPO computed the addition to be made to the total income on account of determination of ALP at Rs. 1,34,27,918 adopting profit margin of 24.82% less working capital adjustment of 1.03% resulting in adopting profit margin of comparables at 23.79% and resultantly computed ALP as follows:
Computation of arm's length price by TPO and the adjustment made:
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The above shortfall of Rs. 1,34,27,918/- (Rupees One Crore, Thirty Four Lakhs, Twenty Seven Thousand, Nine Hundred and Eighteen Only) is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions
6. The addition suggested by the TPO was added to the total income of the Assessee by the AO in the draft order of assessment. Against the draft order of assessment, the Assessee preferred objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act.
Before DRP, the Assessee raised a specific objection viz., Objection 2 C wherein, the Assessee contended that the TPO has excluded companies whose turnover was less than Rs.1 crore. The TPO by the same logic should have excluded turnover of companies whose turnover was huge (above Rs.200 crores) compared to the turnover of the Assessee which was only Rs.17.56 Crores. The DRP did not agree with the above
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 9 of 25 submission of the Asssessee on the ground that when a company is functionally comparable, large turnover would not be a criteria to say that the company is not comparable.
Finally the DRP agreed with selection of some the comparables chosen by the TPO and disagreed with the TPO on some of comparables chosen by the TPO on different criteria. Finally, the following comparable companies remained as comparable companies after the order of the DRP.
Aggrieved by the order of the DRP in deleting some of the comparables chosen by the TPO, the revenue has raised Gr.No.1 to 5 before the Tribunal. Aggrieved by the action of the TPO in retaining some of the comparable companies chosen by the TPO which were objected as not comparable by the Assessee before the DRP, the Assessee has filed Cross-objection before the Tribunal.
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We shall first take up for consideration Gr.No.2(b) raised by the Assessee in its cross objection, viz., the objection that the AO applied lower turnover filter of Rs.1 Crore and rejected companies with turnover of less than Rs.1 crore from the list of comparable companies and by the same logic he ought to have excluded companies with high turnover from the list of comparable companies (companies having turnover of Rs.200 crores and above). If that ground is adjudicated two out of the 4 companies which remain after the order of the DRP, viz., Persistent systems Ltd. and Saken Communications Technologies Ltd., will go out of comparability because their turnover for the relevant previous year is Rs.610.13 Crores and 394.20 Crores respectively. So also the following four companies which are part of the set of 13 comparable companies will go out of comparable companies viz., Infosys Ltd. (Turnove of Rs.25,385 Crores), Larsen & Toubro Infotech Ltd. (turnover of Rs.2331.81 Crores, Mindtree Ltd. (turnover of Rs.878.30 Crores and Tata Elxi Ltd. (turnover of Rs.358.20 Crores). If the aforesaid six companies are excluded by applying turnover filter, then the profit margins of the remaining companies, even assuming those companies are regarded as comparable will be within the range of profit margin permissible in law and therefore the price charged by the Assessee in the international transaction would have to be regarded as at ALP. Therefore there would be no necessity to decide the other grounds of IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 11 of 25 appeal in the Revenue’s appeal regarding transfer pricing as well as the other grounds raised in the Cross-Objection.
As far as the application of turnover filter is concerned, the first objection of the ld. DR was that turnover cannot be a relevant criterion in choosing comparable companies and in this regard placed reliance on the decision of the Hon’ble High Court in the case of Chrys Capital Ltd.,82 Taxmann.com 167(Del). The learned counsel for the Assessee however pointed out that similar objection was raised by the Revenue in one of the case decided by this Tribunal in Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 taxmann.com 263(Banglore-Trib.) and relied on the said decision.
We find that various aspects of application of turnover filter, was considered by this Tribunal in the case of Autodesk India Pvt.Ltd. (supra) and it was held that turnover is a relevant criteria for deciding comparability of companies and that a company with huge turnover cannot be compared with a company with small turnover. The turnover criteria was based on classification of companies with turnover upto Rs.200 Crores falling within one category and companies with turnover of Rs.200 crores to Rs.500 crores falling in another category and so on. The following were the relevant observations:-
“17. The first issue to be decided in Revenue’s appeal is the application of turnover filter for exclusion of companies that are otherwise found to be functionally comparable. The Grievance of the revenue in this regard is projected in Gr.No.2 of the Grounds of appeal raised by the revenue in its appeal. The basic facts to be noticed with regard application of turnover filter are that the Assessee’s turnover for the relevant previous year was Rs.10.65 crores. The TPO excluded from the list of comparable companies chosen by IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 12 of 25 the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the CIT(A) was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The contention of the Assessee was that there would be effect on profitability wherever there is high or low turnover and therefore companies with high turnover should also be excluded from the list of comparable companies. The CIT(A) agreed with the submission of the Assessee and he excluded the following 5 companies whose turnover was above Rs.200 Crores from the list of comparable companies, viz., (i) Flextronics Ltd., (ii) L & T Infotech Ltd., (iii) M/s. Infosys Technologies Ltd., (iv) Satyam Computer Services Ltd., (v) iGate Global Solutions Ltd. The CIT(A) in coming to the above conclusion placed reliance on the decision of the ITAT Bangalore in the case of Genisys Integrating Systems (India) (P) Ltd. Vs. DCIT (2012) 53 SOT 159 (Bang.) wherein it was held when there is a limit for the lower end for identifying the comparable companies, there is no reason why there should not be an upper limit also, as size matters in business. 17.1. The learned DR submitted that high turnover is not a relevant criterion to regard a company as not comparable, so long as the two companies are functionally comparable. If functions by two companies are identical then they have to be regarded as comparable. According to him therefore the CIT(A) was not justified in excluding 5 companies on the ground that their turnover was above Rs.200 Crores and cannot be compared with the Assessee whose turnover was around Rs.10.65 Crores. In support of his contention the learned DR placed reliance on the following decisions:
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Sl. Name of the case Citation Relevant No. paragraph 1. M/S.NTT DATA IT(TP)A No. 23 & Global Delivery 1487/Bang/2013 AY 2005-06 24 Services Ltd. Vs. order dated 6.4.2016 ACIT 2. LSI Technologies IT(TP)A.Nos. 1380 & 14.3 India Pvt. Ltd. Vs. 1381/Bang/2010, AY 2006-07 The ITO order dated 13.5.2016 2. M/S. Societe IT(TP) A.No.1188/Bang/2011 10 Generale Global for AY 2007-08 order dated Solution Centre 22.4.2016 Pvt.Ltd. Vs. DCIT 5. Willis Processing (2013)30 Tamann.com 350 47 Services (Mumbai-Tribunal) for AY (I) (P)Ltd. Vs. DCIT 2007-08 order dated 1.3.2013 6. Capgemini India for 4.3 Pvt. Ltd. Vs. ACIT AY 2007-08 order dated 28.2.2013
17.2. The learned DR also filed before us a note contending that in software industry, size has no influence on the margins earned by an entity. According to him economies of scale are relevant only in capital intensive companies which have substantial fixed assets in the form of plant and machinery. According to him, in software industry, size does not matter, what matters is the human capital. According to him application of the filter of turnover might be justified for excluding companies with low turnover of say Rs.1 crore or less because the margin earned by these companies might widely fluctuate due to narrow capital base and lack of competitive strength, lack of operational efficiencies and also lack of human resources. They also escape the eyes of regulators. He drew our attention to the turnover and profit margins of company Infosys Technologies Ltd. For FY 1997 to 2010 and submitted that in FY 1997 the company had turnover of Rs.139 Crores and its profit margin was 34.95% whereas in FY 2010 its turnover was Rs.21140 crores but its profit margin was only 44.91%. According to him therefore the profit
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 14 of 25 margins hover between 35% and 40% over the period of 15 years and therefore high turnover does not necessarily mean high profit margins. He also gave a chart showing turnover and margin of 20 companies in the IT-BPO industry for three years. According to him the chart would show that for the same range of turnover companies earned different profit margins. Therefore according to him there is no relation between the margins earned and the turnover of a company. According to him software industries operate on the basis of cost plus margin of profits and therefore turnover would be irrelevant and have no impact of the profit margins. His further submission was that under Rule 10B(3) of the Income Tax Rules, 1962 (Rules) it is only functions performed, assets employed and the risks assumed that are relevant criteria for comparison and turnover is not a prescribed criterion for the purpose or comparison. He fairly admitted that there are differences of opinion amongst various benches of the Tribunal on the application of turnover filter and that some Benches have held that high turnover was relevant criteria for excluding comparable companies. His prayer in the alternative was for constitution of a special bench to resolve the conflict. 17.3. Per Contra the learned counsel for the Assessee submitted that ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, considered the various aspects of application of turnover filter for excluding companies and has noted that the first decision rendered on application of this filter was in the case of Genisys Integrating Systems (I)(P) Ltd. Vs. DCIT (2010) 20 taxmann.com 715 rendered on 5.8.2011. In the case of Dell International (supra), the tribunal took note of a divergent view expressed by ITAT Bangalore Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. Vs. DCIT order dated 13.9.2017 after considering the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82 Taxmann.com 167(Del), that high turnover ipso facto does not lead to the conclusion that a company which is IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 15 of 25 otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The Tribunal in the case of Dell International (supra) also took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): “41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, relying on Dun and Bradstreet’s analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business.
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 16 of 25 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.”
The Assessee’s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon’ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 17 of 25
correct and such action does not call for any interference.” 17.4. His submission was that the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital (supra) was not on the application of turnover filter. He brought to our notice that the relevant substantial question of law in the case of Chryscapital decided by the Hon’ble Delhi High Court was (i) whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the Assessee in Transfer Pricing Analysis.(ii) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis. In answering the above question, the Hon’ble Court however at page 218 of the report (the said decision is reported as 376 ITR 183 (del)) observed that the mere circumstance that a company-otherwise confirming to the stipulations in rule 10B(2) of the Rules in all details, presenting a peculiar feature- such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The Court further observed that the Transfer Pricing officer, first, has to be satisfied that such differences do not “materially affect the price …….……… or cost”. Secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made. According to him therefore the observations of the Hon’ble Delhi High Court in so far as it relates to application of turnover filter are obiter dictum. Obiter dictum though is entitled to a weight cannot be equated with ratio decidendi of a case. In support of his contention as above, he relied on the decision of the Hon’ble Supreme Court in the case of Director of Settlements A.P. and others Vs. M.R. Apparao and another (2002) 4 SCC 638. Countering the submission of the learned DR that the decision of the Hon’ble Bombay High Court rendered in the case of Pentair (supra) is not ratio decidendi as it was merely
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 18 of 25 dismissal of appeal u/s.260A of the Act on the ground that no substantial question of law arose for consideration, learned counsel drew our attention to the decision of the Bombay High Court in the case of Pentair (supra) paragraph 9, wherein the Hon’ble Bombay High Court after referring to a decision of the Hon’ble Delhi High Court rendered in the case of CIT Vs. Agnity India Technologies (P) Ltd. (2013) 36 taxmann.com 289 (Delhi), clearly observed that turnover is obviously a relevant fact to consider the comparability. Our attention was also drawn to paragraph-3 of the decision rendered in the case of Pentair (supra) wherein the department specifically contended that the Tribunal erred in holding that size and turnover of a company are deciding factors for treating a company as comparable. According to him therefore it was not a case of merely dismissal of appeal u/s.260A of the Act as unadmitted on the ground that no substantial question of law arose for consideration but was precedent in so far as the Hon’ble Court has expressed a clear opinion on the issue. 17.5. The learned counsel for the Assessee also drew our attention to a decision of the Hon’ble Delhi High Court rendered in the case of PCIT Vs. New River Software Services (P) Ltd. In order dated 22.8.2017 wherein the Hon’ble Delhi High Court followed the decision of the Hon’ble Bombay High Court rendered in the case of Pentair (supra) and held that Infosys BPO was rightly excluded as not being a comparable company. Our attention was also drawn by him to a decision of the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Mercer Consulting (I) (P) Ltd. (2016) 76 Taxmann.com 153 (Punjab & Haryana) wherein the Hon’ble Court held that a giant company cannot be compared with a company which was a captive service provided assuming limited risks. 17.6. As far as the decisions of the Tribunal rendered on the application of turnover filter that are contrary to the IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 19 of 25 decision rendered in the case of M/s. Genisys Integrating Systems (supra), the first submission of the learned counsel for the Assessee was that those decisions were rendered at a later point of time and were to be regarded as per incurium since these decisions were also rendered by a bench of equal strength and either the subsequent decisions refused to follow or were rendered in ignorance of an earlier binding precedent. He submitted that if a bench of equal strength differs with a view taken earlier, the proper course for them is to make a reference to larger bench. They cannot refuse to follow a binding decision. If they do so, the decisions so rendered have to be regarded as per incurium. Even if they are rendered in ignorance of the earlier binding precedent, they have to be regarded as per incurium. In this regard the learned counsel for the Assessee placed reliance on the decisions of Hon’ble Supreme Court in the case of Union of India Vs. Raghubir Singh AIR 1989 SC 1933, Union of India Vs. S.K. Kapoor (2011) 4 SCC 589 and Sundeep Kumar Bafna Vs. State of Maharashtra and another (2014) 16 SCC 623. In the aforesaid decisions the Hon’ble Supreme Court held that in a situation where there are conflicting decisions of High Court on an issue which are irreconcileable and pronounced by judges of co-equal strength, then the earlier view has to be followed as the later decision has to be regarded as per incuriam. The Hon’ble Supreme Court in the case of Sundeep Kumar Bafna Vs. State of Maharashtra & another (2014) 16 SCC 623 (at page-642 (Para-19) held that a decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench and when High Courts encounter two or more mutually irreconcilable decisions of the Supreme Court cited at the Bar, the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam. The following were the relevant observations of the Hon’ble Supreme Court:
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“19. It cannot be over-emphasised that the discipline demanded by a precedent or the disqualification or diminution of a decision on the application of the per incuriam rule is of great importance, since without it, certainty of law, consistency of rulings and comity of Courts would become a costly casualty. A decision or judgment can be per incuriam any provision in a statute, rule or regulation, which was not brought to the notice of the Court. A decision or judgment can also be per incuriam if it is not possible to reconcile its ratio with that of a previously pronounced judgment of a Co-equal or Larger Bench; or if the decision of a High Court is not in consonance with the views of this Court. It must immediately be clarified that the per incuriam rule is strictly and correctly applicable to the ratio decidendi and not to obiter dicta. It is often encountered in High Courts that two or more mutually irreconcilable decisions of the Supreme Court are cited at the Bar. We think that the inviolable recourse is to apply the earliest view as the succeeding ones would fall in the category of per incuriam.” It was therefore submitted by him that the earliest view rendered by the ITAT Bangalore Bench in the case of Genisys Integrating (supra) should be followed. 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 IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 22 of 25 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).”
Following the aforesaid decision of the Tribunal, we hold that it would be appropriate while choosing comparable companies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than Rs.1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. This tribunal in Assessee’s own case for AY 2013-14 in IT (TP)A.No.2046/Bang/2017 has upheld similar contention. For the reasons given above, we uphold the order of the CIT(A).
We, therefore, direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. The ld AR for the assessee, at the time of hearing submitted
IT(TP)A No.59/Bang/2016 CO No.57/Bang/2016 Page 23 of 25 that, if turnover filter is applied to exclude high turnover companies, then PLI determined by the TPO is within + 3% range, therefore, other grounds of appeals becomes academic in nature, and does not require specific adjudication. We, find that, since, we have already directed the AO to apply turnover filter and exclude high turnover companies from the list of comparables, other grounds taken by the revenue in its appeal and the assessee in its Cross objection become academic in nature and hence does not require specific adjudication. Accordingly, all other grounds taken by the assessee and revenue are dismissed.
14. Gr.No.6 in Revenue’s appeal is the only other ground that remains to be considered in the Revenue’s appeal. As far as this ground is considered the issue is whether payments of employees contribution by the Assessee towards provident fund and Employees State Insurance which are not deposited on or before the due date to the respective organizations but which are deposited before the due date for filing return of income u/s.139(1) of the Act, cannot be disallowed u/s.36(1)(va) of the Act. The Hon’ble Karnataka High Court in the case of CIT Vs. Sabari Enterprises (213 CTR 269) taken the view that contributions made by the Assessee to PF and ESI are allowable deductions even though made beyond stipulated period as contemplated under the mandatory provisions off Sec.36(1)(va) read with Section 2(24)(x) of the Act provided such contributions are paid by the Assessee on or before the due date for furnishing the return of income as per Sec.139(1) of the Act. In view of the aforesaid decision, there is no merit in Gr.No.6 raised by the revenue.
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In the result, the appeal filed by the revenue is dismissed and the CO is partly allowed.
Order pronounced in the Open Court on 24th April, 2019.