2016 (3) TMI 1269 - AT - Income Tax

TPA - comparable selection - application of filters for selection - Held that - The assessee company was engaged in providing various software development and other ITES services to its associate enterprises. The assessee was a captive service provider to its associate enterprise M/s. Avalara INC, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. We find merit in the claim of assessee that in case certain filters are picked up by the Assessing Officer and applied, then as per the revised filters picked up by the Assessing Officer in case certain concerns fall within those filters, then the margins of the said concerns need to be applied for benchmarking international transaction of the assessee, by selecting the said concerns in the final set of comparables. Accordingly, we direct the Assessing Officer to consider the results of the said concerns and in case, they fulfill the conditions of filters applied by Assessing Officer while benchmarking the international transaction of the assessee, then the said two concerns may be so selected in the final set of comparables.

Issues Involved:
1. Exclusion of certain companies from the list of comparables due to turnover exceeding ?200 crores.
2. Inclusion of certain companies in the list of comparables that were previously rejected.
3. Exclusion of interest cost from the operating cost while determining the operating margin.
4. Allowance of appropriate risk adjustment for differences in various risks.
5. Application of filters for selecting comparables by the Assessing Officer (AO).
6. Rectification of the order passed under section 154 of the Income-tax Act.

Detailed Analysis:

1. Exclusion of Companies with Turnover Exceeding ?200 Crores:
The Revenue appealed against the order of the CIT(A) directing the AO to exclude companies with turnover exceeding ?200 crores from the list of comparables. The CIT(A) relied on the decision in Genesis Integrating Systems Ltd., which held that companies with very high turnover could not be compared with those having relatively low turnover. The Tribunal upheld the CIT(A)'s decision, noting that turnover filter is an essential criterion and companies with turnover exceeding ?200 crores should be eliminated from the final list of comparables.

2. Inclusion of Rejected Companies:
The assessee's appeal focused on the arbitrary rejection of R.S. Software (India) Ltd. and Datamatics Global Services Ltd. from the list of comparables. The Tribunal directed the AO to verify whether these companies satisfy the filters applied by the AO and, if so, to include them in the final list of comparables. The Tribunal emphasized that if certain filters are applied, then companies meeting those filters should be considered for benchmarking the international transaction.

3. Exclusion of Interest Cost:
The CIT(A) erred in excluding interest cost from the operating cost while determining the operating margin of the assessee company and the comparable entities. However, this issue was not pressed by the assessee during the hearing and was dismissed as not pressed.

4. Allowance of Risk Adjustment:
The assessee argued for appropriate risk adjustment towards differences in market risk, price risk, credit risk, warranty risk, and business risk. This ground was also not pressed during the hearing and was dismissed as not pressed.

5. Application of Filters for Selecting Comparables:
The AO applied modified and additional filters for selecting appropriate comparables, which the assessee contested. The CIT(A) directed the AO to exclude companies with turnover exceeding ?200 crores and those not meeting the 75% export revenue filter. The Tribunal upheld the CIT(A)'s decision, emphasizing the importance of applying appropriate filters for selecting comparables.

6. Rectification of Order under Section 154:
The assessee filed a rectification application under section 154, which the CIT(A) partially allowed. The Tribunal directed the AO to verify the inclusion of R.S. Software (India) Ltd. and Datamatics Global Services Ltd. in the final list of comparables if they meet the applied filters. The Tribunal also directed the AO to consider the exclusion of Silver Line Technologies due to its different financial year.

Conclusion:
The Tribunal dismissed the Revenue's appeal against the exclusion of companies with turnover exceeding ?200 crores and upheld the CIT(A)'s decision. The cross appeals of the assessee and Revenue were allowed for statistical purposes, with directions to the AO to verify and apply appropriate filters for selecting comparables. The Tribunal emphasized the importance of applying consistent and appropriate filters for benchmarking international transactions.

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