YOKOGAWA TECHNOLOGY SOLUTIONS INDIA PRIVATE LIMITED,BANGALORE V. DCIT, CIRCLE-7(1)(1), BENGALURU

ITTPA 2328/BANG/2024

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Yokogawa Technology Solutions India Pvt. Ltd. appealed against the assessment order for the assessment year 2021-22, which included adjustments to the arm's length price of their software development services and imputed interest on delayed receivables. The primary contention was the rejection of their transfer pricing study and the application of inappropriate filters in selecting comparables. The Tribunal found merit in the application of an upper turnover filter in the comparability analysis, which could potentially alter the outcome of the transfer pricing adjustments.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 360891 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 22-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2021-2022
• Other Referred Cases: Chrys Capital Investment Advisory (India) Pvt. Ltd. v. Dy. CIT, Pentair Water India Pvt. Ltd. v. Dy. CIT, Agnity India Technologies Ltd. v. Dy. CIT, Nokia India Limited v. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY MEHTA
• Keywords: Transfer pricing; International transaction; Notional interest
• Section: 143(3); 10B

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A No.2328/Bang/2024 Assessment year : 2021-22 Yokogawa Technology Solutions India Pvt. Ltd., 201-A, 6th Floor, Tower-1, Umiya Business Bay, Cessna Business Park, Outer Ring Road, Bellandur S.O., Kadubeesanahalli, Bangalore – 560 103. PAN: AAACY 2823L Vs. The Deputy Commissioner of Income Tax, Circle 7(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Sanjay Mehta, CA Respondent by : Shri Srinivasa Rao, CIT(DR)(ITAT), & Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. Date of hearing : 08.04.2025 Date of Pronouncement : 22.05.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Yokogawa Technology Solutions India Pvt. Ltd. (the assessee/appellant) for the assessment year 2021-22 against the assessment order passed by the Assessment Unit of the Income Tax Department dated 14.10.2024 pursuant to the IT(TP)A No.2328/Bang/2024 Page 2 of 12 directions of the ld. Dispute Resolution Panel [DRP] raising the following grounds of appeal:- “Ground No. 1: LIMITATION OF TIME On the facts and circumstances of the case and in law, the Assessment Unit, Income Tax Department ('AO') erred in passing the final assessment order u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act, 1961 ('the Act') for the impugned Assessment Year 2021-22, on 14th October 2024, which is beyond the time limit as specified u/s. 153 of the Act which expired on 31' December 2023. Ground No. 2: GENERIC LEGAL ISSUES 2.1 The learned AO erred in making a reference to learned Transfer Pricing Officer ('TPO') for determining arm's length price without demonstrating as to why it was necessary and expedient to do so and the Honourable DRP erred in confirming the action of the learned AO. 2.2 The learned AO erred in making reference of the Appellant's case to the learned TPO, without applying his mind and without recording his satisfaction, thereby making the entire process of referring the matter to the TPO as invalid; 2.3 The Learned TPO erred in rejecting the TP study of Appellant and conducting fresh Search Process in determination of arm's length price without providing any cogent reasons Ground No. 3: RELATING TO TP ADJUSTMENT ON SOFTWARE DEVELOPMENT SERVICES 3.1 The Learned TPO erred in not considering the following comparables selected by the Appellant merely for the reason that the same did not form part of the TPO's search matrix: a. Rheal Software Pvt. Ltd.. IT(TP)A No.2328/Bang/2024 Page 3 of 12 b. Kcube Consultancy Services Pvt. Ltd. c. Orangescape Technologies Ltd. d. Batchmaster Software Pvt Ltd e. Harbinger Systems Pvt. Ltd. f. Toxsl Technologies Pvt. Ltd. g. Infomile Technologies Ltd. h. Isummation Technologies Pvt Ltd i. Broadgate Cyber Tech Solutions Pvt. Ltd 3.2 The Learned TPO erred in not applying an upper limit to the turnover filter of Rs. 200 crores for rejecting companies and thereby wrongly accepting the following companies with turnover exceeding 200 crores as comparable to the Appellant: a. Mindtree Limited b. L&T Infotech Limited c. Wipro Limited d. Tata Elxsi Limited e. Infosys Limited f. Tata Consultancy Services g. Nihilent Limited h. Great Software Laboratory i. Cybage Software Private Limited 3.3 The learned TPO erred in selecting the following companies as comparables even though they are not comparable in respect of one or more of functions performed, risks assumed, assets utilized, size, related party filter, non-availability of segmental information etc. a) Mindtree Limited b) L&T Infotech Limited c) Wipro Limited d) Tata Elxsi Limited e) Infosys Limited f) Tata Consultancy Services g) Cybage Software Private Limited 3.4 The learned TPO erred in modifying the persistent losses filter by excluding companies with operating losses in at least two out of three years as against the filter adopted by the Appellant of excluding IT(TP)A No.2328/Bang/2024 Page 4 of 12 companies with operating losses in all the three years. Thereby excluding Harbinger Knowledge Products Pvt Ltd which is functionally comparable. 3.5 The learned TPO erred in Incorrectly computing the margins of comparable companies. 3.6 The Learned TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for differences in risk profile between the Appellant and comparable companies. Ground No. 4: RELATING TO TP ADJUSTMENT OF INTEREST ON DELAYED RECEIVABLES The learned TPO erred in: a) making the notional interest adjustment of Rs. 83,957 with respect to outstanding receivables of the Assessee for FY 2020-21; b) Re-characterisation of the net outstanding receivables as on 31 March 2021 as a deemed loan and benchmarking the same; c) Not appreciating that the outstanding receivables were consequent to the principal international transaction and could not be considered as a separate international transaction; d) Not appreciating that Appellant does not have a policy of charging interest from other unrelated parties in similar transactions nor has it paid any interest on its outstanding trade payable at year end to related vendors. e) not appreciating that interest cannot be levied on delayed receivables when the Assessee company is debt free. f) Without prejudice, interest rate should be restricted only to the LIBOR rate without adding any further basis points; and IT(TP)A No.2328/Bang/2024 Page 5 of 12 g) Without prejudice, no separate adjustment for interest on delayed receivable is required where the margin of the international transaction is held to be at arm's length price Each of the above Grounds of Appeal are without prejudice to each other. The Appellant craves leave to add, amend, delete, rectify, substitute, modify, or otherwise, all or any of the aforesaid grounds or add a new ground(s) at any time before or during the hearing of the above appeal.” 2. The brief facts of the case show that assessee is a company engaged in the business of software development, filed its return of income for AY 2021-22 on 14.3.2022 at a total income of Rs.7,74,94,178/-. The case of the assessee was picked up for scrutiny to verify the high risk international transaction as per CASS. Notice u/s. 143(2) was issued to the assessee on 28.6.2022. A reference was made to the ld. DCIT (TP), 2(2)(2), Bangalore [ld. TPO] u/s. 92CA of the Act. The ld. TPO passed the order u/s. 92CA(3) wherein he made an adjustment in the arm’s length price [ALP] of the software development services segment of Rs. 230,54,527/- and imputed interest on delayed receivables of Rs.83,957/- and passed order u/s. 92CA(3) wherein the total adjustment of Rs. 231,38,484/- was proposed. Based on this, draft assessment order was passed on 23.12.2023 determining total income at Rs.10,06,32,662/-. 3. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel-II, Bangalore [ld. DRP]. The ld. DRP issued direction u/s. 144C(5) of the Act on 6.9.2024. Based on the direction, the variation in respect of ALP of IT(TP)A No.2328/Bang/2024 Page 6 of 12 international transaction was computed at Rs. 231,38,484/- and total income was determined at Rs.10,06,32,662/-. Aggrieved with this assessment order, assessee is in appeal before us. 4. Ground No.1 is with respect to limitation of time which was neither argued by the ld. AR nor pressed before us and therefore same is dismissed. 5. Ground Nos. 2 to 4 are with respect to transfer pricing issue. The ld. AR filed a copy of the objections filed before the ld. DRP along with written submissions. The ld. AR submits that the TP study report of the assessee was rejected. It was stated that during the course of hearing before the ld. TPO, the assessee insisted on applying the turnover filter having an upper limit of 200 crores. The assessee also pressed for exclusion of the comparables which are incurring losses persistently in the last 3 years. It was submitted that the ld. TPO has applied lower turnover filter, but did not apply the upper turnover filter. It was submitted that the assessee has objected for not applying the upper limit for the turnover filter, though the TPO himself applied lower sales turnover filter. He submits that applying the upper turnover filter is upheld by many decisions of the Tribunal. The ld. TPO rejected this contention wherein he held that in the software industry assessee has no influence on the margins earned and economies of scale are relevant only in capital intensive companies. As in the software development segment there is no substantial investment in the form of plant & machinery and what matters is human capital only, the upper turnover filter is not relevant as it does not impact the margins.. The ld. TPO also IT(TP)A No.2328/Bang/2024 Page 7 of 12 gave the examples of Infosys, Wipro and Tata Consultancy Services. Accordingly he rejected request of assessee to apply upper turnover filter. Arguments of the assessee 6. The ld. AR further submitted that before the DRP also, the assessee objected to the TP adjustment stating that the order of the ld. TPO is incorrect. The ld. DRP relied upon the decision of the Hon’ble Delhi High court in the case of Chrys Capital Investment Advisory (India) Pvt. Ltd. that the company which is otherwise functionally comparable cannot be excluded merely on account of high turnover, particularly when the assessee has not demonstrated how the high turnover has materially impacted the profitability or comparability. It was further stated that the decision cited before the DRP of Hon’ble Bombay High Court of Pentair Water India Pvt. Ltd. and decision of the Hon’ble Delhi High Court in the case of Agnity India Technologies Ltd. were not followed. Accordingly the upper turnover filter and turnover band was dismissed. Therefore, the argument of the ld. AR was that upper turnover filter should have been applied in the case of assessee. 7. On this ground, the ld. DR vehemently supported the order of the ld. TPO and the ld. DRP. It was submitted that unless the assessee shows that company is not functionally comparable, the plea of applying upper turnover filter could not be used for TP analysis. It is pointed out , on the strength of the wording of Rule 10(B) that there was no justification for applying the above two IT(TP)A No.2328/Bang/2024 Page 8 of 12 filters when there was no specific mention of any such filter in the rule itself. Further, reliance is placed on the decision of this Court in Chryscapital Investment Advisors (India) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 417/232 Taxman 20/376 ITR 183 8. The ld. AR referred to the decision of the coordinate Bench in the case of Autodesk in ITA No.540-541/Bang/2013 dated 6.7.2018. He further pressed into service the decision of coordinate Bench in the case Dun & Bradstreet. He further referred to ground 3.2 and submitted that the purpose of applying upper and lower turnover filter is to limit the comparables. He submitted that 9 comparables mentioned in ground no.3.2 would be excluded if the upper turnover filter of 200 crores would be applied. He also referred to the Guidance Note on Transfer Pricing by the Institute of Chartered Accountants of India wherein on the basis of the size of the company and economies of scale, the comparables are to be excluded. It was further stated that the turnover of the assessee is very small and therefore upper turnover limit of 200 crores should have been applied. He also supported the above contention by showing the OECD TP Guidelines and UN Practice Manual on Transfer Pricing. He submitted that on the basis of several judicial precedents also, the upper turnover filter of 200 crores should be applied. It was submitted that if the request of the assessee for application of upper turnover filter of 200 crores is accepted, the margins of assessee would fall within the ALP and other grounds will become academic. 9. We have carefully considered the rival contentions and perused the orders of ld. lower authorities. The assessee is a captive IT(TP)A No.2328/Bang/2024 Page 9 of 12 software development centre of Yokogawa group. It is a 100% EOU. It has entered into international transaction of software development services of Rs.43,78,33,262/-. The assessee on the above segment in the TP study report adopting PLI of Operating Profit / Operating Cost [ OP/OC] of 18.07%, which on analysis of financial statement by the ld. TPO was computed at 19.07%. The TP study report by selecting 16 comparables applying Transactional Net Margin Method [TNMM] held that the international transaction of the assessee is at arm’s length. The ld. TPO examined the filters applied by the assessee and held that assessee has not applied proper filters and therefore carried out fresh search on the basis of various filters, accepted the same PLI and the most appropriate method, determined the margins of the assessee and issued a show cause notice. After considering objections, the ld. TPO took 18 comparables, considered the margin of the assessee at 19.07% and margins of the comparables at 25.09%, computed the shortfall of Rs. 230,54,527/-. The TPO rejected the objections that upper turnover filter of Rs. 200 crores should have been applied. We find that as per ground No.3.2, the assessee submits that if upper turnover filter of Rs. 200 Crores filter is applied, large size companies would be excluded. We find that the turnover of the assessee is Rs. 45 Crores, whereas the turnover of those 9 comparables mentioned in ground No.3.2 is ranging from Rs. 265 Crores to Rs. 50,299 Crores. The Hon’ble Bombay High Court in the case of Pentair Water (India) Pvt. Ltd. has categorically accepted that high turnover filter i.e., manifold higher turnover than the turnover of the assessee comparables vitiate the IT(TP)A No.2328/Bang/2024 Page 10 of 12 comparability analysis. Similarly the Hon’ble Delhi High Court in the case of Agnity also held so. Further the application of higher turnover filter is to limit the number of comparables so that comparability analysis does not become too cumbersome. Further if a goliath which is very large is compared with David, who is very small in comparability analysis ,will definitely distort the process of determination of ALP. 10. While deciding so, we are conscious that the turnover of the assessee is Rs.45 crores and if the upper turnover filter of Rs. 200 Crores is applied, it would be merely 4 times the turnover of the assessee. The turnover bracket of Rs. 200 Crores also cannot be applied universally, otherwise it may also give a distorted picture. For example, if in case of an assessee having turnover of Rs. 150 crores, applying upper turnover filter of Rs 200 crores is an absurdity. Therefore, no doubt we agree with the appropriate upper turnover filter to be applied based on the turnover of the assessee, but it is not necessary that it should only be Rs 200 Crores, it is neither the law nor appeal to common sense. 11. On issue of applicability of filters and other parameters of comparability analysis honourable Delhi high court in CIT V Nokia India Limited [2018] 94 taxmann.com 617 (Delhi)[04-09- 2015] has on the issue of upper turnover filter not finding any mention in IT Rules held that :- \"13. This Court has examined Rule 10B (1) & (2) and is of the view that the said provisions are to be read as laying down broad guidelines as regards IT(TP)A No.2328/Bang/2024 Page 11 of 12 the exercise of determining ALP for an international transaction using certain parameters. The provisions may themselves not spell out the manner and the basis for choosing or excluding comparables. The nature of the industry, the nature of the transactions, the accepted norms and practices of an industry, the structuring and behaviour of markets and a host of other unspecified parameters may have to be considered while determining an ALP. It is not practicable to expect all such situations to be anticipated by the Rules.\" 12. Therefore, allowing ground No. 3.2 of the appeal, we restore the issue back to the file of the ld. TPO with a direction that he must apply the upper turnover filter also in his TP analysis. Therefore, no doubt we agree with the appropriate upper turnover filter to be applied based on the turnover of the assessee, but it is not necessary that it should only be Rs 200 Crores, it is neither the law nor does it appeal to common sense. 13. Thus, ground No. 3.2 of appeal of the assessee is allowed and issue is restored back to the file of the ld. TPO to incorporate the appropriate upper turnover filter for fresh comparability analysis. 14. As it is the claim of assessee that if this ground is decided, all other grounds of TP adjustment would merely become academic or not pressed, hence, all other grounds of appeal are disposed as dismissed. IT(TP)A No.2328/Bang/2024 Page 12 of 12 15. In the result, the appeal by the assessee is allowed partly for statistical purposes. Pronounced in the open court on this 22nd day of May, 2025. Sd/- Sd/- ( SOUNDARARAJAN K. ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 22nd May 2025. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. "