ITO, Bangalore V. M/s Cenduit India Services Pvt. Ltd., Bangalore

ITA 59/BANG/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6776 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 22-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KETAN K VED
• Keywords: Related party transaction; Transfer pricing; International transaction; Question of law
• Section: 143(3); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B.R.BASKARAN, ACCOUNTANT MEMBER IT(TP)A NO.59/BANG/2016 ASSESSMENT YEAR : 2011-12 THE INCOME-TAX OFFICER, WARD-2(1)(1), BENGALURU. VS. M/S CENDUIT (INDIA) SERVICES PVT. LTD., PRESTIGE NEBULA, BLOCK-1, 2 ND FLOOR, CUBBON ROAD, BANGALORE-560 001 PAN AABCI 6552 K . APPELLANT RESPONDENT AND C.O.NO. 57/BANG/16 IN IT(TP)A NO.59/BANG/2015 ASSESSMENT YEAR : 2011-12 CENDUIT (INDIA) SERVICES PVT. LTD., PRESTIGE NEBULA, BLOCK-1, 2 ND FLOOR, CUBBON ROAD, BANGALORE-560 001. PAN AABCI 6552 K. VS. THE INCOME-TAX OFFICER, WARD-2(1)(1), BANGALORE. CROSS OBJECTOR RESPONDENT ASSESSEE BY : SHRI KETAN K VED, C.A REVENUE BY : SHRI PRADEEP KUMAR, CIT DATE OF HEARING : 04.04.2019 DATE OF PRONOUNCEMENT : 24.04.2019 O R D E R PER N.V.VASUDEVAN, VICE-PRESIDENT IT(TP)A.NO.59/BANG/2016 IS AN APPEAL BY THE REVENUE AGAINST THE FINAL ORDER OF ASSESSMENT DATED 24.11.2015 PASSED B Y THE ITO, WARD- IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 2 OF 25 2(1)(1), BANGALORE U/S 143(3) R.W.S 144C(13) OF THE INCOME-TAX ACT 1961 (THE ACT) FOR THE ASST. YEAR 2013-14. THE ASSESSEE HAS FILED CROSS OBJECTION AGAINST THE VERY SAME ORDER. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. WHETHER THE HON'BLE DRIP WAS JUSTIFIED IN ALLOWING RELIEF TO ASSESSEE BY EXCLUDING M/S RS SOFTWARE, M/S ACROPETAL TECHNOLOGIES LTD, M/S MINDTREE LTD AND M/S L&T INFOTECH LTD ON THE GROUND THAT THESE COMPANIES ARE HAVING SIGNIFICANT ONSITE REVENUE AND THAT THEY ARE FUNCTIONALLY DISSIMILAR, WHEN SOFTWARE DEVELOPMENT ACTIVITY COMPRISES OF BOTH ON SITE AND OFFSHORE DEVELOPMENT ACTIVITIES AND THE NATURE OF ACTIVITY REMAINS THE SAME. THE HON'BLE DRIP OUGHT TO HAVE APPRECIATED THE FACT THAT THESE COMPARABLE HAVE QUALIFIED THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 2. WHETHER THE HON'BLE DRP WAS JUSTIFIED IN EXCLUDING THE M/S EZEST SOLUTIONS ON THE GROUND OF FUNCTIONALLY DISSIMILAR WHEN THE COMPANY HAS QUALIFIED ALL QUANTITATIVE FILTERS APPLIED BY THE TPO. THE HON'BLE DRP OUGHT TO HAVE CONSIDERED THE FACT THAT COMPUTER SOFTWARE SERVICES IS CONSIDERED AS SECTOR OF BUSINESS AND BOTH TPO AND THE TAXPAYER HAS NOT GONE INTO VERTICALS OF THE BUSINESS. 3. WHETHER THE HON'BLE DRIP WAS JUSTIFIED IN EXCLUDING THE M/S ICRA TECHNO ANALYTICS LTD AS A COMPARABLE ON THE GROUND THAT IT IS INTO DIVERSIFIED ACTIVITY AND NO SEGMENTAL DATA IS AVAILABLE WHEN THE TPO HAS NOT GONE INTO THE VERTICALS OF THE INDUSTRY OF OPERATION. THE HON'BLE DRP HAS FAILED TO APPRECIATE THE FACT THAT THE COMPANY HAS QUALIFIED ALL QUANTITATIVE FILTERS APPLIED BY THE TPO. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 3 OF 25 4. WHETHER THE HON'BLE DRP WAS JUSTIFIED IN EXCLUDING M/S LNFOSYS TECHNOLOGIES LTD ON THE GROUND THAT IT IS FUNCTIONALLY DIFFERENT. THE HON'BLE DRP OUGHT TO HAVE DECIDED THE COMPARABILITY OF THIS COMPANY ON THE BASIS OF SPECIFIC FACTS BROUGHT ON RECORD BY THE TPO. THE HONBLE DRIP HAS FAILED TO APPRECIATE THE FACT THE COMPARABLE HAS QUALIFIED ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO. 5. THE HON'BLE DRIP FAILED TO APPRECIATE THE FACT THAT M/S TATA ELXSI AS A COMPARABLE WHEN THE COMPARABLE IS FUNCTIONALLY SIMILAR TO THAT OF THE TAXPAYER AS SEEN FROM ITS WEBSITES. 6. THE HON,BLE DRP HAS ERRED IN ALLOWING RELIEF TO ASSESSEE FOR DELAYED PAYMENT OF EMPLOYEE'S MONTHLY CONTRIBUTION TOWARDS PF/ESI, WHICH ARE REQUIRED TO BE CONSIDERED AS INCOME U/S 36(1)(VA) AND TH AMENDMENT TO THE PROVISIONS OF SECTION 431B-INCLUDING THE DELETION OF THE SECOND PROVISO BY THE FINANCE ACT, 2003 W.E.F. 2004 HAS NO RELEVANCE IN THIS REGARD. 7. LEAVE MAY BE GRANTED TO ADD, ALTER, DELETE OR MODIFY ANY OF THE GROUNDS DURING THE APPEAL STAGE. 3. THE ASSESSE HAS RAISED THE FOLLOWING GROUNDS IN ITS CROSS-OBJECTION: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW AND WITHOUT PREJUDICE TO THE DIRECTIONS PASSED BY THE DISPUTE R ESOLUTION PANEL: 1. THE DISPUTE RESOLUTION PANEL ('DRP') HAS ERRED, IN LAW AND IN FACTS, BY NOT ACCEPTING THE RESPONDENT'S PLEA IN ENTIRETY AND CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER ('AO)/TRANSFER PRICING OFFICER ('TPO') OF NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 4 OF 25 THE RESPONDENT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED BY THE RESPONDENT 2. THE HONBLE DRP HAS ERRED, IN LAW AND IN FACTS, BY UPHOLDING THE ACTION OF AO/TPO IN REJECTING COMPARABLE COMPANIES BY APPLYING ARBITRARY QUANTITATIVE AND QUALITATIVE FILTERS, INT ER- ALIA INCLUDING THE FOLLOWING: A) REJECTING THE USE OF MULTIPLE YEAR DATA FOR DETERMINATION OF ARM'S LENGTH MARGIN/PRICE B) UPHOLDING APPLICATION OF ONLY LOWER TURNOVER FILTER FOR THE PURPOSE OF COMPARABILITY. C) REJECTING COMPANIES HAVING DIFFERENT ACCOUNTING YEAR (I.E. COMPANIES HAVING ACCOUNTING YEAR OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS). D) REJECTING COMPANIES HAVING EMPLOYEE COST LESS THAN 25% OF THE TOTAL REVENUES. E) REJECTING COMPANIES USING RELATED PARTY TRANSACTIONS MORE THAN 25% OF TOTAL VALUE OF TRANSACTIONS. F) REJECTING COMPARABLE COMPANIES USING EXPORT SALES LESS THAN 75% OF THE OPERATING REVENUES AS A COMPARABILITY CRITERION. G) REJECTING COMPANIES WITH INCOME FROM SOFTWARE DEVELOPMENT AND RELATED SERVICES LESS THAN 75% OF THE TOTAL OPERATING REVENUE. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 5 OF 25 3. HONBLE DRP HAS ERRED, IN LAW AND IN FACTS IN ACCEPTING CERTAIN INVALID COMPARABLE COMPANIES / REJECTING CERTAIN VALID COMPARABLE COMPANIES. 4. THE LEANED AO/LEARNED TPO/HONBLE DRP HAS ERRED, IN LAW AND IN FACTS, FOR NOT ALLOWING SUITABLE ADJUSTMENTS TO BE MADE TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARABLES. 5. THE HON'BLE DRP ERRED IN NOT ADJUDICATING CLAIM FOR ENHANCED SECTION 1 O BENEFIT AND TREATING IT AS ACADEMIC. THE RESPONDENT SUBMITS THAT EACH OF THE ABOVE GROUND IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, VARY, OMIT, AMEND OR DELETE ONE OR MORE OF THE ABOVE GROUNDS OF CROSS-OBJECTIONS AT ANY TIME BEFORE, OR AT THE TIME OF, HEARING OF THE APPEAL, SO AS TO ENABLE THE APPELLATE TRIBUNAL TO DECIDE THIS RESPONSE ACCORDING TO LAW. 4. THE ISSUE THAT ARISES FOR CONSIDERATION IN GR.NO .1 TO 5 OF THE REVENUES APPEAL AND THE GROUNDS OF APPEAL RAISED I N THE CROSS OBJECTION ARE WITH REGARD TO DETERMINATION OF ARMS LENGTH PR ICE (ALP) IN RESPECT OF AN INTERNATIONAL TRANSACTION OF RENDERING SOFTWARE DEVELOPMENT SERVICES (SWD SERVICES) BY THE ASSESSEE TO ITS ASSOCIATED E NTERPRISE (AE). . IT IS NOT IN DISPUTE THAT THE TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SERVICES BY THE ASSESSEE TO ITS AE WAS AN INTERNATIONAL TRANSAC TION AND IN VIEW OF THE PROVISIONS OF SEC. 92 OF THE INCOME TAX ACT, 1961 ( ACT), INCOME ARISING FROM SUCH INTERNATIONAL TRANSACTION HAS TO BE DETERMINED HAVI NG REGARD TO ARMS LENGTH PRICE (ALP). IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 6 OF 25 5. AS REGARDS THE INTERNATIONAL TRANSACTION OF PRO VISION OF SOFTWARE DEVELOPMENT (SWD) SERVICES TO ITS AES, THE ASSESSEE RECEIVED CONSIDERATION OF RS.17,56,78,482/- FOR RENDERING SO FTWARE DEVELOPMENT SERVICES FROM ITS AE. IN SUPPORT OF ITS CLAIM THAT THE PRICE CHARGED BY IT IN THE INTERNATIONAL TRANSACTION IS AT ARMS LENGTH, T HE ASSESSEE FILED A TRANSFER PRICING STUDY (TP STUDY) IN WHICH THE ASSE SSEE ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST AP PROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP. THE PROFIT LEVEL I NDICATOR (PLI) CHOSEN FOR THE PURPOSE OF COMPARISON OF PROFIT MARGIN OF COMPA RABLE COMPANIES WAS OPERATING PROFIT TO OPERATING COST (OP/OC). THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION BY THE ASSESSEE FROM ITS AE WAS RS.17,56,78,482. THE OPERATING COST OF THE ASSESSEE WAS RS.15,27,63, 874/-. THE OPERATING PROFIT WAS THUS RS.2,29,14,608 AND THUS OP/OC WAS 1 5%. THE ASSESSEE IN ITS TP STUDY HAD CHOSEN 13 COMPANIES AS COMPARAB LE COMPANIES. THE ARITHMETIC MEAN OF THE PROFIT MARGIN OF THE 13 COMPANIES SO SELECTED BY THE ASSESSEE WAS 13.71%. SINCE THE ASSSESSEES PROFIT MARGIN WAS 15%, THE ASSESSEE CLAIMED THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH AND THEREFORE NO AD DITION BY WAY OF ADJUSTMENT TO ALP SHOULD BE MADE. 6. THE ASSESSING OFFICER (AO) REFERRED THE QUESTION OF DETERMINATION OF ALP TO THE TRANSFER PRICING OFFICER (TPO) AS IS REQUIRE D BY THE PROVISIONS OF SEC.92CA OF THE ACT. OUT OF THE ABOVE 13 COMPARABL ES, THE TPO ACCEPTED SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE ASSE SSEE AND CHOSE SOME OTHER COMPANIES ON HIS OWN AND ARRIVED AT A SE T OF 13 COMPARABLE COMPANIES. THE AVERAGE ARITHMETIC PROFIT MARGIN OF THE 13 COMPARABLE COMPANIES CHOSEN BY THE TPO WAS AS FOLLOWS: IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 7 OF 25 5. THE TPO COMPUTED THE ADDITION TO BE MADE TO THE TOTAL INCOME ON ACCOUNT OF DETERMINATION OF ALP AT RS. 1,34,27,918 ADOPTING PROFIT MARGIN OF 24.82% LESS WORKING CAPITAL ADJUSTMENT OF 1.03% RESULTING IN ADOPTING PROFIT MARGIN OF COMPARABLES AT 23.79% AND RESULTANTLY COMPUTED ALP AS FOLLOWS: COMPUTATION OF ARM'S LENGTH PRICE BY TPO AND THE AD JUSTMENT MADE: IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 8 OF 25 THE ABOVE SHORTFALL OF RS. 1,34,27,918/- (RUPEES ONE CRORE, THIRTY FOUR LAKHS, TWENTY SEVEN THOUSAND, NINE HUNDRED AND EIGHTEEN ONLY) IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA IN RESPECT OF SOFTWARE DEVELOPMENT SEGMENT OF THE TAXPAYER'S INTERNATIONAL TRANSACTIONS 6. THE ADDITION SUGGESTED BY THE TPO WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE AO IN THE DRAFT ORDER OF ASSESS MENT. AGAINST THE DRAFT ORDER OF ASSESSMENT, THE ASSESSEE PREFERRED OBJECTI ONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) U/S.144C OF THE ACT. 7. BEFORE DRP, THE ASSESSEE RAISED A SPECIFIC OBJE CTION VIZ., OBJECTION 2 C WHEREIN, THE ASSESSEE CONTENDED THAT THE TPO HAS EX CLUDED COMPANIES WHOSE TURNOVER WAS LESS THAN RS.1 CRORE. THE TPO B Y THE SAME LOGIC SHOULD HAVE EXCLUDED TURNOVER OF COMPANIES WHOSE TU RNOVER WAS HUGE (ABOVE RS.200 CRORES) COMPARED TO THE TURNOVER OF T HE ASSESSEE WHICH WAS ONLY RS.17.56 CRORES. THE DRP DID NOT AGREE W ITH THE ABOVE IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 9 OF 25 SUBMISSION OF THE ASSSESSEE ON THE GROUND THAT WHEN A COMPANY IS FUNCTIONALLY COMPARABLE, LARGE TURNOVER WOULD NOT B E A CRITERIA TO SAY THAT THE COMPANY IS NOT COMPARABLE. 8. FINALLY THE DRP AGREED WITH SELECTION OF SOME T HE COMPARABLES CHOSEN BY THE TPO AND DISAGREED WITH THE TPO ON SOME OF CO MPARABLES CHOSEN BY THE TPO ON DIFFERENT CRITERIA. FINALLY, THE FOL LOWING COMPARABLE COMPANIES REMAINED AS COMPARABLE COMPANIES AFTER TH E ORDER OF THE DRP. 9. AGGRIEVED BY THE ORDER OF THE DRP IN DELETING S OME OF THE COMPARABLES CHOSEN BY THE TPO, THE REVENUE HAS RAISED GR.NO.1 T O 5 BEFORE THE TRIBUNAL. AGGRIEVED BY THE ACTION OF THE TPO IN RE TAINING SOME OF THE COMPARABLE COMPANIES CHOSEN BY THE TPO WHICH WERE O BJECTED AS NOT COMPARABLE BY THE ASSESSEE BEFORE THE DRP, THE ASSE SSEE HAS FILED CROSS-OBJECTION BEFORE THE TRIBUNAL. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 10 OF 25 10. WE SHALL FIRST TAKE UP FOR CONSIDERATION GR.NO .2(B) RAISED BY THE ASSESSEE IN ITS CROSS OBJECTION, VIZ., THE OBJECTIO N THAT THE AO APPLIED LOWER TURNOVER FILTER OF RS.1 CRORE AND REJECTED COMPANIE S WITH TURNOVER OF LESS THAN RS.1 CRORE FROM THE LIST OF COMPARABLE COMPANI ES AND BY THE SAME LOGIC HE OUGHT TO HAVE EXCLUDED COMPANIES WITH HIGH TURNOVER FROM THE LIST OF COMPARABLE COMPANIES (COMPANIES HAVING TURNOVER OF RS.200 CRORES AND ABOVE). IF THAT GROUND IS ADJUDICATED TWO OUT OF THE 4 COMPANIES WHICH REMAIN AFTER THE ORDER OF THE DRP, VIZ., PERSISTENT SYSTEMS LTD. AND SAKEN COMMUNICATIONS TECHNOLOGIES LTD., WILL GO OUT OF C OMPARABILITY BECAUSE THEIR TURNOVER FOR THE RELEVANT PREVIOUS YEAR IS RS .610.13 CRORES AND 394.20 CRORES RESPECTIVELY. SO ALSO THE FOLLOWING FOUR COMPANIES WHICH ARE PART OF THE SET OF 13 COMPARABLE COMPANIES WILL GO OUT OF COMPARABLE COMPANIES VIZ., INFOSYS LTD. (TURNOVE OF RS.25,385 CRORES), LARSEN & TOUBRO INFOTECH LTD. (TURNOVER OF RS.2331.81 CRORES , MINDTREE LTD. (TURNOVER OF RS.878.30 CRORES AND TATA ELXI LTD. (T URNOVER OF RS.358.20 CRORES). IF THE AFORESAID SIX COMPANIES ARE EXCLUD ED BY APPLYING TURNOVER FILTER, THEN THE PROFIT MARGINS OF THE REMAINING CO MPANIES, EVEN ASSUMING THOSE COMPANIES ARE REGARDED AS COMPARABLE WILL BE WITHIN THE RANGE OF PROFIT MARGIN PERMISSIBLE IN LAW AND THEREFORE THE PRICE CHARGED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTION WOULD HAV E TO BE REGARDED AS AT ALP. THEREFORE THERE WOULD BE NO NECESSITY TO DECI DE THE OTHER GROUNDS OF IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 11 OF 25 APPEAL IN THE REVENUES APPEAL REGARDING TRANSFER P RICING AS WELL AS THE OTHER GROUNDS RAISED IN THE CROSS-OBJECTION. 11. AS FAR AS THE APPLICATION OF TURNOVER FILTER I S CONCERNED, THE FIRST OBJECTION OF THE LD. DR WAS THAT TURNOVER CANNOT BE A RELEVANT CRITERION IN CHOOSING COMPARABLE COMPANIES AND IN THIS REGARD PL ACED RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT IN THE CASE OF CHRYS CAPITAL LTD.,82 TAXMANN.COM 167(DEL). THE LEARNED COUNSEL FOR THE ASSESSEE HOWEVER POINTED OUT THAT SIMILAR OBJECTION WAS RAISED BY TH E REVENUE IN ONE OF THE CASE DECIDED BY THIS TRIBUNAL IN AUTODESK INDIA PVT.LTD. VS. DCIT (2018) 96 TAXMANN.COM 263(BANGLORE-TRIB.) AND RELIED ON THE SAID DECISION. 12. WE FIND THAT VARIOUS ASPECTS OF APPLICATION OF TURN OVER FILTER, WAS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF AUTODESK INDIA PVT.LTD. (SUPRA) AND IT WAS HELD THAT TURNOVER IS A RELEVANT CRITERI A FOR DECIDING COMPARABILITY OF COMPANIES AND THAT A COMPANY WITH HUGE TURNOVER CANNOT BE COMPARED WITH A COMPANY WITH SMALL TURNOVER. THE TURNOVER C RITERIA WAS BASED ON CLASSIFICATION OF COMPANIES WITH TURNOVER UPTO RS.2 00 CRORES FALLING WITHIN ONE CATEGORY AND COMPANIES WITH TURNOVER OF RS.200 CRORES TO RS.500 CRORES FALLING IN ANOTHER CATEGORY AND SO ON. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS:- 17. THE FIRST ISSUE TO BE DECIDED IN REVENUES AP PEAL IS THE APPLICATION OF TURNOVER FILTER FOR EXCLUSION OF COMPANIES THAT ARE OTHERWISE FOUND TO BE FUNCTIONALLY COMPARA BLE. THE GRIEVANCE OF THE REVENUE IN THIS REGARD IS PROJECTE D IN GR.NO.2 OF THE GROUNDS OF APPEAL RAISED BY THE REVE NUE IN ITS APPEAL. THE BASIC FACTS TO BE NOTICED WITH REGARD APPLICATION OF TURNOVER FILTER ARE THAT THE ASSESSEES TURNOVER FOR THE RELEVANT PREVIOUS YEAR WAS RS.10.65 CRORES. THE TP O EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES CHOS EN BY IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 12 OF 25 THE ASSESSEE IN ITS TP STUDY COMPANIES WHOSE TURNOV ER WAS LESS THAN RS.1 CRORE. THE CONTENTION OF THE ASSESS EE BEFORE THE CIT(A) WAS THAT WHILE THE TPO EXCLUDED COMPANIE S WITH LOW TURNOVER, HE FAILED TO APPLY THE SAME YARDSTICK TO EXCLUDE COMPANIES WITH HIGH TURNOVER COMPARED TO THE ASSESS EE. THE REASON FOR EXCLUDING COMPANIES WITH LOW TURNOVER WA S THAT SUCH COMPANIES DO NOT REFLECT THE INDUSTRY TREND AS THEIR LOW COST TO SALES RATIO MADE THEIR RESULTS LESS RELIABL E. THE CONTENTION OF THE ASSESSEE WAS THAT THERE WOULD BE EFFECT ON PROFITABILITY WHEREVER THERE IS HIGH OR LOW TURNOVE R AND THEREFORE COMPANIES WITH HIGH TURNOVER SHOULD ALSO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE AND HE E XCLUDED THE FOLLOWING 5 COMPANIES WHOSE TURNOVER WAS ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COMPANIES, VIZ., (I) FLEXTRONICS LTD., (II) L & T INFOTECH LTD., (III) M /S. INFOSYS TECHNOLOGIES LTD., (IV) SATYAM COMPUTER SERVICES LT D., (V) IGATE GLOBAL SOLUTIONS LTD. THE CIT(A) IN COMING TO THE ABOVE CONCLUSION PLACED RELIANCE ON THE DECISION OF THE ITAT BANGALORE IN THE CASE OF GENISYS INTEGRATING SYSTEM S (INDIA) (P) LTD. VS. DCIT (2012) 53 SOT 159 (BANG.) WHEREIN IT WAS HELD WHEN THERE IS A LIMIT FOR THE LOWER END FOR ID ENTIFYING THE COMPARABLE COMPANIES, THERE IS NO REASON WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO, AS SIZE MATTERS IN BUSI NESS. 17.1. THE LEARNED DR SUBMITTED THAT HIGH TURNOVER IS NOT A RELEVANT CRITERION TO REGARD A COMPANY AS NOT COMPA RABLE, SO LONG AS THE TWO COMPANIES ARE FUNCTIONALLY COMPARAB LE. IF FUNCTIONS BY TWO COMPANIES ARE IDENTICAL THEN THEY HAVE TO BE REGARDED AS COMPARABLE. ACCORDING TO HIM THEREFORE THE CIT(A) WAS NOT JUSTIFIED IN EXCLUDING 5 COMPANIES O N THE GROUND THAT THEIR TURNOVER WAS ABOVE RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURNOVER WAS AROUND RS.10.65 CRORES. IN SUPPORT OF HIS CONTENTIO N THE LEARNED DR PLACED RELIANCE ON THE FOLLOWING DECISIO NS: IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 13 OF 25 SL. NO. NAME OF THE CASE CITATION RELEVANT PARAGRAPH 1. M/S.NTT DATA GLOBAL DELIVERY SERVICES LTD. VS. ACIT IT(TP)A NO. 1487/BANG/2013 AY 2005-06 ORDER DATED 6.4.2016 23 & 24 2. LSI TECHNOLOGIES INDIA PVT. LTD. VS. THE ITO IT(TP)A.NOS. 1380 & 1381/BANG/2010, AY 2006-07 ORDER DATED 13.5.2016 14.3 2. M/S. SOCIETE GENERALE GLOBAL SOLUTION CENTRE PVT.LTD. VS. DCIT IT(TP) A.NO.1188/BANG/2011 FOR AY 2007-08 ORDER DATED 22.4.2016 10 5. WILLIS PROCESSING SERVICES (I) (P)LTD. VS. DCIT (2013)30 TAMANN.COM 350 (MUMBAI-TRIBUNAL) FOR AY 2007-08 ORDER DATED 1.3.2013 47 6. CAPGEMINI INDIA PVT. LTD. VS. ACIT ITA NO.7861/MUM/2011 FOR AY 2007-08 ORDER DATED 28.2.2013 4.3 17.2. THE LEARNED DR ALSO FILED BEFORE US A NOTE CONTENDING THAT IN SOFTWARE INDUSTRY, SIZE HAS NO INFLUENCE ON THE MARGINS EARNED BY AN ENTITY. ACCORDING TO HIM ECONOMIES OF SCALE ARE RELEVANT ONLY IN CAPITAL INTENSIVE COMPANIES WHICH HAVE SUBSTANTIAL FIXED ASSETS IN THE FORM OF PLANT AND M ACHINERY. ACCORDING TO HIM, IN SOFTWARE INDUSTRY, SIZE DOES N OT MATTER, WHAT MATTERS IS THE HUMAN CAPITAL. ACCORDING TO HI M APPLICATION OF THE FILTER OF TURNOVER MIGHT BE JUST IFIED FOR EXCLUDING COMPANIES WITH LOW TURNOVER OF SAY RS.1 C RORE OR LESS BECAUSE THE MARGIN EARNED BY THESE COMPANIES M IGHT WIDELY FLUCTUATE DUE TO NARROW CAPITAL BASE AND LAC K OF COMPETITIVE STRENGTH, LACK OF OPERATIONAL EFFICIENC IES AND ALSO LACK OF HUMAN RESOURCES. THEY ALSO ESCAPE THE EYES OF REGULATORS. HE DREW OUR ATTENTION TO THE TURNOVER AND PROFIT MARGINS OF COMPANY INFOSYS TECHNOLOGIES LTD. FOR FY 1997 TO 2010 AND SUBMITTED THAT IN FY 1997 THE COMPANY HAD TURNOVER OF RS.139 CRORES AND ITS PROFIT MARGIN WAS 34.95% W HEREAS IN FY 2010 ITS TURNOVER WAS RS.21140 CRORES BUT ITS PR OFIT MARGIN WAS ONLY 44.91%. ACCORDING TO HIM THEREFORE THE PR OFIT IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 14 OF 25 MARGINS HOVER BETWEEN 35% AND 40% OVER THE PERIOD O F 15 YEARS AND THEREFORE HIGH TURNOVER DOES NOT NECESSAR ILY MEAN HIGH PROFIT MARGINS. HE ALSO GAVE A CHART SHOWING TURNOVER AND MARGIN OF 20 COMPANIES IN THE IT-BPO INDUSTRY F OR THREE YEARS. ACCORDING TO HIM THE CHART WOULD SHOW THAT FOR THE SAME RANGE OF TURNOVER COMPANIES EARNED DIFFERENT P ROFIT MARGINS. THEREFORE ACCORDING TO HIM THERE IS NO RE LATION BETWEEN THE MARGINS EARNED AND THE TURNOVER OF A CO MPANY. ACCORDING TO HIM SOFTWARE INDUSTRIES OPERATE ON THE BASIS OF COST PLUS MARGIN OF PROFITS AND THEREFORE TURNOVER WOULD BE IRRELEVANT AND HAVE NO IMPACT OF THE PROFIT MARGINS . HIS FURTHER SUBMISSION WAS THAT UNDER RULE 10B(3) OF TH E INCOME TAX RULES, 1962 (RULES) IT IS ONLY FUNCTIONS PERFOR MED, ASSETS EMPLOYED AND THE RISKS ASSUMED THAT ARE RELEVANT CR ITERIA FOR COMPARISON AND TURNOVER IS NOT A PRESCRIBED CRITERI ON FOR THE PURPOSE OR COMPARISON. HE FAIRLY ADMITTED THAT THER E ARE DIFFERENCES OF OPINION AMONGST VARIOUS BENCHES OF T HE TRIBUNAL ON THE APPLICATION OF TURNOVER FILTER AND THAT SOME BENCHES HAVE HELD THAT HIGH TURNOVER WAS RELEVANT CRITERIA FOR EXCLUDING COMPARABLE COMPANIES. HIS PRAYER IN THE ALTERNATIV E WAS FOR CONSTITUTION OF A SPECIAL BENCH TO RESOLVE THE CONF LICT. 17.3. PER CONTRA THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITTED THAT ITAT BANGALORE BENCH IN THE CASE OF DELL INTER NATIONAL SERVICES INDIA (P) LTD. VS. DCIT (2018) 89 TAXMANN. COM 44 (BANG-TRIB) ORDER DATED 13.10.2017, CONSIDERED THE VARIOUS ASPECTS OF APPLICATION OF TURNOVER FILTER FOR EXCLU DING COMPANIES AND HAS NOTED THAT THE FIRST DECISION REN DERED ON APPLICATION OF THIS FILTER WAS IN THE CASE OF GENIS YS INTEGRATING SYSTEMS (I)(P) LTD. VS. DCIT (2010) 20 TAXMANN.COM 715 RENDERED ON 5.8.2011. IN THE CASE OF DELL INTERNAT IONAL (SUPRA), THE TRIBUNAL TOOK NOTE OF A DIVERGENT VIEW EXPRESSED BY ITAT BANGALORE BENCH IN THE CASE OF ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD. VS. DCIT IT A NO.1519/BANG/2013 ORDER DATED 13.9.2017 AFTER CONS IDERING THE DECISION RENDERED BY THE HONBLE DELHI HIGH COU RT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISORS INDIA PVT. LTD VS. DCIT 82 TAXMANN.COM 167(DEL), THAT HIGH TURNOVER IP SO FACTO DOES NOT LEAD TO THE CONCLUSION THAT A COMPANY WHIC H IS IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 15 OF 25 OTHERWISE COMPARABLE ON FAR ANALYSIS CAN BE EXCLUDE D AND THAT THE EFFECT OF SUCH HIGH TURNOVER ON THE MARGIN SHOULD BE SEEN. THE TRIBUNAL IN THE CASE OF DELL INTERNATION AL (SUPRA) ALSO TOOK NOTE OF THE DECISION OF THE ITAT BANGALOR E BENCH IN THE CASE OF SYSARRIS SOFTWARE PVT.LTD. VS. DCIT (20 16) 67 TAXMANN.COM 243 (BANGALORE-TRIB) WHEREIN THE TRIBUN AL AFTER NOTICING THE DECISION OF THE HONBLE DELHI HIGH COU RT IN THE CASE OF CHRYSCAPITAL (SUPRA) AND THE DECISION TO TH E 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 T HAT 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 WA TER (SUPRA) SHOULD BE ADOPTED. THE FOLLOWING WERE THE CONCLUSIO NS 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 BRADSTREETS 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. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 16 OF 25 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 ASSESSEES TURNOVER WAS AROUND RS.110 CRORES. THEREFORE THE ACTION OF THE CIT(A) IN DIRE CTING TPO TO EXCLUDE COMPANIES HAVING TURNOVER OF MORE TH AN RS.200 CRORES AS NOT COMPARABLE WITH THE ASSESSEE W AS JUSTIFIED. AS RIGHTLY POINTED OUT BY THE LEARNED C OUNSEL FOR THE ASSESSEE, THERE ARE TWO VIEWS EXPRESSED BY TWO HONBLE HIGH COURTS OF BOMBAY AND DELHI AND BOTH AR E 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 TH E CIT(A) EXCLUDING COMPANIES WITH TURNOVER OF ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COMPANIES IS HEL D TO IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 17 OF 25 CORRECT AND SUCH ACTION DOES NOT CALL FOR ANY INTERFERENCE. 17.4. HIS SUBMISSION WAS THAT THE DECISION RENDERE D BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCA PITAL (SUPRA) WAS NOT ON THE APPLICATION OF TURNOVER FILT ER. HE BROUGHT TO OUR NOTICE THAT THE RELEVANT SUBSTANTIAL QUESTION OF LAW IN THE CASE OF CHRYSCAPITAL DECIDED BY THE HONBLE DELHI HIGH COURT WAS (I) WHETHER COMPARABLE S CAN BE REJECTED ON THE GROUND THAT THEY HAVE EXCEPTIONALLY HIGH PROFIT MARGINS AS COMPARED TO TH E ASSESSEE IN TRANSFER PRICING ANALYSIS.(II) WHETHER FACTORS LIKE DIFFERENTIAL FUNCTIONAL AND RISK PROFI LE COUPLED WITH HIGH DEGREE OF VOLATILITY IN OPERATING PROFIT MARGINS IS SUFFICIENT GROUND TO REJECT COMPARABLES FOR TRANSFER PRICING ANALYSIS. IN ANSWERING THE ABOVE QUESTION, THE HONBLE COURT HOWEVER AT PAGE 218 OF THE REPORT (THE SAID DECISION IS REPORTED AS 376 ITR 18 3 (DEL)) OBSERVED THAT THE MERE CIRCUMSTANCE THAT A COMPANY-OTHERWISE CONFIRMING TO THE STIPULATIONS IN RULE 10B(2) OF THE RULES IN ALL DETAILS, PRESENTING A PE CULIAR FEATURE- SUCH AS A HUGE PROFIT OR A HUGE TURNOVER, IPSO FACTO DOES NOT LEAD TO ITS EXCLUSION. THE COURT FU RTHER OBSERVED THAT THE TRANSFER PRICING OFFICER, FIRST, HAS TO BE SATISFIED THAT SUCH DIFFERENCES DO NOT MATERIALLY AFFECT THE PRICE . OR COST. SECONDLY, AN ATTEMPT TO MAKE REASONABLE ADJUSTMENT TO ELIMINATE THE MATERIA L EFFECT OF SUCH DIFFERENCES HAS TO BE MADE. ACCORDI NG TO HIM THEREFORE THE OBSERVATIONS OF THE HONBLE DELHI HIGH COURT IN SO FAR AS IT RELATES TO APPLICATION OF TUR NOVER FILTER ARE OBITER DICTUM. OBITER DICTUM THOUGH IS ENTITLED TO A WEIGHT CANNOT BE EQUATED WITH RATIO DECIDENDI OF A CASE. IN SUPPORT OF HIS CONTENTION AS ABOVE, HE REL IED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF DIRECTOR OF SETTLEMENTS A.P. AND OTHERS VS. M.R. AP PARAO AND ANOTHER (2002) 4 SCC 638. COUNTERING THE SUBMISSION OF THE LEARNED DR THAT THE DECISION OF T HE HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF PENTAIR (SUPRA) IS NOT RATIO DECIDENDI AS IT WAS ME RELY IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 18 OF 25 DISMISSAL OF APPEAL U/S.260A OF THE ACT ON THE GROU ND THAT NO SUBSTANTIAL QUESTION OF LAW AROSE FOR CONSIDERATION, LEARNED COUNSEL DREW OUR ATTENTION T O THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF PENTAIR (SUPRA) PARAGRAPH 9, WHEREIN THE HONBLE BOMBAY HIGH COURT AFTER REFERRING TO A DECISION OF THE HONBLE DELHI HIGH COURT RENDERED IN THE CASE OF CI T VS. AGNITY INDIA TECHNOLOGIES (P) LTD. (2013) 36 TAXMANN.COM 289 (DELHI), CLEARLY OBSERVED THAT TUR NOVER IS OBVIOUSLY A RELEVANT FACT TO CONSIDER THE COMPAR ABILITY. OUR ATTENTION WAS ALSO DRAWN TO PARAGRAPH-3 OF THE DECISION RENDERED IN THE CASE OF PENTAIR (SUPRA) WH EREIN THE DEPARTMENT SPECIFICALLY CONTENDED THAT THE TRIB UNAL ERRED IN HOLDING THAT SIZE AND TURNOVER OF A COMPAN Y ARE DECIDING FACTORS FOR TREATING A COMPANY AS COMPARAB LE. ACCORDING TO HIM THEREFORE IT WAS NOT A CASE OF MER ELY DISMISSAL OF APPEAL U/S.260A OF THE ACT AS UNADMITT ED ON THE GROUND THAT NO SUBSTANTIAL QUESTION OF LAW AROS E FOR CONSIDERATION BUT WAS PRECEDENT IN SO FAR AS THE HO NBLE COURT HAS EXPRESSED A CLEAR OPINION ON THE ISSUE. 17.5. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DR EW OUR ATTENTION TO A DECISION OF THE HONBLE DELHI HIGH C OURT RENDERED IN THE CASE OF PCIT VS. NEW RIVER SOFTWARE SERVICES (P) LTD. IN ITA NO.924/2016 ORDER DATED 22.8.2017 WHEREIN THE HONBLE DELHI HIGH COURT FOLLOWED THE DECISION OF THE HONBLE BOMBAY HIGH CO URT RENDERED IN THE CASE OF PENTAIR (SUPRA) AND HELD TH AT INFOSYS BPO WAS RIGHTLY EXCLUDED AS NOT BEING A COMPARABLE COMPANY. OUR ATTENTION WAS ALSO DRAWN B Y HIM TO A DECISION OF THE HONBLE PUNJAB & HARYANA H IGH COURT IN THE CASE OF CIT VS. MERCER CONSULTING (I) (P) LTD. (2016) 76 TAXMANN.COM 153 (PUNJAB & HARYANA) WHEREIN THE HONBLE COURT HELD THAT A GIANT COMPANY CANNOT BE COMPARED WITH A COMPANY WHICH WAS A CAPTI VE SERVICE PROVIDED ASSUMING LIMITED RISKS. 17.6. AS FAR AS THE DECISIONS OF THE TRIBUNAL REND ERED ON THE APPLICATION OF TURNOVER FILTER THAT ARE CONTRAR Y TO THE IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 19 OF 25 DECISION RENDERED IN THE CASE OF M/S. GENISYS INTEG RATING SYSTEMS (SUPRA), THE FIRST SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE WAS THAT THOSE DECISIONS W ERE RENDERED AT A LATER POINT OF TIME AND WERE TO BE RE GARDED AS PER INCURIUM SINCE THESE DECISIONS WERE ALSO REN DERED BY A BENCH OF EQUAL STRENGTH AND EITHER THE SUBSEQU ENT DECISIONS REFUSED TO FOLLOW OR WERE RENDERED IN IGNORANCE OF AN EARLIER BINDING PRECEDENT. HE SUBM ITTED THAT IF A BENCH OF EQUAL STRENGTH DIFFERS WITH A VI EW TAKEN EARLIER, THE PROPER COURSE FOR THEM IS TO MAKE A RE FERENCE TO LARGER BENCH. THEY CANNOT REFUSE TO FOLLOW A BI NDING DECISION. IF THEY DO SO, THE DECISIONS SO RENDERED HAVE TO BE REGARDED AS PER INCURIUM. EVEN IF THEY ARE REND ERED IN IGNORANCE OF THE EARLIER BINDING PRECEDENT, THEY HAVE TO BE REGARDED AS PER INCURIUM. IN THIS REGARD THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. RAGHUBIR SINGH AIR 1989 SC 1933, UNION OF INDIA VS. S.K. KAPOOR (2011) 4 SCC 589 AND SUNDEEP KUMAR BAFNA VS. STATE OF MAHARASHTRA AND ANOTHER (2014) 16 SCC 623. IN THE AFORESAID DECISIONS THE HONBLE SUPREME COURT HELD THAT IN A SITUATION WHER E THERE ARE CONFLICTING DECISIONS OF HIGH COURT ON AN ISSUE WHICH ARE IRRECONCILEABLE AND PRONOUNCED BY JUDGES OF CO-EQUAL STRENGTH, THEN THE EARLIER VIEW HAS TO BE FOLLOWED AS THE LATER DECISION HAS TO BE REGARDED A S PER INCURIAM. THE HONBLE SUPREME COURT IN THE CASE OF SUNDEEP KUMAR BAFNA VS. STATE OF MAHARASHTRA & ANOTHER (2014) 16 SCC 623 (AT PAGE-642 (PARA-19) HE LD THAT A DECISION OR JUDGMENT CAN ALSO BE PER INCURI AM IF IT IS NOT POSSIBLE TO RECONCILE ITS RATIO WITH THAT OF A PREVIOUSLY PRONOUNCED JUDGMENT OF A CO-EQUAL OR LAR GER BENCH AND WHEN HIGH COURTS ENCOUNTER TWO OR MORE MUTUALLY IRRECONCILABLE DECISIONS OF THE SUPREME CO URT CITED AT THE BAR, THE INVIOLABLE RECOURSE IS TO APP LY THE EARLIEST VIEW AS THE SUCCEEDING ONES WOULD FALL IN THE CATEGORY OF PER INCURIAM. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE HONBLE SUPREME COURT: IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 20 OF 25 19. IT CANNOT BE OVER-EMPHASISED THAT THE DISCIPLINE DEMANDED BY A PRECEDENT OR THE DISQUALIFICATION OR DIMINUTION OF A DECISION ON THE APPLICATION OF THE PER INCURIAM RULE IS OF GREAT IMPORTANCE, SINCE WITHOUT IT, CERTAINTY OF LAW, CONSISTENCY OF RULINGS AND COMITY OF COURTS WOULD BECOME A COSTLY CASUALTY. A DECISION OR JUDGMENT CA N BE PER INCURIAM ANY PROVISION IN A STATUTE, RULE OR REGULATION, WHICH WAS NOT BROUGHT TO THE NOTICE OF THE COURT. A DECISION OR JUDGMENT CAN ALSO BE PER INCUR IAM IF IT IS NOT POSSIBLE TO RECONCILE ITS RATIO WITH T HAT OF A PREVIOUSLY PRONOUNCED JUDGMENT OF A CO-EQUAL OR LARGER BENCH; OR IF THE DECISION OF A HIGH COURT IS NOT IN CONSONANCE WITH THE VIEWS OF THIS COURT. IT MUST IMMEDIATELY BE CLARIFIED THAT THE PER INCURIAM RULE IS STRICTLY AND CORRECTLY APPLICABLE TO THE RATIO DECI DENDI AND NOT TO OBITER DICTA. IT IS OFTEN ENCOUNTERED IN HIGH COURTS THAT TWO OR MORE MUTUALLY IRRECONCILABLE DECISIONS OF THE SUPREME COURT ARE CITED AT THE BAR . WE THINK THAT THE INVIOLABLE RECOURSE IS TO APPLY THE EARLIEST VIEW AS THE SUCCEEDING ONES WOULD FALL IN THE CATEG ORY OF PER INCURIAM. IT WAS THEREFORE SUBMITTED BY HIM THAT THE EARLIEST VIEW RENDERED BY THE ITAT BANGALORE BENCH IN THE CASE OF GENISYS INTEGRATING (SUPRA) SHOULD BE FOLLOWED. 17.7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. TH E SUBSTANTIAL QUESTION OF LAW (QUESTION NO.1 TO 3) WH ICH WAS FRAMED BY THE HON'BLE DELHI HIGH COURT IN THE C ASE OF CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT.LTD ., (SUPRA) WAS AS TO WHETHER COMPARABLE CAN BE REJECTE D 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 T HE OBSERVATIONS OF THE HON'BLE HIGH COURT, IN SO FAR A S IT REFERS TO TURNOVER, WERE IN THE NATURE OF OBITER DI CTUM. JUDICIAL DISCIPLINE REQUIRES THAT THE TRIBUNAL SHOU LD FOLLOW THE DECISION OF A NON-JURISDICTION HIGH COUR T, EVEN THOUGH THE SAID DECISION IS OF A NON-JURISDICT IONAL IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 21 OF 25 HIGH COURT. WE HOWEVER FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PENTAIR WATER IND IA PVT.LTD. TAX APPEAL NO.18 OF 2015 JUDGMENT DATED 16.9.2015 HAS TAKEN THE VIEW THAT TURNOVER IS A REL EVANT CRITERION FOR CHOOSING COMPANIES AS COMPARABLE COMPANIES IN DETERMINATION OF ALP IN TRANSFER PRICI NG CASES. THERE IS NO DECISION OF THE JURISDICTIONAL H IGH COURT ON THIS ISSUE. IN THE CIRCUMSTANCES, FOLLOWIN G THE PRINCIPLE THAT WHERE TWO VIEWS ARE AVAILABLE ON AN ISSUE, THE VIEW FAVOURABLE TO THE ASSESSEE HAS TO BE ADOPT ED, WE RESPECTFULLY FOLLOW THE VIEW OF THE HON'BLE BOMBAY HIGH COURT ON THE ISSUE. RESPECTFULLY FOLLOWING THE AFOR ESAID DECISION, WE UPHOLD THE ORDER OF THE DRP EXCLUDING 5 COMPANIES FROM THE LIST OF COMPARABLE COMPANIES CHO SEN BY THE TPO ON THE BASIS THAT THE 5 COMPANIES TURNOV ER WAS MUCH HIGHER COMPARED TO THAT THE ASSESSEE. 17.8. IN VIEW OF THE ABOVE CONCLUSION, THERE MAY N OT 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 EXAMI NE THE SAID ISSUE ALSO. ON THIS ISSUE, THE FIRST ASPE CT WHICH WE NOTICE IS THAT THE DECISION RENDERED IN THE CASE OF GENISYS INTEGRATING (SUPRA) WAS THE EARLIEST DECISI ON RENDERED ON THE ISSUE OF COMPARABILITY OF COMPANIES ON THE BASIS OF TURNOVER IN TRANSFER PRICING CASES. T HE 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 PROC ESSING SERVICES (SUPRA) AND CAPEGEMINI INDIA PVT.LTD. (SUP RA) ARE TO BE REGARDED AS PER INCURIUM AS THESE DECISIO NS IGNORE A BINDING CO-ORDINATE BENCH DECISION. IN TH IS REGARD THE DECISIONS REFERRED TO BY THE LEARNED COU NSEL FOR THE ASSESSEE SUPPORTS THE PLEA OF THE LEARNED C OUNSEL FOR THE ASSESSEE. THE DECISIONS RENDERED IN THE CA SE OF IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 22 OF 25 M/S.NTT DATA (SUPRA), SOCIETE GENERALE GLOBAL SOLUTIONS (SUPRA) AND LSI TECHNOLOGIES (SUPRA) WERE RENDERED LATER IN POINT OF TIME. THOSE DECISIONS F OLLOW THE RATIO LAID DOWN IN WILLIS PROCESSING SERVICES ( SUPRA) AND HAVE TO BE REGARDED AS PER INCURIUM. THESE THR EE DECISIONS ALSO PLACE RELIANCE ON THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF CHRISCAPITA L INVESTMENT (SUPRA). WE HAVE ALREADY HELD THAT THE DECISION RENDERED IN THE CASE OF CHRISCAPITAL INVES TMENT (SUPRA) IS OBITER DICTA AND THAT THE RATIO DECIDEND I LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE O F 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 TH AT HIGH TURNOVER IS NOT RELEVANT CRITERIA FOR DECIDING ON COMPARABILITY OF COMPANIES IN DETERMINATION OF ALP UNDER THE TRANSFER PRICING REGULATIONS UNDER THE AC T. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ORDER OF THE CIT(A) ON THE ISSUE OF APPLICATION OF TURNOVER FILT ER AND HIS ACTION IN EXCLUDING COMPANIES BY FOLLOWING THE RATIO LAID DOWN IN THE CASE OF GENISYS INTEGRATING (SUPRA ). 13. FOLLOWING THE AFORESAID DECISION OF THE TRIBUN AL, WE HOLD THAT IT WOULD BE APPROPRIATE WHILE CHOOSING COMPARABLE COMP ANIES TO EXCLUDE COMPANIES BY APPLICATION OF TURNOVER FILTER. WE AL SO OBSERVE THAT THE TPO HAS HIMSELF APPLIED LOWER TURNOVER FILTER OF EXCLUD ING COMPANIES WITH TURNOVER OF LESS THAN RS.1 CRORE AND IN SUCH CIRCUM STANCES, THERE IS NO REASON AS TO WHY HE SHOULD NOT APPLY THE HIGHER TUR NOVER LIMIT. THIS TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2013-14 IN I T (TP)A.NO.2046/BANG/2017 HAS UPHELD SIMILAR CONTENTI ON. FOR THE REASONS GIVEN ABOVE, WE UPHOLD THE ORDER OF THE CIT(A). 14. WE, THEREFORE, DIRECT THE AO TO RE-COMPUTE ALP BY EXCLUDING ABOVE SIX COMPANIES FROM THE LIST OF COMPARABLE COMPANIE S BY APPLYING THE TURNOVER FILTER. THE LD AR FOR THE ASSESSEE, AT THE TIME OF HEARING SUBMITTED IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 23 OF 25 THAT, IF TURNOVER FILTER IS APPLIED TO EXCLUDE HIGH TURNOVER COMPANIES, THEN PLI DETERMINED BY THE TPO IS WITHIN + 3% RANGE, THEREFORE, OTHER GROUNDS OF APPEALS BECOMES ACADEMIC IN NATURE, AND DOES NO T REQUIRE SPECIFIC ADJUDICATION. WE, FIND THAT, SINCE, WE HAVE ALREAD Y DIRECTED THE AO TO APPLY TURNOVER FILTER AND EXCLUDE HIGH TURNOVER COM PANIES FROM THE LIST OF COMPARABLES, OTHER GROUNDS TAKEN BY THE REVENUE IN ITS APPEAL AND THE ASSESSEE IN ITS CROSS OBJECTION BECOME ACADEMIC IN NATURE AND HENCE DOES NOT REQUIRE SPECIFIC ADJUDICATION. ACCORDINGL Y, ALL OTHER GROUNDS TAKEN BY THE ASSESSEE AND REVENUE ARE DISMISSED. 14. GR.NO.6 IN REVENUES APPEAL IS THE ONLY OTHER G ROUND THAT REMAINS TO BE CONSIDERED IN THE REVENUES APPEAL. AS FAR A S THIS GROUND IS CONSIDERED THE ISSUE IS WHETHER PAYMENTS OF EMPLOYE ES CONTRIBUTION BY THE ASSESSEE TOWARDS PROVIDENT FUND AND EMPLOYEES STATE INSURANCE WHICH ARE NOT DEPOSITED ON OR BEFORE THE DUE DATE TO THE RESPECTIVE ORGANIZATIONS BUT WHICH ARE DEPOSITED BEFORE THE DUE DATE FOR FIL ING RETURN OF INCOME U/S.139(1) OF THE ACT, CANNOT BE DISALLOWED U/S.36( 1)(VA) OF THE ACT. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SABARI ENTERPRISES (213 CTR 269) TAKEN THE VIEW THAT CONTRIBUTIONS MAD E BY THE ASSESSEE TO PF AND ESI ARE ALLOWABLE DEDUCTIONS EVEN THOUGH MAD E BEYOND STIPULATED PERIOD AS CONTEMPLATED UNDER THE MANDATORY PROVISIO NS OFF SEC.36(1)(VA) READ WITH SECTION 2(24)(X) OF THE ACT PROVIDED SUCH CONTRIBUTIONS ARE PAID BY THE ASSESSEE ON OR BEFORE THE DUE DATE FOR FURNI SHING THE RETURN OF INCOME AS PER SEC.139(1) OF THE ACT. IN VIEW OF TH E AFORESAID DECISION, THERE IS NO MERIT IN GR.NO.6 RAISED BY THE REVENUE. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 24 OF 25 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CO IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH APRIL , 2019 . SD/ - (B.R.BASKARAN) ACCOUNTANT MEMBER SD/ - ( N.V. VASUDEVAN) VICE PRESIDENT BANGALORE, DATED, 24 TH APRIL, 2019. / VMS / COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER A SST. REGISTRAR, ITAT, BANGALORE. IT(TP)A NO.59/BANG/2016 CO NO.57/BANG/2016 PAGE 25 OF 25 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR. P. S .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SEC TION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..