In App Information Technologies India Private Limited Vs ACIT (ITAT Cochin)
Summary: The Income Tax Appellate Tribunal, Cochin Bench, in In App Information Technologies India Private Limited Vs ACIT, decided a transfer pricing comparability dispute involving the application of an upper turnover filter for Assessment Year 2016-17. The assessee, a software services company operating predominantly in the maintenance-management segment, supplied software services to associated enterprises outside India, including entities in the United States and Japan. It reported international transactions involving the sale of computer software amounting to ₹17,32,49,904 and an operating margin of 15.07% on operating cost. In its transfer pricing study, the assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and selected eight comparable companies using the Prowess and Capitaline databases. Their median margin was 12.67%, with the 35th and 65th percentiles at 7.04% and 20.61%, respectively. On this basis, the assessee treated its international transactions as being at arm’s length.
During scrutiny assessment, the Transfer Pricing Officer accepted TNMM as the most appropriate method but rejected the assessee’s benchmarking documentation as unreliable. After applying several filters, including current-year data, positive net worth, persistent-loss, export-revenue, employee-cost, turnover, related-party transaction and functional criteria, the TPO selected 13 software-development comparables. Eleven were newly introduced and two were retained from the assessee’s original set. The TPO determined the arm’s length margin at 28.20%, compared with the assessee’s recomputed margin of 15.29%, resulting in a proposed adjustment of ₹2,10,36,622. Additionally, the TPO treated delayed receivables from associated enterprises as an international transaction and computed notional interest using six-month LIBOR plus 450 basis points, making a further adjustment of ₹21,348. The total proposed transfer pricing adjustment was ₹2,10,57,970. Following the proceedings before the Dispute Resolution Panel, the final assessment order dated 19 April 2021 enhanced the adjustment to ₹2,16,61,068.
Before the Tribunal, the assessee pressed only ground 4.9, challenging the TPO’s failure to apply an upper turnover ceiling while excluding companies with turnover below ₹1 crore. The assessee’s annual turnover was approximately ₹18.80 crore. It argued that companies with turnover exceeding ₹200 crore were materially different in size, resources, bargaining power and profitability and should not be regarded as comparable. The assessee sought exclusion of Larsen & Toubro Infotech, Persistent Systems, Infosys, Cybage Software, Nihilent Analytics, Thirdware Solutions, R.S. Software and Aspire Systems, subject to the relevant turnover data. In support, it relied upon several decisions of the Bangalore Tribunal, including Aurigo Software Technologies Pvt. Ltd., BORQS Software Solutions Pvt. Ltd., Autodesk India Pvt. Ltd., Arista Networks India Pvt. Ltd. and Ametek Instruments India Pvt. Ltd. The Departmental Representative supported the TPO’s and DRP’s determinations.
The Tribunal accepted the assessee’s objections concerning the turnover filter. Referring to the Dun & Bradstreet classification, it noted three categories of software companies: those with turnover below ₹200 crore, those with turnover between ₹200 crore and ₹2,000 crore, and those exceeding ₹2,000 crore. Since the assessee’s turnover was ₹18.80 crore, it fell within the small-company category. The Tribunal held that the TPO and DRP had erred in excluding very small companies without applying a corresponding upper turnover filter to large companies. Following the approach in CIT Vs Pentair Water India Pvt. Ltd., Genisys Integrating Systems (India) Pvt. Ltd., Autodesk India and Aurigo Software Technologies, it directed exclusion of seven high-turnover companies from the final comparables: Larsen & Toubro, Persistent, Infosys, Cybage Software, Nihilent Analytics, Thirdware Solutions and Aspire Systems.
The Tribunal separately considered R.S. Software (India) Ltd., whose turnover for Financial Year 2015-16 was below ₹200 crore but exceeded that threshold in the two preceding financial years. Following the approach discussed in Barracuda Networks India Pvt. Ltd. Vs DCIT and Aurigo Software Technologies, the Tribunal directed exclusion of the margins of R.S. Software for Financial Years 2013-14 and 2014-15 while redetermining the arm’s length price. The appeal was accordingly allowed with directions to the Assessing Officer and TPO to recompute the benchmark after implementing the exclusions. Since the substantive appeal had been disposed of, the connected stay petition became infructuous and was dismissed. Thus, the order provided relief concerning the composition of the comparable set and the computation of arm’s length price; it did not determine a final revised tax adjustment in the Tribunal’s order itself.
Cases Discussed
1. Genisys Integrating Systems (India) Pvt. Ltd. Vs DCIT (ITAT Bangalore); ITA No. 1231/Bang/2010 — Cited in the reproduced precedent for the importance of applying a turnover filter and restricting comparables to an appropriate turnover band.
2. CIT Vs Pentair Water India Pvt. Ltd. (Bombay High Court); Tax Appeal No. 18 of 2015; 16/09/2015 — Followed in the quoted Autodesk decision for recognising turnover as a relevant consideration in selecting transfer pricing comparables.
3. Sysarris Software Pvt. Ltd. Vs DCIT (ITAT Bangalore); (2016) 67 taxmann.com 243 — Discussed in the reproduced Aurigo decision concerning conflicting approaches to high-turnover comparable companies.
4. Dell International Services India (P) Ltd. Vs DCIT (ITAT Bangalore); (2018) 89 taxmann.com 44; 13/10/2017 — Discussed for favouring a ₹1 crore to ₹200 crore comparability band, taking account of judicial precedents on turnover.
5. Autodesk India Pvt. Ltd. Vs DCIT (ITAT Bangalore); (2018) 96 taxmann.com 263 — Considered in detail concerning exclusion of high-turnover companies and the treatment of divergent judicial interpretations.
6. Chryscapital Investment Advisors India Pvt. Ltd. Vs DCIT (Delhi High Court); 82 taxmann.com 167 — Discussed in the reproduced Aurigo and Autodesk reasoning. Its observations concerning turnover were distinguished in those decisions.
7. Arista Networks India Pvt. Ltd. Vs DCIT (ITAT Bangalore); (2021) 133 taxmann.com 204 — Cited as a precedent applying the turnover filter to software development comparables.
8. Barracuda Networks India Pvt. Ltd. Vs DCIT (ITAT Bangalore); IT(TP)A No. 229/Bang/2021; 25/10/2021 — Relied upon within the Aurigo extract concerning the treatment of R.S. Software’s margins for years in which it exceeded the applicable turnover ceiling.
9. BORQS Software Solutions Pvt. Ltd. Vs ACIT (ITAT Bangalore); (2022) 135 taxmann.com 337 — Cited by the assessee in support of excluding high-turnover software development comparables.
10. Aurigo Software Technologies Pvt. Ltd. Vs DCIT (ITAT Bangalore); (2022) 137 taxmann.com 201 — Extensively followed; its reasoning on the ₹200 crore upper turnover filter and R.S. Software’s prior-year margins is reproduced in the order.
11. Ametek Instruments India Pvt. Ltd. Vs DCIT (ITAT Bangalore); IT(TP)A No. 432/Bang/2021; 13/06/2022 — Cited by the assessee in support of applying an upper turnover filter.
12. Willis Processing Services (ITAT Mumbai) — Mentioned in the reproduced Autodesk judgment as a contrary view on turnover-based exclusion.
13. Capgemini India Pvt. Ltd. (ITAT Mumbai) — Mentioned within the Autodesk extract as a contrary turnover-filter authority.
14. NTT Data, Societe Generale Global Solutions and LSI Technologies (ITAT decisions) — Mentioned collectively in the quoted Autodesk reasoning concerning the treatment of decisions following the contrary approach to turnover filters.
FULL TEXT OF THE ORDER OF ITAT COCHIN
This appeal at the instance of the assessee is directed against final assessment order dated 19.04.2021. The relevant assessment year is 2016-2017. The assessee has also preferred a Stay Petition for stay of outstanding demand.
2. The brief facts of the case are as follows:
The assessee is a software services company engaged in the provision of software services predominantly in the maintenance management segment. The assessee is the holding Company for InApp US and InApp Japan. For the assessment year 2016-2017, the assessee had entered into the international transaction of sale of computer software with its Associated Enterprises (“AE”) outside India for Rs17,32,49,904. The assessee had earned operating margin of 15.07 percent on operating cost. The assessee in its TP study had selected Transaction Net Margin Method (“TNMM”) as the Most Appropriate Method (“MAM”) and carried out the search for uncontrolled comparables using Prowess and Capitaline Database The search of the databases yielded a set of 8 (eight) comparable companies with median of 12.67 percent, with 35th and 65th percentile being 7.04 percent and 20.61 percent respectively (Refer page 82 and 83 of Paper book-Vol I). Hence, the margin of the assessee at 15.07percent on operating cost was treated at arm’s length in the software development segment.
3. The assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued. During the course of assessment proceedings, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO). The TPO agreed with the assessee that TNMM was to be applied as the MAM. The TP Officer however opined that the data used for determining the Arm’s Length Price (“ALP”) by the assessee in the TP study was unreliable and hence the TP Officer rejected the TP documentation maintained by the assessee. The TP Officer thereafter applied certain filters and selected 13 comparable companies in software development segment which included 11 new companies as comparables, while 2 company selected by the assessee was retained. The list of the final set of comparables selected by the TP Officer is provided in page 69-70 of the TP order. The TP Officer in selecting the said comparables applied the following filters (page 19-20 of TP order):
| S No | Filters used for Software development segment |
|---|---|
| 1. | Use of current year data |
| 2. | Companies having positive net worth |
| 3. | Persistent loss filter (Companies reporting loss for any 2 years out of last three years, is excluded) |
| 4. | The companies whose income from non-financial services to sales is >75% are selected |
| 5. | The companies whose export revenues are more than 75% of the revenues are selected |
| 6. | Employee to sale > 25% |
| 7. | The companies whose turnover is more than Rs. 1 Crore are selected |
| 8. | Related Party Transactions < 25% of the revenues are selected and Related Party Transactions < 25% of the expenses are selected |
| 9. | FAR |
4. The TP Officer determined the ALP at 28.20 percent based on the profit margins computed for the 13 comparable companies in software development segment. The TPO re-computed the profit margin of the assessee at 15.29 percent (page 4 of the TO order). A summary of the margin computed and ALP determined is provided in the table below:
| Particulars | As per TP Officer |
|---|---|
| Total Operating Revenue (Rs) | 18,79,28,972 |
| Total Operating Expenses (Rs) | 16,29,99,683 |
| Operating Profit (Rs) | 2,49,29,289 |
| OP/ OC (percent) | 15.29 |
| ALP (percent) | 28.20 |
| TP adjustment (Rs) | 2,10,36,622 |
5. The TPO also treated the delayed receivables from AEs as an international transaction and computed notional interest on delayed receivables using 6 Months LIBOR + 450 basis points (Pages 85-86 of TP order) and made an adjustment of Rs 21,348. The TPO passed the order dated 31.10.2019 under section 92CA of the I.T.Act and determined the total TP adjustment of Rs.2,10,57,970.
6. Pursuant to the order u/s 92CA of the I.T.Act, the A.O. passed the draft assessment order (DAO) dated 06.11.2019 proposing the above TP addition. The assessee filed objections before the Dispute Resolution Panel (“DRP”). The DRP disposed of the objections filed by the assessee vide directions dated 02.03.20921 directing rectification of the margins of certain companies in the software development segment. Subsequently, a rectification application was filed before the DRP dated 16.03.2021 to restrict the TP adjustment to the value of international transaction. The DRP dismissed the application vide order dated 05.04. 2021. The AO passed the final assessment order dated 19.04.2021 giving effect to the directions of the DRP wherein the TP adjustment of Rs 2,10,57,970/- proposed in the DAO was enhanced to Rs 2,16,61,068/- in the final assessment order.
7. Aggrieved by the final assessment order, the assessee has filed the present appeal before the ITAT. The assessee has raised several grounds and sub-grounds (Ground 7 and its sub-grounds). However, the learned AR during the course of hearing had only pressed ground 4.9. Ground 4.9 reads as follows:-
“4.9. The ld.AO/TPO erred in not applying the turnover filter at the upper limit so as to reject high turnover companies. The ld.AO/TPO, while applying the said turnover filter in the lower limit so as to reject companies having turnovers less than INR 1 crore erred in not applying the said filter at the upper end so as to reject the following higher turnover companies as well;
(a) Larsen & Toubro Infotech Ltd.
(b) Persistent Systems Ltd.
(c) Infosys Ltd.
(d) Cybage Software Pvt. Ltd.
(e) Nihilent Analytics
(f) Thirdware Solutions Limited
(g) R.S.Software (India) Limited
(h) Aspire Systems (India) Private Limited.”
8. The learned AR submitted that the assessee’s turnover is only Rs.18.80 crore, and therefore, the comparable companies having turnover of more than Rs.200 crore are to be excluded. In this context, the learned AR relied on the following orders of the Tribunal:-
(i) Aurigo Software Technologies Pvt. Ltd. reported in (2022) 137 taxmann.com 201 (Bangalore – Trib.)
(ii) BORQS Software Solutions Private Limited reported in (2022) 135 taxmann.com 337 (Bangalore – Trib.)
(iii) Autodesk India Private Limited reported in (2018) 86 taxmann.com 263 (Bangalore- Trib.)
(iv) Arista Networks India Private Limited reported in (2021) 133 taxmann.com 204 (Bangalore-Trib.)
(v) Ametek Instruments India Private Limited in IT(TP)A No.432/Bang/2021 (order dated 13.06.2022)
9. The learned Departmental Representative strongly relied on the orders of the TPO and the DRP.
10. We have heard rival submissions and perused the material on record. At the outset, we notice that the TPO/DRP have erred in not applying the upper turnover filter to reject high turnover companies, while on the other hand, he has rejected companies with lower turnover of less than one (1) Crore. As per the Dun & Bradstreet classification of software industry, the companies could be classified under three (3) major heads depending on the turnover of the company viz.,
a. Less than Rs 200 crores categorized as small size companies;
b. Rs 200 crores to Rs 2000 crores categorized as medium size companies;
c. More than Rs 2,000 crores categorized as large size companies.
10.1 The turnover of the assessee for the relevant assessment year stands at Rs 18.8 crores and therefore would fall under the category of small size company having turnover in the range of Rs 1 crore to Rs 200 crores. Therefore, the companies not falling within the range ie, companies having turnover less than Rs 1 crore or turnover more than Rs 200 crores deserves to be excluded. We observe that, out of the 13 companies selected by the TPO and confirmed by the DRP, following seven companies would be excluded by applying the aforesaid turnover filter:
1. Larsen & Toubro Ltd
2. Persistent Limited
3. Infosys Limited
4. Cybage Software Limited
5. Nihilent Analytics
6. Thirdware Solutions Limited
7. Aspire Systems India Private Limited
10.2 The Bangalore Bench of the Tribunal in the case of Autodesk India (P) Ltd [2018] 96 taxmann.com 263, after considering the gamut of decisions on the subject, has concluded that companies having turnover more than 200 Crores cannot be considered as comparable to a small company. This decision has been subsequently followed in a number of decisions including the Bangalore Tribunal decision in the case of Arista Networks India (P.) Ltd.[2021] 133 taxmann.com 204 (Bangalore-Trib.). The recent decisions of Bangalore Tribunal in the case of Aurigo Software Technologies Private Limited [2022] 137 Taxmann.com 201 (Bangalore-Trib), has excluded the above seven comparable companies on application of turnover filter. Further, Tribunal excluded the margin of R S Software for FY 2013-14 and 2014-15 (since the turnover of RS Software for FY 2015-16 was less than 200 Crores but the turnover for the previous two years were more than 200 Crores). The findings of Bangalore Bench order in the case of Aurigo Software Technologies Private Limited (supra) for excluding the seven companies, namely, (i) Larsen & Toubro Limited, (ii) Persistent Limited, (iii) Infosys Limited, (iv) Cybage Software Limited, (v) Nihilent Analytics, (vi) Thirdware Solutions Limited, and (vii) Aspire Systems India Private Limited, are as under:-
“Ground No. 6 and additional ground numbered as ground No.13: In these grounds, the assessee has prayed for exclusion of some companies by applying the turnover filter. These grounds read as follows:
“6. The learned AO/learned TPO/Hon’ble DRP erred in not applying the upper limit on turnover while selecting the comparable companies.”
Additional Ground:
“Ground No. 13 — The appellant submits that the AO/ learned TPO/ Hon’ble DRP erred in not applying the upper limit on turnover of INR 200 crores while selecting the comparable companies and the following companies ought to be rejected:
a. Infosys Limited
b. Larsen & Toubro Infotech Limited
c. Persistent Systems Limited
d. Asprie Systems (India) Private Limited
e. Thirdware Solutions Limited
f. Cybage Software Private Limited
g. Nihilent Limited
h. R S Software Limited for FY 2013-14 & FY 2014-15
The said ground of appeal is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”
8. As far as ground No.6 and additional ground No.13 which is expansion of Ground No.6 is 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:
10B. Determination of arm’s length price under section 92C . (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.
9. 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.
10. 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 beingcompared 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.
11. 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. 18,80,27,279/-. 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.
12. 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.”
13. 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).
14. In view of the aforesaid decision, we hold that companies listed in Sl.No.(a) to (g) of Grd.No.13 raised by the Assessee whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies.”
10.3 As regards exclusion of margin of R S Software India Limited for the financial year 2013-2014 and 2015-2016, the observation of the Tribunal in the case of Aurigo Software Technologies Private Limited (supra) are as follows:-
“15. As far as company listed at Sl.No.(h) of Grd.No.13 i.e., R.S.Software (India) Ltd., is concerned, the turnover of this company in the current year is less than Rs.200 Crores but in the earlier two years its turnover was more than Rs.200 crores and was liable to be excluded in those earlier two years. The question raised in the aforesaid grounds is as to:
whether this company should also be excluded on the application of turnover filter by reason of its turnover in the earlier two years being more than Rs.200 crores in the light of Rule 10CA of the rules which were applicable from AY 2014-15 onwards
or
whether in computing the weighted average profit margin of this company, the earlier two years profit margins have to be ignored because they fail the test of comparability in those two earlier years by reason of the application of the Rs.200 Crore turnover filter.
16. This Tribunal in the case of M/s. Barracuda Network (India) Pvt. Ltd., Vs. DCIT in IT(TP)A No.229/Bang/2021 for Assessment Year 2016-17, order dated 25.10.2021, held that R. S. Software (India) Ltd., is to be regarded as a comparable company, but the margins for Assessment Year 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We accordingly direct the TPO to take the margins of this company for Financial Year 2015-16 alone.”
10.4 In view of the above order of the Tribunal, we direct the AO / TPO to exclude the seven companies, referred supra, from the final list of companies on the basis of application of turnover filter. Further, we direct the A.O. to exclude the margin of R S Software India Limited for the financial year 2013-2014 and 2014-2015 by applying turnover filter (since turnover for F.Y. 2013-2014 and 2014-2015 exceeded Rs.200 crore) while re-determining the arm’s length price of the international transaction. It is ordered accordingly.
SA No.13/Coch/2021
11. Since we have disposed of the appeal, the stay petition becomes infructuous and the same is dismissed.
12. In the result, the appeal filed by the assessee is allowed and the stay petition filed by the assessee is dismissed.
Order pronounced on this 24th day of June, 2022.
