Companies with turnover of less than Rs. 200 crores cannot be compared with companies having turnover exceeding Rs. 200 crores

Biesse Manufacturing Company Pvt. Ltd. Vs DCIT (ITAT Bangalore)

We have noticed that the turnover of the assessee company for software development segment was Rs. 4.56 crores and hence the assessee company falls in the category of companies having turnover of Rs. 1 to 200 crores. The coordinate bench in the case of Autodesk India Pvt. Ltd. has expressed the view that the companies having turnover of less than Rs.200 crores cannot be compared with the companies having turnover exceeding Rs.200 crores. Accordingly, we find merit in the submission of the assessee and accordingly direct the A.O. to exclude above said 6 companies from the list of comparable companies.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

The assessee has filed this appeal challenging the assessment order dated 29.2.2016 passed for assessment year 2011-12 u/s 143(3) r.w.s 144C of the Act in pursuance of directions given by Ld. DRP.

2. Though the assessee has raised many grounds with regard to the Transfer pricing adjustment made by the AO/TPO in software development segment, at the time of hearing, the Ld. A.R. restricted his arguments with regard to exclusion of 6 comparable companies and inclusion of 3 comparable companies. Accordingly, all other grounds are rejected as not pressed.

3. The facts relating to the above said issue are stated in brief. The assessee company is wholly owned subsidiary of M/s. Biesse Spa, Italy. The assessee company is engaged in production and trading of wood working machinery and spare parts. In addition to these functions, the assessee company also provides some technology services to its A.E and others. The assessee has entered into various international transactions with its A.E. We are concerned with the transfer pricing adjustment made in respect of software development segment. The technology services were held to be “software development activity” by the Transfer Pricing Officer (TPO). During the year under consideration, the assessee has shown receipts of Rs.4,55,96,879/- from software development activity, which included Rs.1.78 crores received from it’s A.E. The assessee did not bench mark his transaction. The assessee submitted before TPO that the software testing and technical services are inextricably linked to its manufacturing activity and hence no separate bench marking was required. The TPO did not accept the contentions of the assessee and proceeded to determine ALP of software segment separately under TNM method. The TPO selected 13 comparables whose average margin worked out to Rs.24.82%. Accordingly, he made transfer pricing adjustment of Rs.49,16,335/- in respect of software development services. The assessee has also accepted the methodology adopted by the TPO and it is contesting only inclusion/exclusion of certain comparable companies. The 13 comparables selected by the TPO are as under:

4. The Ld. DRP directed exclusion of Acropetal Technologies Ltd. (Seg), E-Infochips Ltd. & ICRA Techno Analytics Ltd. In effect, the Ld. DRP retained 10 comparables selected by the TPO.

5. Before us, the assessee seeks exclusion of following 6 comparables on the ground that they fail under turnover criteria.

6. The Ld. A.R. submitted that the assessee falls in the category of companies having turnover to Rs.1 to 200 crores, while the turnover of the above said companies has exceeded Rs.200 crores. Accordingly, by placing reliance on the decision of coordinate bench rendered in the case of Autodesk India Ltd. Vs. Deputy Commissioner of Income-tax (2018) 96 com 263, the Ld. A.R. submitted that the above said companies cannot be taken as comparable companies.

7. We heard Ld. D.R. on this issue and perused the record. We have noticed that the turnover of the assessee company for software development segment was Rs.4.56 crores and hence the assessee company falls in the category of companies having turnover of Rs.1 to 200 crores. The coordinate bench in the case of Autodesk India Pvt. Ltd. has expressed the view that the companies having turnover of less than Rs.200 crores cannot be compared with the companies having turnover exceeding Rs.200 crores. Accordingly, we find merit in the submission of the assessee and accordingly direct the A.O. to exclude above said 6 companies from the list of comparable companies.

8. The assessee seeks exclusion of following 3 companies:

a) CG-VAK Software & Exports Ltd.

b) CTIL Ltd.

c) Cat Technologies Ltd.

The Ld. A.R. submitted the following in respect of the above said three companies:-

(a) The Ld. DRP rejected CG-VAK Software & Exports Ltd. on the reasoning that the details of employee cost are not available and hence it is not clear as to whether it satisfies the employee cost filter. The Ld. A.R. submitted that the details of employee cost are available and it passes employee cost filter.

(b) The Ld DRP rejected CTIL Ltd on the reasoning that the company is engaged in outsourcing of software development. The Ld A.R submitted that the company is not outsourcing its activities and hence the reasoning given by Ld DRP is wrong.

(c) The Ld DRP has rejected this company on the reasoning that this company fails in employee cost filter. The Ld A.R submitted that the Ld DRP has arrived at the above said conclusion by considering consolidated financial results. He submitted that the segmental results are available and it passes employee cost filter.

9. The Ld D.R submitted that the Ld A.R is relying on certain factual aspects and they require verification.

10. We heard the parties on this issue. Before us, the Ld A.R has submitted that the reasoning given by Ld DRP for exclusion of above said three companies is contrary to the facts available on record. However, as submitted by Ld DR, the relevant factual aspects require verification. Accordingly, we restore these three comparable companies to the file of AO/TPO for examining the claim of the assessee.

11. Accordingly, the issue relating to TP adjustment in software development segment is restored to the file of AO/TPO.

12. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes.

Order pronounced in the open court on 11^th Oct, 2021