Bangalore ITAT Applies Turnover and RPT Filters, Allows Section 10A Deduction

ANSR Global Corporation Pvt. Ltd. Vs ACIT (ITAT Bangalore)

ANSR Global Corporation Pvt. Ltd., a wholly owned subsidiary of NI Group, UAE, provided Software Development Services (SWD) to its Associated Enterprise (AE). For AY 2016-17, the assessee used TNMM with Operating Profit/Operating Cost (OP/OC) as the PLI. Its operating income was Rs.18,52,49,493 and its OP/OC margin was 16.05%.

The TPO accepted TNMM but selected comparable companies and determined the 35th percentile margin at 20.87% and median margin at 25.64%. Applying the median margin, the TPO determined an ALP of Rs.20,05,59,578 against operating revenue of Rs.18,52,49,493 and proposed a transfer-pricing adjustment of Rs.1,53,10,085. The assessee challenged the adjustment before the DRP and, to the extent relief was not granted, before the Tribunal.

The assessee challenged the inclusion of several companies whose turnover exceeded Rs.200 crore, while its own turnover was only Rs.18.52 crore. It argued that the TPO had applied a lower turnover filter but failed to apply an upper limit.

The Tribunal considered its earlier decision in Autodesk India Pvt. Ltd. Vs. DCIT and other decisions concerning turnover comparability. It held that the companies listed in Ground No.16, except Inteq Software Pvt. Ltd., whose current-year turnover was below Rs.200 crore, should be excluded where the turnover exceeded Rs.200 crore. The TPO was also directed to verify the turnover of the relevant companies for FY 2013-14 and FY 2014-15 and, where the turnover was below Rs.200 crore in those years, consider those years’ margins in computing the three-year average.

The assessee sought exclusion of R.S. Software (India) Ltd. because its related-party transactions (RPT) were 17.52%. The DRP had applied a 25% threshold.

The Tribunal referred to the Karnataka High Court’s decision in Pr. Commissioner of Income Tax-7 & Anr. Vs. M/s. Yodlee Infotech Pvt. Ltd. and held that, on the facts of the case, the 15% RPT filter was applicable. It therefore directed the exclusion of R.S. Software (India) Ltd. from the comparable set.

The assessee argued that Inteq Software was functionally different. The DRP had found from the company’s Directors’ Report and audit report that its principal activity was software development services and that software services represented 100% of its turnover.

The Tribunal found no ground to differ from the DRP on functional comparability. It also rejected the objection based on the increase in intangible assets, observing that the assessee had not established that the intangibles affected functional comparability.

However, because the RPT filter issue affected the earlier financial year, the Tribunal directed that the FY 2013-14 margin of Inteq Software should not be considered in computing its average profit margin.

The TPO/AO was directed to recompute the ALP of the SWD international transaction in accordance with the Tribunal’s directions after providing the assessee an opportunity of being heard.

The assessee also raised a corporate-tax ground concerning the treatment of deduction under section 10AA as stated in its additional ground, while the Tribunal’s discussion and final direction concerned section 10A. The issue was whether losses of the non-10A unit could be set off against the eligible profits before allowing the section 10A deduction.

The AO had taken the view that business losses and unabsorbed depreciation of earlier years had to be set off against eligible-unit income before allowing the deduction. The Tribunal considered the Supreme Court’s decision in CIT vs. Yokogawa India Ltd., 391 ITR 274, dated 16.12.2016.

Following that decision, the Tribunal held that the deduction under section 10A was to be allowed before applying the provisions concerning set-off and carry-forward under Chapter VI. It therefore directed the AO not to set off losses of non-10A units against profits of 10A units before allowing the section 10A deduction.

The appeal was partly allowed. The Tribunal directed exclusion of specified high-turnover comparables, applied the 15% RPT filter to R.S. Software, restricted consideration of Inteq Software’s FY 2013-14 margin, directed fresh computation of the SWD ALP, and allowed the section 10A deduction without first setting off losses of non-10A units.

Cases Discussed

• CIT vs. Yokogawa India Ltd. (Supreme Court), 391 ITR 274.
• Pr. Commissioner of Income Tax – 7 & Anr. Vs. M/s. Yodlee Infotech Pvt Ltd. (Karnataka High Court), I.T.A.No.684/2017 & I.T.A.No.685/2017.
• Autodesk India Pvt.Ltd. Vs. DCIT (ITAT Bangalore), (2018) 96 Taxmann.com 263 (Banglore-Tribunal).
• CIT Vs. Pentair Water India Pvt.Ltd. (Bombay High Court), Tax Appeal No.18 of 2015 dated 16.9.2015.
• Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT (Delhi High Court), 82 Taxmann.com 167(Del).
• Dell International Services India (P) Ltd. Vs. DCIT (ITAT Bangalore), (2018) 89 Taxmann.com 44 (Bang-Trib), order dated 13.10.2017.
• Sysarris Software Pvt.Ltd. Vs. DCIT (ITAT Bangalore), (2016) 67 Taxmann.com 243 (Bangalore-Trib).
• Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT (ITAT Bangalore), ITA No.1231/Bang/2010.
• NTPC Ltd., 229 ITR 383 (SC).

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal by the Assessee is directed against the order dated 30.03.2021 of the Assistant Commissioner of Income Tax, Circle 1(1)(1), Bangalore, (hereinafter referred to as the Assessing Officer, “AO” in short) passed u/s.143(3) read with Section 144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2016-2017.

2. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its Associated Enterprise (AE). The Assessee is a wholly owned subsidiary of NI Group, UAE. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company and its subsidiary were Associated Enterprises (“AEs”). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an “international transaction” i.e., 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. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm’s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms’ Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE.

3. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of the Assessee’s profit margin with that of the comparable companies. The Assessee is a captive service provider and does not bear any cost of software development and support services. The entire cost of operations is passed on to the AE as cost incurred by the Assessee and is reimbursed by the AE along with mark-up. The OP/OC of the Assessee was arrived at 16.05% by the Assessee in its TP study. The operating income was Rs.18,52,49,493/-. The Operating profit (Operating income – Operating cost was arrived at 16.05%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the Assessee. The Assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm’s Length.

4. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/OC. He also selected comparable companies from database. The TPO on his own identified some other companies as comparable with the Assessee company and arrived at a set of 13 comparable companies. The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows:

5. The TPO computed the Addition to total income on account of adjustment to ALP as follows:

“Computation of Arm’s Length Price:

23.1 The median of the weighted average Profit Level indicators is taken as the arms length margin. Please see Annexure A & B for details of computation of PLI of the comparable. Based on this, the arm’s length price of the services rendered by the taxpayer to its AE(s) is computed as under:

23.2 The above shortfall of Rs. 1,53,10,085/– is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer’s inter-transactions.”

6. Thus a sum of Rs.1,53,10,085/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE.

7. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment consequent to determination of ALP was added to the total income of the Assessee by the AO. The DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal.

8. The main grievance of the Assessee projected in the grounds of appeal filed before the Tribunal which was argued and which was pressed for adjudication before us was (i) choice of comparable companies by the TPO in disregard of the Assessee’s claim that the companies chosen had high turnover and hence should not be considered as comparable with the Assessee. The stand of the TPO was affirmed by the DRP against which the Assessee is in appeal (Ground No.10 and 16) The said ground reads thus:

10. The learned AO/ learned TPO/ Hon’ble DRP erred in not applying an upper limit to the turnover filter.

Grounds related to Software Development Segment (“SWD”)

16. The learned AO/ learned TPO/ Hon’ ble DRP has grossly erred in not rejecting the following companies:

• • Inteq Software Pvt Ltd.
  • Larsen & Toubro Infotech Ltd.
  • Nihilent Ltd.
  • Persistent Systems Ltd.
  • Infosys Ltd.
  • Thirdware Solution Ltd.
  • Infobeans Technologies Ltd.
  • Aspire Systems India Pvt Ltd.
  • Cybage Software Pvt Ltd.
  • Tata Elxsi Ltd.
  • Cigniti Technologies Ltd.

(ii) exclusion of R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15%. In this regard, the assessee has raised the following additional ground of appeal numbered as ground Nos.23 and 24. The additional ground being a legal ground is admitted for adjudication keeping in mind the ratio laid down by the Hon’ble Supreme Court in the case of NTPC Ltd., 229 ITR 383 (SC). The additional grounds raised by the Assessee reads as follows:

23. The TPO/DRP has erred in not rejecting the company ‘R S Software (India) Limited’ from the comparable set, as it fails the Replated Party Transaction (“RPT”) filter threshold of 15% which has been confirmed by the jurisdictional High Court in the case of Yodlee infotech Private Limited (ITA No. 684-685/2017).

24. Without prejudice to Ground no 23, even if R S Software (India) Limited were to be considered as a comparable by applying the RPT filter thresholder of 25%, the margins of prior two years (AY 2014-15 and AY 2015-16) are not to be considered since the turnover of” the company exceeds the upper threshold of Rs 200 Crores for the two years.

9. As far as Ground No.10 and 16 are concerned, the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows:

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 [or a specified domestic 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 [or a specified domestic 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 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 [or the specified domestic 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 [or the specified domestic transaction];

(f)…..

(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic 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 [or a specified domestic 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 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.

10. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.

11. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the “TPG”) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm’s length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that:

• None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or
• Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called “comparability adjustments.

12. As far as comparability of companies listed as (a) to (g) in Grd.No.4 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee’s turnover is only Rs.18.52 Crores. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP 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 DRP primarily relied on 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), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4 before the Tribunal challenging the aforesaid view of the DRP.

13. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The 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, 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, ITA No.1231/Bang/2010, 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. 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.”

42. 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 correct and such action does not call for any interference.”

14. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), took note of all the conflicting decision on the issue and rendered its decision and in paragraph 17.7. of the decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The following were the relevant observations:

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 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).

15. In view of the aforesaid decision, we hold that companies listed in Grd.No.16 raised by the Assessee except Inteq Software Pvt. Ltd., whose turnover in the current year is less than Rs.200 Crores should be excluded from the list of comparable companies. The TPO is directed to verify the turnover of these companies for Financial Years 2013-14 and 2014-15 and if in these years the turnover is less than 200 Crores, then the margins of these years shall be taken in working out the average profit margin of 3 years.

16. As far as exclusion of this company R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15% is concerned, we find that the admitted position with regard to related party transaction in this case of R.S.Software (India) Ltd., is 17.52%. The DRP in its order proceeded on the basis that the threshold limit for application of the Related Party Transaction filter (RPT filter) would be 25% of the total transaction. The Hon’ble Karnataka High Court in its Judgment 28-06-2018 in I.T.A.No.684/2017 & I.T.A..No.685/2017 Pr. Commissioner of Income Tax – 7 & Anr. Vs. M/s. Yodlee Infotech Pvt Ltd., had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt Ltd? and Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO?. The Hon’ble Court held as follows:

“3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-

“7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the TPO has applied the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 17 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. having 19.89% of RPT.” ………

4. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.

…………………

5. The relevant portion of the said judgment is quoted below for ready reference:

” Conclusion:

55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.

56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.

57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.

58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”

6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed and are dismissed accordingly.

17. We are of the view that the facts of the Assessee’s case is similar to the case decided by the Hon’ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon’ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly.

18. As far as exclusion of Inteq Software Private Limited is concerned, the first objection of the learned counsel for the Assessee was that this company is functionally not comparable because it is engaged in the business of computer programming, consultancy and related activities. The objections of the Assessee in this regard are based on contents in the website of this company. The DRP has dealt with this objection in paragraph 2.18.1 of its order, which reads thus:

“2.20.1 Having considered the submissions, we note that as per information in the Director’s report of the company, the company’s principal activity is software development services (MC code 620), which is 100% of its total turnover (Annexure-A to the Boards Report). The independent Audit report states that the Company is a service company primarily rendering software services. As per Revenue Recognition Policy (Note 20(F)), there is mention relating to revenue from software development and there is no information about product. sales. We also note that this company satisfies the various filters adopted by the TPO. The assessee has not disputed or rebutted any of these information stated in the annual report. Instead, the assessee has merely argued that this company is functionally different with reference to certain information in the website. We have already discussed that the information in the website cannot be given credence as they are generally forward looking statements with advertisement and promotional motives. In view of these, we do not find any merit. in the assessee’s picas. As we find that this company is engaged in software development services, we hold that it is functionary comparable to the assessee and accordingly, the objection is rejected.”

19. We find no grounds to take a view different from the view taken by the DRP on this aspect of comparability of this company.

20. The next argument for exclusion of this company is based on inconsistencies in the financial statement of this company. The argument advanced in this regard were that the value of the intangible assets to the total assets is very high and that indicates that the functions of this company could be dissimilar. Regarding the argument that there are some unusual features observed from the financial statements of this company, these features do not affect the comparability. By merely pointing out that there is a substantial increase in value of intangible assets, the Assessee cannot seek to exclude this company from the list of comparable companies, unless the Assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of this company with the Assessee.

21. The next argument is that by applying RPT filter this company cannot be regarded as comparable for FY 2013-14 and therefore while working the margin of this company the margin for FY 2013-14 should not be considered. We have already upheld similar argument while deciding on the exclusion of margins of R.S.Software on the ground of application of turnover filter for FY 2013-14 and 2014-15. Those reasons given will equally apply to this comparable company also and accordingly, we direct that the margins of this company for FY 2013-14 should not be taken for working out the average profit margins of this company which is to be included in the dataset.

22. No other grounds except the above were argued before us. The TPO/AO is directed to compute the ALP of the international transaction of rendering of SWD services by the Assessee to AE in the light of the directions given above, after affording Assessee opportunity of being heard.

23. Corporate Tax grounds:

The assessee has raised ground No.22 which reads as follows:

22. Additional Ground: Set off and carry forward of business loss while assessing the total income of the Appellant

• • The Learned AO has erred in granting deduction under section 10AA of the Act at the stage of computation of total income under chapter VI of the Act as against the stage of computation of gross total income of the undertaking under chapter IV of the Act.
  • The Learned AO failed to appreciate that the ruling of Hon’ ble Supreme Court in the case of CIT vs. Yokogawa India Limited [(2017) 391 ITR 274 (SC) would apply to section 10AA of the Act.
  • Based on the facts and circumstances of the case and in law, the Learned AO ought to have allowed deduction under section 10AA of the Act before the aggregation of income and set-off of brought forward losses, though not followed by the Appellant while filing its return of income.

24. As far as the aforesaid grounds are concerned, the issue is with regard to the set off of losses of the non-10A unit against the eligible profits of the 10A unit while allowing deduction u/s.10A of the Income Tax Act, 1961 (Act). The assessee had claimed deduction u/s 10A of the Act before setting of losses of the non-10A unit. The AO was of the view that deduction u/s 10A of the Act was not in the nature of exemption provision and, therefore, the business loss and unabsorbed depreciation of the earlier years has to be first set off against the income of the eligible unit and only on the reminder deduction u/s 10A of the Act has to be allowed. The view of the AO was confirmed by the CIT(A), hence this ground of appeal by the assessee before the Tribunal.

25. At the time of hearing it was agreed by the parties before us that this issue is no longer res integra and has been concluded by the Hon’ble Supreme Court in the case of Yokogawa India Ltd., 391 ITR 274 by its order dated 16.12.2016 and in the aforesaid decision the Hon’ble Supreme Court took the following view :-

• That from a reading of the relevant provisions of section 10A it is more than clear that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee.
• This is also more than clear from the contemporaneous Circular No. 794, dated 9-8-2000.
• If the specific provisions of the Act provide [first proviso to sections 10A(1); 10A(1A) and 10A(4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No.794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, “immediately after the stage of determination of its profits and gains.
• At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression ‘total income of the assessee’ in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in section 10A as ‘total income of the undertaking’.
• For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and’ not at the stage of computation of the total income under Chapter VI. ”

26. The effect of the aforesaid decision would be that the provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon’ble Supreme Court, the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act.

27. In the result, the appeal is partly allowed.

Pronounced in the open court on the date mentioned on the caption page.