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2014 (9) TMI 1001 - AT - Income TaxTransfer pricing adjustment - selection of comparables - Held that - RPT filter should be considered at 15% of the total revenue and companies having RPT in excess of 15% of total revenues are to be excluded from the list of comparables. In this view of the matter, the order of the learned CIT (Appeals) holding that companies are not to be considered as comparables even if they have a single RPT i.e. ;that the RPT is in excess of 0%, is reversed. Entitlement to standard deduction of 5% from the ALP under the proviso to section 92C(2) - Held that - In view of the amendment brought about by the Finance Act, 2012 by introduction of the clarificatory amendment of section 92CA(2) of the Act w.r.e.f. 1.4.2002, the issue has been settled and therefore the assessee is not entitled to the benefit of 5% standard deduction from the ALP of international transactions.
Issues Involved:
1. Turnover Filter of Rs. 200 Crores. 2. Related Party Transactions (RPT) Filter. 3. Exclusion of Certain Comparable Companies. 4. Standard Deduction of 5% from the ALP. 5. Rejection of Assessee's Claim for Capacity Underutilization and Risk Adjustment. 6. Computation of Arm's Length Price (ALP) and Transfer Pricing Analysis. Detailed Analysis: 1. Turnover Filter of Rs. 200 Crores: The Tribunal upheld the CIT(A)'s application of the turnover filter of Rs. 200 Crores, excluding companies with turnovers exceeding Rs. 200 Crores from the list of comparables. This decision followed the precedent set in the case of Genisys Integrating Systems (India) Pvt. Ltd., where it was held that companies with turnovers significantly higher than the assessee's should not be considered comparable. Consequently, companies like Infosys Technologies Ltd., Flextronics Software Systems Ltd., i-Gate Global Solutions Ltd., L&T Infotech Ltd., and Satyam Computer Services Ltd. were excluded. 2. Related Party Transactions (RPT) Filter: The Tribunal reversed the CIT(A)'s decision to exclude companies with any RPT (0% threshold). Instead, it followed the decision in 24/7 Customer.Com Pvt. Ltd., applying a 15% RPT filter. Companies with RPT exceeding 15% of total revenues were to be excluded. Consequently, companies like Sasken Communication Technologies Ltd., R.S. Software (India) Ltd., and Sasken Network Systems Ltd., which had RPT below 15%, were included. Four Soft Ltd. was excluded due to RPT of 19.89%, and the comparability of Geometric Software Solutions Ltd. was remanded for fresh examination. 3. Exclusion of Certain Comparable Companies: - Exensys Software Solutions Ltd.: Excluded due to being functionally different and having abnormal profits resulting from an amalgamation. - Thirdware Solutions Ltd.: The Tribunal remanded the issue to the CIT(A) to examine functional differences and high profits. - Tata Elxsi Ltd.: Excluded for being functionally different, engaged in product design services, and not purely in software development services. - Sankhya Infotech Ltd.: The Tribunal remanded the issue to the TPO for examination of functional differences. - Visualsoft Technologies Ltd.: The assessee's challenge to its inclusion was dismissed as it was not raised before the CIT(A). 4. Standard Deduction of 5% from the ALP: The Tribunal reversed the CIT(A)'s decision allowing a 5% standard deduction from the ALP under the proviso to section 92C(2) of the Act. The retrospective amendment to section 92C(2A) clarified that the + / - 5% variation is only to justify the price charged in international transactions and not for standard deduction. 5. Rejection of Assessee's Claim for Capacity Underutilization and Risk Adjustment: The CIT(A) rejected the assessee's claim for capacity underutilization and risk adjustment but allowed a standard deduction of 5%, which was subsequently reversed by the Tribunal. 6. Computation of Arm's Length Price (ALP) and Transfer Pricing Analysis: The Tribunal directed the Assessing Officer / TPO to recompute the working capital adjustment while giving effect to the order. The ALP adjustment proposed by the TPO was Rs. 1,63,08,116, which was contested by the assessee on various grounds, including the rejection of comparables and the use of data not available during the transfer pricing documentation. Conclusion: Both the Revenue's appeal and the assessee's cross objections were partly allowed. The Tribunal provided specific directions for recomputing the ALP and working capital adjustments, ensuring that the comparables selected were appropriate and in line with established legal precedents.
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