MFX Infotech Private Limited, Bengaluru V. Deputy Commissioner Of Income Tax, Circle- 4(1)(2), Bangalore

ITA 251/BANG/2021

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9946 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 26-09-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 16-06-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Notional interest
• Section: 92C; 92B; 133(6); 10B; 143(2); 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri N.V. Vasudevan, Vice President and Ms. Padmavathy S., Accountant Member IT(TP)A No. 251/Bang/2021 (Assessment Year: 2016-17) M/s. MFX Infotech Pvt. Ltd. 3/3/2 Quess House, Sarjapur Ambalipura Road Bellandur Gate Bengaluru 560102 PAN – AAJCM2530P vs DCIT, Circe - 4(1)(2) BMTC Building, 80 Feet Road 6th Block, Koramangala Bengaluru 560095 (Appellant) (Respondent) Assessee by: Shri Padamchand Kincha, CA Revenue by: Shri Manjunath Karkihalli, CIT-DR Date of hearing: 27 /09/2022 Date of pronouncement: 21/10/2022 O R D E R Per: Padmavathy, A.M. This appeal is against the final assessment order passed by National e-assessment centre dated 22.04.2021 passed under Section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) for the assessment year (AY) 2016-17. 2. The assessee raised the following concise grounds of appeal: . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 2 “General Grounds 1. The orders passed by the learned Deputy Commissioner of Income-tax Transfer Pricing - 2(1)(1) (Transfer Pricing Officer/ TPO); and Honorable Dispute Resolution Panel [collectively referred as "lower income tax authorities" for brevity] to the extent prejudicial to the assessee are bad in law and liable to be quashed. 2. The learned AO erred in not passing the order in conformity with the procedure prescribed in faceless assessment scheme under section 144B of the Act. 3. The learned AO has erred in making an addition of Rs. 5,18,74,725 to the total income of the Appellant, without appreciating that the learned TPO vide order dated 16.04.2021 had reduced the transfer pricing adjustment to Rs. 4,94,73,850 after giving effect to directions of DRP. 4. The learned AO has erred in making a reference to TPO for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. 5. The lower income tax authorities have erred in (a) making transfer pricing adjustment of Rs. 4,82,08,643 (Software Development Segment) and Rs. 36,66,083 (Interest on delayed receivables); (b) not appreciating that there is no amendment to the definition of "income" and charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and (c) passing the orders without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. (d) in not restricting the TP adjustment to AE transactions only and thereby making an adjustment in respect of transactions with non-associated enterprises also. 6. The lower income tax authorities have erred in law and on facts by gathering information from various companies under section 133(6) of the Act without appreciating that the said . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 3 information (a) was not available with the Appellant at the time of preparing its transfer pricing documentation; and (b) was not available in public domain. Software Development Segment 7. The lower income tax authorities have erred in computing the net margin of the Appellant at 2.46 percent based on the entity level financials of the Appellant instead of 25.62 percent as claimed by the Appellant based on segmental information for comparability analysis. 8. The lower income tax authorities have erred in law and on facts of the case in (a) rejecting the segmental profitability by concluding that the Appellant's adoption of cost allocation method based on employee head count is flawed and has resulted in skewed results. (b) not appreciating the business model of the Appellant wherein it hires employees on project specific requirements . 9. The lower income tax authorities have erred in rejecting the transfer pricing study of the Appellant and conducting a fresh economic analysis for the determination of the arms-length price in connection with the impugned international transactions by: (a) not providing cogent reasons for such rejection; and (b) carrying out fresh economic analysis which is non- contemporaneous and not in accordance with Rule 108(4). 10. The lower income tax authorities have erred in including the following companies, even though they fail the higher threshold limit of INR 200 crores for turnover filter: (a) Infosys Ltd. (b) Larsen & Toubro Infotech Ltd (c) Persistent Systems Ltd (d) Aspire Systems (India) Pvt Ltd (e) Thirdware Solution Ltd. (f) Cybage Software Pvt Ltd. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 4 (g) Nihilent Ltd. 11. The lower income tax authorities have erred in including the operating income and operating expense of FY 2014-15 and FY 2013-14 in computing the weighted average margin for R S Software Ltd even though the same fails the upper turnover limit of Rs. 200 crores for the above-mentioned years. 12. The lower income tax authorities have erred in law and in facts, by accepting the following companies as comparable even though the same did not fulfil one or more filters applied by the learned TPO or were not comparable to the Appellant on FAR analysis: (a) Inteq Software Private Limited (b) Infobeans Technologies Limited (c) CG-VAK Software and Export Limited 13. The lower income tax authorities have erred in law and in facts, in rejecting I2T2 India Limited forming part of Appellant's transfer pricing study, without providing any cogent reasons for the same. 14. The lower income tax authorities erred in facts and in law: (a) rejecting the filter of companies owning significant intellectual property, brand or developing proprietary products, as applied by the Appellant. (b) by not excluding the following comparable companies even though they fail the RPT filter of 15% of operating sales: - Persistent Systems Ltd - Aspire Systems (India) Pvt Ltd - Inteq Software Private Limited - Thirdware Solutions Ltd. - Rheal Software Private Limited - Larsen & Turbo Infotech Ltd 15. The lower income tax authorities erred in excluding the following companies, even though they are functionally comparable to the appellant: (a) Minvesta Infotech Limited (b) Exilant Technologies Private Limited (c) Agilisys SWD Services India Private Limited . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 5 (d) Batchmaster Software Private Limited (e) DCIS Dot Com Solutions India Private Limited (f) Evoke Technologies Private Limited (g) Sagarsoft (India) Ltd. (h) Ace Software Exports Limited (i) Synfosys Business Solutions Limited (j) Harbinger Systems Private Limited (k) Orion India Systems Private Limited (l) Isummation Technologies Private Limited 16. The lower income tax authorities erred in inappropriately computing the net margins (operating profit over operating cost) of the following comparable companies: (a) CG-VAK Software and Export Limited (b) Larsen & Toubro Infotech Ltd (c) Aspire Systems (India) Pvt Ltd (d) Cybage Software Pvt Ltd. (e) Kals Information Systems Limited 17. The lower income tax authorities erred in facts and in law by: (a) inconsistently applying / modifying the filters and cherry picking the comparable companies is bad in law; (b) not making suitable adjustment to account for the differences in working capital position of the Appellant vis-a-vis the comparable; (c) selecting only those comparable companies whose data for FY 2015-16 was available; (d) rejecting the methodology/workings provided by the Appellant for computing the risk adjustment without providing any cogent reasons. (e) not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (i) accounting practice; (ii) positive working capital adjustment; (iii) risk profile between the Appellant and the comparable companies, if favourable to the Appellant. 18. On facts and circumstances of the case and in law applicable, the aforesaid companies should be included/ rejected as comparable companies. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 6 Interest on delayed receivables 19. The lower income tax authorities erred in making the notional interest adjustment with respect to outstanding receivables of the Appellant for FY 2015-16. 20. The lower income tax authorities erred in making the notional interest adjustment with respect to outstanding receivables of the appellant for FY 2015-16. The Learned TPO erred in (a) Re-characterisation of the net outstanding receivables as on 31st March 2016 as a deemed loan and benchmarking the same is not permissible in law. (b) Not appreciating that the outstanding receivables were a consequence to the principal international transaction and could not be considered as a separate international transaction. (c) the Appellant follows the same policy of not charging any interest on trade receivables from unrelated parties. 21. Assuming without admitting that interest on delayed receivables is added, the lower authorities have erred in: (a) adopting CUP method as the most appropriate method without justifying, how the same was the most appropriate method in the facts and circumstance of the case. (b) adopting the LIBOR rate for an average maturity period of three years and up to five years which is not applicable to the facts of the case. 22. Without prejudice, no separate adjustment for interest on delayed receivables is required when (i) working capital adjustment is given; or (ii) where the margins of the international transaction is held to be at arms-length price.” 3. The assessee is engaged in the business of providing software development, testing, infrastructure, application development services etc. to MFX US (AE). Further the assessee also provided IT support . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 7 services in the nature of data migration from one software to another to Commercial International Bank (CIB), which is the non-AE. The assessee is also rendering similar services to its Indian AEs. The assessee filed return of income for AY 2016-17 on 16.11.2016 declaring a total income of Rs.49,19,380/-. The case was selected for limited scrutiny under CASS and notice under Section 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP). The TOP made TP adjustment of Rs.5,18,74,725/- in the software development claim and interest on receivables in respect of the international transactions entered into by the assessee with its AE. The assessee raised objections before the DRP. The DRP gave partial relief to the assessee whereby the TP adjustment was reduced to Rs.4,94,73,850. The assessee is in appeal before the tribunal against the final order of assessment passed in pursuant to the directions of the DRP. 4. The assessee adopted transfer net margin method (TNMM) as the most appropriate method. The operating profit and operating cost has been taken as the profit level indicated in TNMM analysis. For the purpose of TP study the assessee has computed the profit margins for each of the segments i.e. Transactions with AEs, Non-AEs, and Indian AEs and this segmental profitability statement were certified by an Independent Chartered Accountant. The financials of the assessee with its AE as per the TP study are as under: - . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 8 Particulars Amount in Rs. Revenue from operations 18,66,58,660 Unbilled Revenue 1,06,98,655 Total Operating Revenue 19,73,57,315 Employee Benefit Expenses 12,97,72,926 Depreciation and Amortization Expenses 11,84,149 Other Expenses 2,61,48,809 Total expenses 15,71,05,884 Total Operating Profit 4,02,51,431 Operating Margin on Operating Cost 25.62% 5. The TPO rejected the segmental profitability statement on the ground that adoption of head count as the basis of cost allocation chosen by the assessee is resulting in skewed results. The TPO therefore considered the entity level margin which is computed as under for the purpose of ALP: - Particulars Amount Total Income 20,66,35,603 Total Operating Income 20,66,35,603 Employee Benefit Expenses 16,85,66,279 Depreciation and Amortization Expenses 14,03,030 Other Expenses 3,17,11,797 Total expenses 20,16,81,106 Total Operating Profit 49,54,497 OP/CO 2.46% 6. Further, out of the 10 comparable companies chosen by the assessee the TPO rejected 7 and applied new filter to choose fresh set . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 9 of comparable companies as listed below and arrived at the revised operating margin:- Sl.No. Comparable companies OP/TC 3 yr Weighted Unadjusted Average (OP/TC) 31-Mar-16 31-Mar-15 31-Mar-14 1 KALS Information Systems Limited 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Ltd 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Pvt Ltd 16.10% 13.88% 15.26% 14.74% 5 C G- V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 6 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 7 Larsen & Tourbo Infotech Ltd. 26.29% 24.22% 23.54% 24.83% 8 Nihilent Ltd 15.94% 29.19% 35.72% 26.36% 9 Inteq Software Pvt. Ltd 7.53% 32.14% 45.00% 28.20% 10 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 11 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 12 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 13 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 14 Aspire Systems (India) Pvt. Ltd 34.26% 47.56% 38.04% 39.28% 15 Cybage Software Pvt Ltd 62.90% 68.68% 68.82% 66.45% No of comparable companies 15 35th Percentile 20.87% Median 26.36% 65tb Percentile 30.89% 7. The TPO compared the entity level margin of 2.46% with the margin of the comparable companies chosen by him to arrive at the transfer pricing adjustment of Rs.4,82,08,643/- computed as below: - SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers operating revenue OR 20,66,35,603 Taxpayers operating cost OC 20,16,81,106 Taxpayers operating profit OP 49,54,497 Taxpayers PLI PLI=OP/OC 2.46% 35 th Percentile Margin of comparable companies set 20.87% Adjustment Required (if PLI <35 th Percentile) Yes . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 10 Median Margin of comparable set M 26.36% Arm’s Length Price ALP=(1+m0*OC 25,48,44,246 Price Received OR 20,66,35,603 Shortfall being adjustment ALP-OR 4,82,08,643 8. The TPO also made adjustment towards interest on delayed receivables to arrive at an adjustment of Rs.36,66,083/- to arrive at the overall TP adjustment of Rs.5,18,74,725. The assessee being aggrieved raised its objections before the DRP. 9. The DRP gave partial relief to the assessee in terms of (i) To include M/s.Eluminious Technologies Limited as a comparable company (ii) To Treat provision for bad debt as non-operating (iii) To consider the correct margins as per the financials of certain comparable companies Larsen & Toubro Infotech Ltd., Aspire Systems (India) Pvt. Ltd., Cybage Software Pvt Ltd., KALS Information Systems Limited., C G- V A K Software & Exports Ltd (iv) To re-compute the interest on delayed receivables based on the invoice details submitted by the assessee considering the actual period of delay 10. The TPO based on the directions of the DRP recomputed the TP adjustment in software segment as Rs.4,66,55,698 and interest on delayed receivable as Rs.28,18,152. In the final assessment order however the TP adjustment is retained as in the draft assessment order. In the detailed grounds of appeal raised by the assessee, the ground pertaining to the AO retaining the addition made towards TP adjustment as in draft assessment in the final assessment order was . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 11 contended vide Ground 4.2. However during the course of hearing, the ld AR did not press this ground and proceeded to argue on merits relating to the TP adjustment contended through the concise grounds reproduced above. We therefore dismiss ground no. 4.2 as not pressed and proceed to adjudicate only the issue raised in the concise grounds in the following paras. Out of the concise grounds the ld AR argued only the following during the course of hearing and therefore the rest of the grounds are dismissed as not pressed (i) Computing the entity level margin ignoring the segmental margin computed by the assessee – Ground 7 (ii) Exclusion of companies based on turnover filter – Ground 10 (iii) Exclusion of margins of R S Software Ltd for FY 2014-15 & 2013-14 based on turnover filter – Ground 11 (iv) Exclusion of CG-VAK Software and Export Limited – Ground 12(c) & additional ground (v) Exclusion of I2T2 India Limited – Ground 13 (vi) Exclusion of Rheal Software Private Limited – Ground 14(b) 11. Before us the learned A.R. submitted that out of the 16 final list of comparable companies, 7 comparable companies, namely, L & T Infotech Ltd., Nihilent Ltd., Persistent Systems Ltd., Thirdware Solution Ltd., Infosys Ltd., Aspire Systems (India) Pvt. Ltd. and Cybage Software Pvt. Ltd, need to be excluded based on the turnover filter. The learned A.R. submitted that the turnover of the assessee is Rs.19,73,57,315/- towards software development services and the TPO while selecting the comparable companies did not apply the upper limit for the filters. The learned A.R. relied on the decision of the coordinate . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 12 bench of the Tribunal in the case BORQS Software Solutions Pvt. Ltd. IT(TP)A No. 310/Bang/2021 dated 25.10.2021. 12. The learned D.R. relied on the decision of the lower authorities. 13. We heard both the parties and perused the material on record. We notice that the coordinate bench of the Tribunal in the case BORQS Software Solutions Pvt. Ltd. (supra) has considered the issue of TPO failing to apply upper turnover filter and has excluded the following comparable companies on this ground. The relevant observation of the Hon'ble ITAT is as under: - “7. The main grievance of the Assessee projected in the grounds of appeal filed before the Tribunal which was argued 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. 8.7) The said ground reads thus: 8.7 Without prejudice, the Learned DRP is not justified in upholding the selection of the following companies by the Learned TPO by refusing to adopt the upper turnover filter: (a) Larsen & Toubro Infotech Ltd. (b) Nihilent Ltd. (c) Persistent Systems Ltd. (d) Aspire Systems (India) Pvt. Ltd. (e) Infosys Ltd. (f) Thirdware Solution Ltd. (g) Cybage Software Pvt. Ltd. (ii) exclusion of R.S.Software (India) Ltd., on the ground that the related party transaction is more than 15%; or in the alternative prayer for excluding the operating income and operating expense of FY 2014-15 and FY 2013-14 in computing the weighted average margin for RS Software Ltd, . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 13 even though the same fails the upper turnover limit of Rs. 200 crores for the above-mentioned years. (iii) non acceptance of Assessee's claim regarding non inclusion of certain companies comparable company. Inteq Software Pvt.Ltd., and Infobeans Software Ltd. 8. As far as Ground No. 8.7 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; . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 14 (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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 15 (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 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. 11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 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. 24,71,71,242/-. 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 16 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 (P.) Ltd. v. Dy. CIT [2017] 82 taxmann.com 167 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 17 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 comparable companies. This shows that there is a limit for the lower end for identifying the comparable companies. 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 comparable companies, 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 18 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 nonjurisdictional 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 (Bangalore-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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 19 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 20 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.8.7 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.” 14. We notice that in the above decision the Hon’ble Tribunal has excluded all the seven comparable companies from the upper turnover filter. Respectfully following the decision of the coordinate bench of the Tribunal we direct the TPO to exclude the above listed companies based on upper turnover filter and recomputed the ALP accordingly. 15. With regard to exclusion of R.S. Software the learned A.R. submitted that the upper turnover filter for AY 2013-14 and 2014-15 to would fail and therefore this also needs to be excluded for comparable companies. In this regard the learned A.R. relied on the decision of the Barracuda Network India Pvt. Ltd. vs. DCIT in IT(TP)A No. 229/Bang/2021. 16. We notice that the coordinate bench in the case of Barracuda Network India Pvt. Ltd. (supra) has considered similar issue with regard to exclusion of RS Software India Ltd. and held as under: - “15. As far as company listed at Sl.No.(h) of Grd.No.4 and Grd.No.5 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 21 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. To answer the above question, we need to look at the amendment to the rules that allow for introduction of a “range concept” for determination of ALP and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases. The provisions of the Income-tax Act were amended through the Finance (No.2) Act, 2014 to facilitate alignment of Indian transfer regime with international best practices. The manner of computation of ALP is laid down under the Income-tax Rules. The Government has notified the amended Rules for determining ALP vide S.O. No. 2860 (E) dated 19/10/2015. The amended regime will be applicable for computation of ALP of international transactions and specified domestic transactions undertaken on or after 1/04/2014 i.e. on and after PY 2014-15. The amended rules allow for introduction of a “range concept” for determination of ALP and “use of multiple year data” for undertaking comparability analysis in transfer pricing cases. The use of range concept being a statistical tool enhances the reliability of analysis undertaken for computation of ALP. The range concept will be applicable in certain cases for determining the price and will begin with the 35th percentile and end with the 65th percentile of the comparable prices. Transaction price shown by the taxpayers falling within the range will be accepted and no adjustment will be made. The use of multiple year data allows for yearly variations to be averaged out and would therefore add value to transfer pricing analysis. The Amended Income tax Rules, 1962 (‘Rules’) via Notification 83 of 2015 which is the 16th amendment to the originally drafted Indian Tax Rules, 1962, are applicable for transactions undertaken on or after 1 April 2014 (i.e. from FY 2014-15 and onwards). These amended provisions are applicable only when the determination of ‘ALP’ is done under the MAM being resale price method (‘RPM’), cost plus method (‘CPM’) or transactional net margin method (‘TNMM’). The relevant provisions of Rule 10CA of the Rules, in so far as it relates to choice of comparable companies, read as follows: . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 22 “Computation of arm's length price in certain cases. 10CA. (1) Where in respect of an international transaction or a specified domestic transaction, the application of the most appropriate method referred to in sub-section (1) of section 92C results in determination of more than one price, then the arm's length price in respect of such international transaction or specified domestic transaction shall be computed in accordance with the provisions of this rule. (2) A dataset shall be constructed by placing the prices referred to in sub-rule (1) in an ascending order and the arm's length price shall be determined on the basis of the dataset so constructed: Provided that in a case referred to in clause (i) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction then,— i) the most appropriate method used to determine the price of the comparable uncontrolled transaction or transactions undertaken in the aforesaid period and the price in respect of such uncontrolled transactions shall be determined; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the current year and in the aforesaid period preceding it shall be included in the dataset instead of the price referred to in sub-rule (1): further that in a case referred to in clause (ii) of sub-rule (5) of rule 10B, where the comparable uncontrolled transaction has been identified on the basis of the data relating to the financial year immediately preceding the current year and the enterprise undertaking the said uncontrolled transaction, [not being the enterprise undertaking the international transaction or the specified domestic transaction referred to in sub-rule (1)], has in the financial year immediately preceding the said financial . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 23 year undertaken the same or similar comparable uncontrolled transaction then,— (i) the price in respect of such uncontrolled transaction shall be determined by applying the most appropriate method in a similar manner as it was applied to determine the price of the comparable uncontrolled transaction undertaken in the financial year immediately preceding the current year; and (ii) the weighted average of the prices, computed in accordance with the manner provided in sub-rule (3), of the comparable uncontrolled transactions undertaken in the aforesaid period of two years shall be included in the dataset instead of the price referred to in sub-rule (1) : Provided also that where the use of data relating to the current year in terms of the proviso to sub-rule (5) of rule 10B establishes that,— (i) the enterprise has not undertaken same or similar uncontrolled transaction during the current year; or (ii) the uncontrolled transaction undertaken by an enterprise in the current year is not a comparable uncontrolled transaction, then, irrespective of the fact that such an enterprise had undertaken comparable uncontrolled transaction in the financial year immediately preceding the current year or the financial year immediately preceding such financial year, the price of comparable uncontrolled transaction or the weighted average of the prices of the uncontrolled transactions, as the case may be, undertaken by such enterprise shall not be included in the dataset. (3) Where an enterprise has undertaken comparable uncontrolled transactions in more than one financial year, then for the purposes of sub-rule (2) the weighted average of the prices of such transactions shall be computed in the following manner, namely:— (i) where the prices have been determined using the method referred to in clause (b) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of sales which has been considered for arriving at the respective prices; . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 24 (ii) where the prices have been determined using the method referred to in clause (c) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs which has been considered for arriving at the respective prices; (iii) where the prices have been determined using the method referred to in clause (e) of subrule (1) of rule 10B, the weighted average of the prices shall be computed with weights being assigned to the quantum of costs incurred or sales effected or assets employed or to be employed, or as the case may be, any other base which has been considered for arriving at the respective prices ........... 17. Let us apply the above rules to the comparable company R.S.Software (India) Ltd. As per Rule 10CA(2), the dataset of comparable companies chosen has to be arranged in ascending order. As per the 1st proviso to Rule 10CA(2), R.S.Software (India) Ltd., was chosen as a comparable company based on the data relating to the current year and in the earlier two financial years immediately preceding the current financial year. In all the financial years the said company has undertaken similar comparable uncontrolled transaction. Clause (i) to 1st proviso to Sec.10CA(2) mandates that the same MAM has to be used to arrive at the price of the comparable uncontrolled transaction undertaken by R.S.Software (India) Ltd., in the financial years 2013-14 and 2014-15. As per clause (ii) of 1st proviso to Sec.10CA(2), weighted average of the prices of the 3 financial years have to be taken in accordance with Rule 10CA(3) and the weighted average so taken shall be included data set instead of the price arrived at by using current year data alone. In the present case, if one sees the chart of comparable companies of TPO given in paragraph-4 of this order, the profit margins of the Company R.S.Software (India) Ltd., for the three financial years were 2013- 14 to 2015-16 were 24.14%, 32.75% and -2.09% respectively and the weighted average margin of 24.83% has been considered by the TPO. 18. The second proviso to Sec.10CA(2) of the Rules provides for a situation where R.S.Software (India) Ltd., has undertaken comparable uncontrolled transaction only in Financial year 2014- . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 25 15 & 2015-16, then the weighted average of the two financial year 2014-15 and 2015-16 has to be computed in the manner laid down in Rule 10CA(3) of the Rules and the margin so arrived at has to be included in the dataset. 19. The third proviso to Sec.10CA(2) of the rules provides that if in the current year i.e., financial year 2015-16 if R.S.Software (India) Ltd., has not undertaken any uncontrolled comparable transaction then that company can never be considered for inclusion in the dataset. 20. The submission of the learned Counsel for the Assessee was that as per the proviso to Rule 10CA(2) of the Rules, R.S.Software (India) Ltd., cannot be regarded as comparable company for Financial Year 2013-14 and 2014- 15 because in those years, the turnover of this company was more than Rs.200 crores. Therefore as per the first and second proviso to Rule 10CA(2) of the Rules, the profit margin of this company for Financial year 2013-14 & 2014-15 has to be ignored and the profit margin of the financial year 2015-16 alone should be taken. If one looks at Rule 10CA(2) in isolation, we have to reject this argument because the 1st and 2nd proviso to Rule 10CA(2) of the Rules refers to only R.S.Software (India) Ltd., (i.e., “where the comparable uncontrolled transaction has been identified on the basis of data relating to the current year and the enterprise undertaking the said uncontrolled transaction has in either or both of the two financial years immediately preceding the current year undertaken the same or similar comparable uncontrolled transaction”) undertaking uncontrolled transaction during the relevant previous year and if this condition is satisfied then the profit margin of R.S.Software for the 2 financial years immediately prior to the current financial year has to be taken. A plain reading of the 1st proviso would show that the question of comparability is not to be seen while applying the 1st and 2nd proviso to Rule 10CA(2) of the Rules. The provisions of Rule 10CA(2) have to be read harmoniously with the other provisions of Rule 10B 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 . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 26 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); (iv) 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]; .................... (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; . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 27 (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. (4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction [or a specified domestic transaction] shall be the data relating to the financial year [(hereafter in this rule and in rule 10CA referred to as the 'current year')] in which the international transaction [or the specified domestic transaction] has been entered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 28 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 reasonably accurate adjustments can be made to eliminate the material effects of such differences. A reading of Proviso to Rule 10B(4) would show that use of data relating to a period of two years prior to the current year may also be considered but with a rider that “if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared”. If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of Rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of Rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 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 hold accordingly.” 17. Respectfully following the above decision of the coordinate bench of the Tribunal we hold that with regard to the inclusion of R S Software Ltd., the margins for the assessment years in which the upper turnover filter would fail should be ignored and should not be regarded as comparable. It is ordered accordingly. 18. With respect to exclusion of Rheal Software Pvt Ltd., the assessee the learned A.R. submitted that the company is functionally dissimilar as it is engaged in custom software/application development and maintenance, data base solutions and outsourcing services. The learned A.R. also submitted that the segmental information is not . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 29 available with respect to this company and that the margins of the company is highly fluctuating (For year ended 2014 -36.64% and for year ended 2015 – 2.76%). It was further argued that the company has significant related party transaction for AY 2015-16 and AY 2016-17 and would fail the RPT filter of > 15% as laid down in the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks (supra). For these reasons the ld AR prayed for exclusion of the company. 19. We notice that the coordinate bench of the Tribunal in the case of Barracuda Network India Pvt. Ltd. (supra) has considered exclusion of companies on the ground that related party transactions are more than 15% and has also held that the RPT filter is to be considered on the upper threshold limit of 15% by relying on the decision of the Hon'ble Karnataka High Court in the case of PCIT and Anr. Vs. M.s Yahoo Infotech Pvt. Ltd. The ITAT has made the following observations in this regard: - “22. 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. Accordingly, respectfully following the decision of the coordinate bench of the Tribunal we hold that Rheal Software Pvt. Ltd. cannot be excluded on the basis of RPT filter”. 20. In view of the above we remit the issue back to the TPO with a direction to verify the RPT transaction of Rheal Software Pvt Ltd and . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 30 decide the comparability of the company considering the decision of the coordinate bench of the Tribunal in the case of Barracuda Networks (supra). It is ordered accordingly. 21. With regard to the exclusion of CG VAK Software and Exports Ltd., the learned A.R. submitted that the company is not functionally comparable being a product company and is engaged in diversified activities. The ld AR also submitted that the company is into significant research and development activities and is an outsource software company. The learned A.R. in this regard drew our attention to the annual report of the company in page 2196 & 2197 of paper book. The ld AR relied on the decision of the coordinate bench of the Tribunal in the case of 3DPLM vs. DICT in [2014] 42 taxmann.com 333 (Bangalore-Trib). 22. The learned D.R. raised objection to the exclusion of the company on the ground that the company is chosen as comparable by the assessee and that the exclusion of this company was not contended before the TPO or DRP. 23. The learned A.R. in rebuttal submitted that though the company is included as comparable by the assessee, it does not stop the assessee to plead for exclusion before the Tribunal and in this regard placed reliance on decision of the Special Bench in the case of DCIT vs Quark Systems (P) Ltd., [(2010) (4 ITR(T) 606 (Chandigarh Trib)] . . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 31 24. We have heard the rival contentions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of 3DPLM (supra) has held that in the absence of segmental information or details the companies cannot be taken for comparable analysis. Further it is noticed that the assessee has not contended the exclusion of this company before the TPO/DRP. In view of this we remit the issue back to the TPO/AO with a direction to consider the issue of exclusion of C G VAK Software and Exports Ltd., afresh, keeping in mind the decision of the Tribunal in the case of 3DPLM (supra). 25. With regard to inclusion of I2T2 India Limited, the TPO rejected the company stating that the company fails the turnover filter. The DRP upheld the same by stating that the turnover of the company for the year ended 31.03.2006 is less than Rs.1 crore and as per the provisions of Rule 10CA of Income Tax Rules, if the company is not found to be a comparable for the current year it cannot be selected as a comparable even if found as comparable in earlier years. The ld AR submitted that the company is functionally similar to the assessee. The ld AR also submitted that the company passes Rs.1 crore turnover filter for last 2 years and hence the last 2 years margins should be considered for computation purpose. The Ld AR further submitted that the company passes the RPT and export revenue filter and prayed for inclusion of the same. In this regard the ld AR placed reliance on the decision of the coordinate bench of the Tribunal in the case of Huawei Technologies . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 32 India (P.) Ltd. vs ACIT [2021] 133 taxmann.com 486 (Bangalore - Trib.). 26. We heard the rival submissions and perused the material on record. We notice that in the case of Huawei Technologies(supra) relied on by the assessee I2T2 was included on that ground that the non-availability of Related Party Transaction (RPT) in the annual report cannot be a reason for exclusion. It is also noticed that in the current year, the turnover of the company is less than Rs.1crore and fails the lower turnover filter. We therefore uphold the exclusion of I2T2. 27. Through ground No.7 of concise grounds, the assessee contended the computation of net margin at the entity level by the TPO. The assessee is rendering services to international AE, Indian AE and non-AE and has drawn financials segment wise which is certified by a Chartered Accountant (page 961 to 963 of paper book). For the purpose of transfer pricing, the assessee had considered the segmental financials relating to transactions with its AE. The TPO rejected the segmental financials of the assessee and worked out the entity level margins of the assessee while arriving at the TP adjustment. The TPO rejected the segmental financials on the by stating that “The taxpayer has contested the above margin computation of the TPO and has produced a segmental profitability statement certified by an Independent Chartered Accountant where a margin of 25.62% and 9.84% have been shown in the AE and non-AE segment respectively. The taxpayer has sought to adopt 25.62% for computing the ALP margin. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 33 The TPO has gone through the submissions made by the taxpayer and it seen from the segmental financials furnished at Annexure 6 that all expenses have been allocated on the basis of head count employed under respective segments. The following discrepancies have been noticed with this cost allocation • The taxpayer has reported Rs.75,82,277/- (102%) as employee expense for the Non-AE segment against a revenue of 74,14,852/-. Whereas in the MFX US AE segment employee expense of Rs.12,97,72,926/- (69.52%) has been reported against a revenue of Rs.18,66,58,660/- and in the Indian AE segment employee cost of 3,17,87,219/- has been reported against NIL revenue. • Revenue from non-AE segment is only 3.8% of the total revenue. • The taxpayer has not given any reasons as to why a cost of Rs.3,61,28,425/- has been incurred in the Quess (Indian AE) segment against NIL revenue. The revenue recognition policy of the company clearly states that Revenue from contracts 'priced on a time and material basis are recognized when services are rendered and related costs are incurred.' Clearly adoption of employee head count as the cost allocation basis has resulted in skewed results in each segment. Further the taxpayer has not furnished details of nature of employees under each segment. Revenue from non-AE segment being merely 3.8%, the TPO proceeds to take the entity level margin of the taxpayer for computing the ALP margin.” 28. The DRP upheld the decision of the TPO. 29. Before us, the ld. AR argued that the billing for services rendered by the assessee is done on the basis of time sheets i.e. the time spent by the manpower / employees on services rendered to AEs, non-AEs (pg. 996 of Paper Book). The ld. AR also submitted that the direct expenses attributable to these segments are allocated directly and . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 34 only expenses that are not identifiable are allocated based on head count since the revenue is based on manpower. The ld. AR further submitted that the segmental financials are prepared based on the audited statement of accounts and is certified by the CA which fact has been admitted by the TPO in his order. The ld DR supported the decision of the lower authorities 30. We have heard the rival contentions and perused the material on record. We notice that the TPO has rejected the segmental financials for the reason that the cost allocated are not proportionate to the revenue reported in each of the segments. It is submitted by the ld.AR that though the assessee has allocated a sum of Rs.3,17,87,219 to the Indian AE segment, there was no billing done as the contract did not go through with the Indian AE. We notice that the coordinate Bench of the Tribunal in the case of Cisco Systems India Pvt. Ltd. v. DCIT, (2014) 50 taxmann.com 280 (Bang.Trib.) has considered similar issue and held that- “9. At the time of hearing, it was brought to our notice that in assessee's own case for the A.Y. 2008-09 in ITA No.1510/Bang/2012, by order dated 31.10.2013, has upheld the use of headcount method followed by the assessee as appropriate method for allocation of common expenses between its various business units. The following were the relevant observations of the Tribunal:— "6. Having heard both the parties and having considered the rival contentions and also the material on record, we find that the dispute revolves around the allocation of indirect and common expenses relating to various units and the expenditure allocated to STPI unit, income from which is eligible for deduction u/s 10A of the Act. The assessee is . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 35 stated to be following head-count of personnel as the basis for allocation of the common and indirect expenses while the AO seeks to allocate the common expenses on the basis of the turnover of each segment. As narrated in the above paragraphs, the assessee is into various activities and the assessee is eligible for deduction u/s 10A of the Act only with regard to software development activity which is set up in STPI. The assessee had explained in detail before the AO the methodology and as to how the total expenditure of 207 crores has been bifurcated into 120 crores which is towards the common cost excluding IT and communication support cost and 87 crores which is common costs only in relation to IT and communication cost. The software development would fall within the second category i.e. IT and communication cost and its employees who are involved in such IT and communication are considered for allocation of the expenditure. The AO, in the draft assessment order, has considered number of employees in STPI and SEZ division and has come to the conclusion that the assessee is not following head-count method for division of allocable expenses. Before giving a finding as to whether the assessee is following the head-count method for division of allocable expenses, we would like to examine whether the method adopted by the assessee is correct. Similar question had arisen before the Hon'ble Delhi High Court in the case of M/s. EHTP India Pvt. Ltd. (cited supra) wherein apportionment of expenses between 10A and non-10A units was considered. In the said case also, the assessee was following allocation of common expenses on the head-count basis. After considering the facts of the said case, the Hon'ble High Court held that the assessee's contention therein that in the service industry head-count method would be more proper is a plausible view though it could possibly be a debatable view. It was held that merely because there can be more than one method of apportioning common expenses between STPI and domestic unit, it cannot be said that the method of head-count followed by the assessee should be discarded that too midway even though it was not questioned at any time in the past. While referring to the observations of the Hon'ble Supreme Court in the case of Hukumchand Mills, . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 36 the Hon'ble High court observed that where alternative methods of apportioning of expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness and if such is the endeavour, it can hardly be said that there is an attempt to distort the profits. Thus it can be seen that where two basis of apportionment are available, following one of the basis consistently is to be accepted. As the claim of deduction u/s 10A during the relevant assessment year is the 9th year in which the assessee is claiming the deduction u/s 10A and the revenue has accepted the method of allocation of expenses in all the earlier assessment years, we are of the opinion that the same method should be adopted for the relevant assessment year also. However, with regard to the discrepancy pointed out by the AO to the effect that there were more employees in the STPI unit while only 27 crores was allocated towards such unit, whereas there were less employees in SEZ unit but more than 53 crores was allocated to such division, we are of the opinion that this needs verification by the AO. The assessee has given detailed explanation as to how it is allocating the expenditure between various units on the basis of head-count but both the AO as well as the DRP have failed to consider the factual aspects of the said submission. In view of the same, upholding the method adopted by the assessee for allocation of common expenses, we remand the issue to the file of the AO only for verification of the number of employees and the expenditure allocated to such employees. Ground No.3 is accordingly allowed for statistical purposes." 10. It is not in dispute before us that the facts and circumstances prevailing in the present assessment year are identical to the facts that prevailed in A.Y. 2008-09. Following the aforesaid decision of the Tribunal for the A.Y. 2008-09, we direct the Assessing Officer to allocate common expenses on the basis of headcount and remand the issue to his file for the limited purpose of verification of the number of employees and expenses allocated to such employees, as was done in the A.Y. 2008-09.” . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 37 31. The TPO had stated that the head count of cost allocation basis has resulted in skewed results and that the assessee has not furnished the details of nature of employees under each segment. Considering the decision of the coordinate Bench and the facts of the present case, we remit the issue back to the TPO/AO for considering the issue afresh keeping in mind the ratio laid down by the coordinate Bench in the case of Cisco Systems India Pvt. Ltd. (supra). The assessee is directed to furnish required details and cooperate with the proceedings. Interest on delayed receivables 32. The TPO considered the outstanding receivable as a separate international transaction and charged notional interest using 6 months LIBOR + 450 basis points which worked out to 5.386% and arrived at TP adjustment of Rs.36,66,083. The assessee raised objections before the DRP contending the levy of notional interest. The DRP confirmed the levy of interest by the TPO. However, the DRP directed the assessee to submit the invoice wise details of realisation and period of delay before the TPO based on which the TPO was directed to compute the interest with reference to the actual period of delay. 33. Before us, the ld.AR submitted that the assessee is a fully funded entity of the AE and the amount outstanding from the AE will be settled on an on-going basis in the normal course of business having regard to the commercial and economic factors. The ld. AR also submitted that the ALP determination for the said receivable is subsumed within the ALP determination of the software development . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 38 services and therefore the TPO should not have considered the interest on receivables as a separate international transaction. The ld. AR further submitted that the assessee is not charging any interest on the receivable from non-AE transactions and the profit margin earned from AE transactions is higher than the profit from non-AE transactions, thereby no adjustment could be done on account of notional interest on the receivable from AE. The ld. AR drew our attention that the actual debtors turnover period for the assessee is 131 days (page 1284 of PB) as against 335 days considered by the TPO. Without prejudice, the ld.AR also drew our attention to the fact that the average period of realisation of third party debtors is 81 days (page 1371, 1372 of PB) and prayed that the period of 90 days credit shall be considered while computing the notional interest on receivables. 34. We notice that the coordinate bench of the Tribunal in the case of Barracuda (supra) has considered the issue of charging notional interest on receivables and has held that - 41. We have carefully considered the rival submissions. On the question whether delayed realization of trade receivables from the AE constitutes an international transaction or not, there are conflicting decisions of various benches of the Tribunal, which we shall point out. Sec.92B of the Act defining what is an international transaction was amended by Finance Act, 2012, way of insertion of an Explanation to sec.92B with retrospective effect from 1-4-2002 and the same reads thus:- “Explanation- For the removed of doubts, it is hereby clarified then-(i) the expression "international transaction" shall include— (a) ............. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 39 (b) .............. (c) capital financing, including any type of long-term or short- term borrowing. lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment of receivable or any other debt arising during the course of business: ............” The amendment is to the effect that “international transaction” would specifically include within its ambit. 'deferred payment or receivable or any other debt arising during the course of business’ and hence non- charging or under-charging of interest on the excess period of credit allowed to the AE for the realization of invoices would amount to an international transaction. It was so held by the ITAT Delhi Bench in the case of Bechtel India Pvt Ltd (in ITA No.6530/De1/2016 dated 16 May 2017). It is important to note that the Bench while arriving at the said conclusion distinguished its earlier order in the case of Kusum Healthcare Pvt. Ltd. (supra) and rejected the contention that interest gets subsumed in the working capital adjustment. The Hon`ble Bombay High court in the case of CIT vs. Patni Computer Systems Ltd, (2013) 215 Taxman 108 (Bom) dealt, inter alia, with the following question of law:- "(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any Other transaction having a bearing on the profits, income, losses or assets of such enterprises?" While answering the above question, the Hon'ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon'ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 40 amendment. In the case of BT e Serv (TS-849-ITAT-2017(DEL)-TP) the ITAT Delhi Bench held that undoubtedly the receivable or any other debt arising during the course of the business is included in the definition of 'capital financing' as an 'international transaction' as per explanation 2 to section 92B of the Act w.e.f. 01.04.2002 inserted by the Finance Act 2012. Therefore, even the outstanding receivable partake the character of capital financing and consequently, overdue outstanding is an "international transaction". The natural corollary would be of imputing interest on such "capital financing" if same is not charged at arm's length. The ITAT concluded that if outstanding receivables are within the terms of agreement, then it may be argued that interest on such outstanding is already covered in the sale price of the goods. However, if the agreement does not specify the term of the payment, even then assessee must be given benefit of credit period which is accepted business practice in the trade. The ITAT confirmed 30 days as the normal credit period adopted by the TPO. 42. The foregoing discussion discloses that non-charging or under- charging of interest on the excess period of credit allowed to the AE, for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. In view of the above observations. the reliance placed by the ld. counsel for the assessee on earlier decisions cannot be accepted. Similarly, Considering the above discussion, it is held that deferred trade receivable constitutes international transaction. 43. Having concluded that deferred trade receivables constitute international transaction, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. On this aspect we can take useful guidance from the decision of the ITAT Delhi Bench in the case of Techbooks International (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle- 3, Noida [2015] 63 taxmann.com 114 (Delhi - Trib.), wherein the . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 41 Tribunal laid down guidelines on the manner of determination of ALP, as follows: “13.11 Now, we come to the computation of the ALP of the international transaction of 'debt arising during the course of business.' This has two ingredients, viz., the amount on which interest should be charged and the arm's length rate at which the interest should be charged. 13.12 In so far as the first aspect is concerned, we find that the TPO has taken normal credit period of 60 days and accordingly made addition on account of transfer pricing adjustment for the period in excess of 60 days. In our considered opinion, transfer pricing adjustment on account of interest for the entire period of delay beyond 60 days cannot be treated as a separate international transaction of trading debt arising during the course of business. It is noticed that the assessee entered into an agreement with its AE for realization of invoices within a period of 150 days. This implies that the interest amount on non-realization of invoices up to 150 days was factored in the price charged for the services rendered. Annexure-1 to the TPO's order gives details of the instances of late realization or non-realization of advances up to the year ending. First three and a half pages of this Annexure indicate number of days for which there was delayed realization. Such delay ranges from 175 days to 217 days. The remaining pages disclose no realization of invoices up to 31st March, 2010. When we consider the dates of invoices in the remaining pages, it is manifested that in certain cases these invoices have been raised on 31st August, 30th or September or 31st October, 2009. In all such cases, the period of 150 days already stood expired as on 31st March, 2010 and the assessee ought to have charged interest on the delay in realizing such invoices along with the first three and a half pages in which there is an absolute and identified delay in realization of invoices beyond the stipulated period. When the interest for realization of trade advances up to 150 days is part and parcel of the price charged from the AE, then the delay up to this extent cannot give rise to a . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 42 separate international transaction of interest uncharged. Rather interest for the period in excess of normally realizable period in an uncontrolled situation upto 150 days needs to be considered in the determining the ALP of the international transaction of the 'Provision of IT Enabled data conversion services'. This can be done by increasing the revenue charged by the comparable companies with the amount of interest for the period between that allowed by them in realization of invoices and 150 days as allowed by the assessee, so as to bring such comparables at par with the assessee's international transaction of provision of the ITES. To illustrate, if the comparables have allowed credit period of, say, 60 days and the assessee has realized its invoices in 180 days, then interest for 90 days (150 days minus 60 days) should be added to the price charged by the comparables and the amount of their resultant adjusted operating profit be computed. Rule 10B permits making such an adjustment. Sub-rule (2) to rule 10B stipulates that for the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged, inter alia, with reference to the : '(c) the contractual terms (whether or not such terms are formal or in writing) of the transactions ...' . Then sub-rule (3) mandates that an uncontrolled transaction shall be comparable to an international transaction if 'reasonably accurate adjustments can be made to eliminate the material effects of such differences'. Applying the prescription of rule 10, it becomes vivid that difference on account of the 'contractual terms of the transactions', which also include the credit period allowed, needs to be adjusted in the profit of comparables. As the TPO has taken the entire delay beyond that normally allowed as a separate international transaction, which position is not correct, we hold that the effect of delay on interest up to 150 days over and above the normal period of realization in an uncontrolled situation, should be considered in the determination of the ALP of the international transaction of 'Provision of IT Enabled data conversion services' and the period of delay above 150 days, namely, 30 days in our above illustration (180 days minus 150 days) should be considered as a separate international transaction in terms of clause (c) of Explanation to section 92B. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 43 13.13 In so far as the question of rate of interest is concerned, we find that this issue is no more res integra in view of the judgment of the Hon'ble jurisdictional High Court in the case of Cotton Naturals (I) (P.) Ltd. (supra), in which it has been held that it is the currency in which the loan is to be repaid which determines the rate of interest and hence the prime lending rate should not be considered for determining the interest rate. Under such circumstances, we set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of addition on account of transfer pricing adjustment towards interest not realized from its AE on the debts arising during the course of business in line with our above observations.” 44. We are of the view that the issue with regard to determination of ALP in respect of the international transaction of giving extended credit period for receivables should be directed to be examined afresh by the AO/TPO on the guidelines laid down in the decision referred to in the earlier paragraph, after affording Assessee opportunity of being heard. As held in the aforesaid decision the prime lending rate should not be considered and this reasoning will apply to adopting short term deposit interest rate offered by State Bank of India (SBI) also. The rate of interest would be on the basis of the currency in which the loan is to be repaid. We hold and direct accordingly. All issues on determination of ALP of the transaction are kept open.” 35. Respectfully following the above decision of the coordinate Bench, we remit the issue back to the TPO/AO for bench marking of the transaction of interest on delayed receivables and recomputation of ALP accordingly. . ITA No. 251/Bang/2021 M/s. MFX Infotech Pvt. Ltd 44 36. In the result, the appeal filed by the assessee is partly allowed. Pronounced in the open Court on 21 st October, 2022. Sd/- Sd/- (N.V. Vasudevan) (Padmavathy S) Vice President Accountant Member Bengaluru, Dated: 21 st October, 2022 n.p./ Desai S Murthy / Copy to: 1. The Appellant 2. The Respondent 3. The DRP 4. The CIT - 5. The DR, ITAT, Bengaluru By Order Assistant Registrar ITAT, Bengaluru