Tyco Fire and Security India Private Limited Vs ACIT (ITAT Bangalore)
As far as comparability of companies listed in Grd.No.4.3 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. 40,39,51,067/-. 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, 4.1 to 4.3 before the Tribunal challenging the aforesaid view of the DRP.
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 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.
In view of the aforesaid decision, we hold that 7 companies listed in the earlier paragraph 7 of this order whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by the Assessee is directed against the final order of assessment dated 27.04.2021 of National e-Assessment Centre (NFAC), Delhi, (Assistant Commissioner of Income Tax, Circle-7(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 learned counsel for the Assessee submitted that the grounds of appeal filed along with Form No.36 on 23.6.2021 can be taken up for consideration. In ground No.1 to 16 of the grounds of appeal, the Assessee has challenged the order of the AO whereby the AO added a sum of Rs.4,63,62,735/- to the total income of the Assessee on account of determination of Arm’s Length Price in respect of an international transaction of rendering of Software Development Services by the Assessee to its Associated Enerprise. Though the Assessee has raised several grounds of appeal, at the time of hearing of the Appeal, the learned counsel for the Assessee restricted his arguments to exclusion of 7 comparable companies viz., and exclusion of margins for R.S.Software (India) Ltd., for FY 2014-15 & 201516) inclusion of one comparable company Akshay Software Technologies Ltd., besides grounds on working capital adjustment.
3. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company 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 nonresidents, 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.
4. 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 OP/OC of the Assessee was arrived at 12.70% by the Assessee in its TP study. The operating income was Rs.40,39,51,067/- and the Operating Cost was Rs.35,84,15,952/-. The Operating profit (Operating income – Operating cost was Rs.4,55,35,115/-. Thus, the OP/TC was arrived at 12.70%. The Assessee chose companies who are engaged in providing similar services such as the Assessee. The Assessee identified 13 comparable companies with an arm’s length range of 9.83% to 15.49% and a median of 10.97%. The TPO however identified 17 companies whose average arithmetic mean of profit margin was in the range of 18.50% to 30.89% and a median of 25.64%. 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.The TPO worked out the average arithmetic mean of their profit margins of the 13 comparable companies as follows:
