CME India Technology Support Services Private Limited, Bengaluru V. Assessment Unit, Income Tax Department, Bangalore

ITTPA 889/BANG/2022

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The case involves CME India & Technology Support Services Pvt. Ltd., which appealed against the final order of assessment passed by the Assessing Officer under sections 143(3) and 144C(13) of the Income-tax Act, 1961 for the assessment year 2018-19. The primary issues in the appeal were the modification of the turnover filter applied by the assessee and the inclusion of functionally dissimilar companies in the final assessment order, which were not part of the draft assessment order. The Tribunal examined the arguments presented, particularly focusing on the application of the turnover filter and the selection of comparables for transfer pricing purposes. The Tribunal's decision was influenced by previous judgments and the principles of natural justice, leading to the allowance of the assessee's appeal.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 124588 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 27 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-12-2022
• Assessment Year: misc
• Appeal Filed On: 21-09-2022
• Other Referred Cases: Autodesk India Pvt.Ltd. Vs. DCIT, Chryscapital Investment Advisors (India) Pvt.Ltd., CIT Vs. Pentair Water India Pvt.Ltd., Genisys Integrating, Willis Processing Services, Capegemini India Pvt.Ltd., NTT Data, Societe Generale Global Solutions, LSI Technologies
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Revised return
• Section: 143(3); 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No. 889/Bang/2022 Assessment year : 2018-19 CME India & Technology Support Services Pvt. Ltd., Level 8, Block A, Tridib Building, Bagmane Tech Park, C V Raman Nagar, Bengaluru – 560 093. PAN: AAGCC 0711R Vs. The Assessment Unit, Income Tax Department, Bangalore. APPELLANT RESPONDENT Appellant by : Shri Rony Antony, CA Respondent by : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.12.2022 Date of Pronouncement : 19.12.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final order of assessment passed by AO u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 16.7.2022 for the assessment year 2018-19. 2. The assessee raised 10 grounds with respect to the impugned additions. During the course of hearing, the ld. AR presented IT(TP)A No. 889/Bang/2022 Page 2 of 11 arguments only with respect to Ground Nos. 2 & 7. The relevant grounds read as follows:- “2. Turnover Filter 2.1 The Ld. AO / TPO erred in facts and in law by modifying the turnover filter applied by the Assessee. 2.2 Without prejudice, the Ld. AO / TPO erred in facts and in law by not applying the 10 times limit on the turnover filter and the Hon'ble DRP also erred in upholding the same. 7. Companies not part of TP Order and Draft Assessment Order, erroneously included in Final Assessment Order 7.1 The Ld. AO / TPO erred in facts by including the functionally dissimilar companies in the final assessment order when these companies were rejected by the TPO and were not a part of the TP Order and draft assessment order. objection was raised before Hon'ble DRP for these companies: Sr. No. Name of Company 1 Back Office IT Services India Private Limited 2 XS Cad India Private Limited 3 Smartstream Trechnologies India Private 4 Anjana Software Solutions Private Limited 5 Consilient technologies Private Limited 6 Temenos India Private Limited As the above companies were not a part of the draft assessment order, this is an unambiguous case of violation of principle of natural justice and hence the action of the Ld. AO / TPO of including these companies in the final assessment order is liable to be obliterated. 7.2 With prejudice to the above ground i.e. 7.1, the Company submits that the above companies also fails the filters as provided below: IT(TP)A No. 889/Bang/2022 Page 3 of 11 Sr. No. Name of Company Filters failing 1 Back Office IT Services India Private Limited Fails RPT filter 2 XS Cad India Private Limited Functionally dissimilar – in ITeS 3 Smartstream Trechnologies India Private Limited Fails RPT and functional filter 4 Anjana Software Solutions Private Limited Fails RPT and functional filter 5 Consilient technologies Private Limited Functionally dissimilar and fails export filter 6 Temenos India Private Limited Fails RPT and functional filter 3. The assessee is a private limited company engaged in the business of software development, implementation, testing, support and maintenance and to provide information technology data base administration and infrastructure and technology support for software development to CME group companies. The assessee filed the original return of income on 27.11.2018 declaring a total income of Rs.18,28,89,922. Subsequently, the assessee filed a revised return on 22.3.2019 declaring a total income of Rs.18,40,30,545. The case was selected for scrutiny and a reference was made to the TPO for the purpose of determining the ALP of the international transactions entered into by the assessee with its AE. The TPO passed an order u/s. 92CA proposing a TP adjustment of Rs.4,02,85,978. The AO passed a draft assessment order incorporating the TP adjustment. The assessee raised objections before the DRP. The DRP issued directions whereby the TP adjustment was recalculated @ Rs.2,65,85,158 in the IT(TP)A No. 889/Bang/2022 Page 4 of 11 order giving effect passed by the TPO. The assessee is in appeal before the Tribunal against the final order of assessment. 4. The assessee applied Transactional Net Margin Method as the most appropriate method for the purpose of TP document. Operating Profit/Operating Cost is the profit level indicator. The assessee had arrived at an operating margin of 18.19% which is computed as under:- Particulars Total (INR) Total (INR) Income Operating Income 88,00,51,718 88,00,51,718 Operating Income (A) 88,00,51,718 88,00,51,718 Operating Cost Employee Benefit Expenses 51,50,39,665 51,50,39,665 Depreciation 4,24,19,052 4,24,19,052 Other Expense 19,03,47,824 Less: Non-operating Cost CSR Expenditure 11,72,048 Loss on sale of property, plant and equipment 42,740 Interest on PF 14,97,475 Interest on professional tax 1,697 Interest on taxes 1,32,794 Penalty 3,50,000 18,71,51,070 Operating Cost (B) 74,46,09,787 Operating Profit (A-B)=C 13,54,41,931 Operating margin as a percentage of Operating Cost (C/B) % 18.19% 5. The AO rejected the comparables selected by the assessee and arrived at the following final list of comparables :- IT(TP)A No. 889/Bang/2022 Page 5 of 11 SWD Segment SI. No. Company Name F.Year wise OPIOC (%) Wt. Average 2015-16 2016-17 2017-18 1 Infomile Technologies Ltd. 9.86 11.06 8.64 9.69 2 Harbinger Systems Pvt. Ltd. 12.69 12.80 9.46 11.65 3 Exilant Technologies Pvt. Ltd. 25.82 17.27 8.50 17.17 4 Tech Mahindra Ltd. 17.5 18.06 20.03 18.57 5 Larsen & Toubro Infotech Ltd. 20.78 19.21 17.14 18.94 6 Great Software Laboratory Pvt. Ltd. 17.88 23.87 17.31 19.73 7 Elveego Circuits Pvt. Ltd. 8.3 40.17 6.75 20.19 8 Black Pepper 9.63 13.84 24.83 20.62 9 Mindtree Ltd. 26.11 20.12 18.41 21.21 10 Aptus Software Labs Pvt. Ltd. 27.67 24.83 15.16 22.70 11 Acewin Agriteck Ltd. 26.54 23.23 22.73 24.51 12 Persistent Systems Ltd. 23.9 24.44 26.94 24.98 13 Wipro Ltd. 27.27 26.38 27.03 26.83 14 Tata Elxsi Ltd. 24.9 29.13 30.56 28.24 15 Infobeans Technologies Ltd. 34.98 23.89 27.82 28.52 16 Nihilent Ltd. 24.46 30.8 35.11 30.17 17 Thirdware Solution Ltd. 30.18 33.36 29.27 30.94 18 Threesixty Logica Testing Services Pvt. Ltd. 48.4636.6326.236.58 19 Infosys Ltd. 38.2938.7935.2737.38 20 Cybage Software Pvt.Ltd. 62.0461.4047.7856.81 35th percentile 20.19 Median 23.60 65th percentile 26.83 6. Accordingly, the TPO arrived at the TP adjustment as under:- SWD SEGMENT Particulars Formula Amount (in Rs.) Taxpayers Operating Revenue OR 88,00,51,718 Taxpayers Operating Cost OC 74,46,09,787 Taxpayers Operating Profit OP 13,54,41,931 IT(TP)A No. 889/Bang/2022 Page 6 of 11 Taxpayers PLI PLI=OP/OC 18.19% 35th Percentile Margin of comparable set 20.19% Adjustment Required (if PLI< 35th Percentile) Yes Median Margin of comparable set M 23.60% Arm's Length Price ALP= (1+M)*OC 92,03,37,696 Price Received OR 88,00,51,718 Shortfall being adjustment ALP-OR 4,02,85,97 7. The DRP upheld the TP adjustment. 8. The ld. AR submitted that the following list of comparables whose turnover is more than 200 crores have to be excluded since the TPO has not applied the upper turnover filter Rs.200 crores. The ld. AR submitted that the turnover of the assessee is Rs.88 crores and accordingly these comparables need to be excluded. S. No. Companies Turnover for FY 2017- 18 (in INR crores) Page book Reference 1 Exilant Technologies Private Limited 332.44 Page 1219 of part 2 of paper book, volume 4 of 34 2 Larsen a Toubro Infotech Ltd. 6906.40 Page 1997 of part 2 of paper book, volume 6 of 34 3 Temenos India Pvt. Ltd* 376.91 Page 9443 of part 2 of paper book, volume 30 of 34 4 Mindtree Ltd. 5,325.00 Page 3263 of part 2of paper book, volume 10 of 34 5 Nihilent Ltd. 280.06 Page 6253 of Part 2 of paper book, volume 20 of 34 IT(TP)A No. 889/Bang/2022 Page 7 of 11 6 Persistent Systems Ltd. 1,732.75 Page 4613 of part 2 of paper book, volume 14 of 34 7 Wipro Limited 44,710.00 Page 5401 of part 2 of paper book, volume 17 of 34 8 Tata Elxsi Ltd. 1,386.30 Page 5864 of part 2 of paper book, volume 18 of 34 9 Infosys Ltd. 61,941.00 Page 7389 of part 2 of paper book, volume 24 of 34 10 Cybage Software Private Limited 737.16 Page 7965 of Part 2 of paper book, volume 26 of 34 9. We heard the rival submissions and perused the material on record. The coordinate bench of 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 IT(TP)A No. 889/Bang/2022 Page 8 of 11 that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the ITAT Mumbai and Bangalore Benches taking a view contrary to that taken in the case of Genisys Integrating (supra), we proceed to examine the said issue also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing IT(TP)A No. 889/Bang/2022 Page 9 of 11 Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon’ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon’ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 10. Respectfully following the above decision of the coordinate Bench, we hold that the above list of comparables whose turnover is more than 200 crores should be excluded from the list of comparables. 11. With regard to ground No.7, the ld. AR submitted that in the order giving effect in accordance with directions of the DRP, the list of comparables have been erroneously extracted including 6 comparables which are not part of the final list of comparables decided by the TPO. Accordingly, in the final order of assessment, the TP adjustment was calculated at Rs.2,65,85,158. The ld. AR submitted that these comparables are not part of the final list of comparables and therefore need to be excluded. The ld. DR conceded the issue. 12. We have heard the rival submissions and perused the material on record. We notice that in the order giving effect [page. 8 to 10 of final assessment order], the following companies have been included : IT(TP)A No. 889/Bang/2022 Page 10 of 11 S. No. Companies Page book reference 1 Back Office IT Services India Private Limited Page 548 of part 1 of paper book, volume 3 of 4 2 XS Cad India Private Limited Page 550 of part 1 of paper book, volume 3 of 4 3 Smartstream Technologies India Private Limited Page 554 of part 1 of paper book, volume 3 of 4 4 Anjana Software Solutions Private Limited Page 555 of part 1 of paper book, volume 3 of 4 5 Consilient technologies Private Limited Page 561-562 of part 1 of paper book, volume 3 of 4 6 Temenos India Private Limited Page 550-551 of part 1 of paper book, volume 3 of 4 13. We also notice that in the final list of comparables as extracted in the earlier part of this order from the TPO’s order (page 52 to 54 of TPO’s order), the above listed 6 companies are not part of list. We therefore see merit in the submission of the ld. AR that in the order giving effect, the comparables have been erroneously extracted based on the show cause notice of the TPO. We therefore direct AO/TPO to delete these comparables. 14. The AO/TPO is directed to recomputed the ALP in accordance with the directions given int his order. 15. In the result, the appeal of the assessee is allowed. Pronounced in the open court on this 19 th day of December, 2022. Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 19 th December, 2022. /Desai S Murthy / IT(TP)A No. 889/Bang/2022 Page 11 of 11 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.