2016 (1) TMI 1402 - AT - Income Tax

TPO - Comparable selection - rejection of comparables by the TPO merely on the ground that the comparable companies have incurred losses - Held that - Commissioner of Income Tax (Appeals) has erred in upholding the findings of the TPO in rejecting the Astro Bio Systems Limited Maars Software International Limited and Megasoft Ltd. only on the ground that the said companies have incurred losses in the comparable year or in the year under consideration. We are of the considered view that the aforesaid three companies should not have been excluded from the list of comparables for arriving at ALP in relation to international transactions. We remit this issue back to the file of Assessing Officer to include the above mentioned three companies in the list of comparable entities and thereafter work out the weighted average mean of the comparables. This ground of appeal of the assessee is accordingly accepted. Cherry picking of high margin companies - TPO in the final list of comparable has retained M/s. V M F Soft Tech Ltd. which is having profit margin of 35.70%. On the one hand the TPO has rejected loss making companies and on the other hand he has retained a comparable having super profits. The TPO should either have rejected both the comparables or included both the extreme comparable in the list of comparables. Since we have directed the Assessing Officer to include the loss making companies in the list of comparables M/s. V M F Soft Tech Ltd. can be retained in the same list accordingly this ground of appeal of the assessee is rejected. Inclusion of Compucom Software Ltd. in the final list of comparables - TPO applied RPT filter of 25% to reject companies having substantial related party transactions - Held that - The Tribunal in the subsequent assessment year 2007-08 has excluded Compucom Software Ltd. from the list of comparables as it is having related party transactions in excess of 25%. We are of the considered view that the authorities below have erred in not considering the details furnished by the assessee with respect to the related party transactions of Compucom Software Ltd. furnished by the assessee. We deem it appropriate to remit this issue back to the file of Assessing Officer and decide this issue afresh in the light of the order of Tribunal in assessee s own case for the assessment years 2006-07 and 2007-08. Accordingly this ground of appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Rejection of comparable companies due to losses.
2. Cherry-picking of high margin companies.
3. Inconsistent application of benchmarking criteria, specifically related party transactions (RPT) filter.

Detailed Analysis:

1. Rejection of Comparable Companies Due to Losses:
The primary issue raised by the assessee was the rejection of comparable companies by the Transfer Pricing Officer (TPO) on the grounds that these companies had incurred losses. The TPO rejected Astro Bio Systems Limited, Maars Software International Limited, and Megasoft Ltd. solely because they had losses in the year under consideration. The Tribunal referred to previous decisions, notably in the cases of M/s. Bobst India Private Limited and Goldman Sachs (India) Securities Private Limited, which held that a company making persistent losses for the past three years is not a good comparable. Since the rejected companies had losses only in one year, the Tribunal found the exclusion unjustified. The Tribunal directed the Assessing Officer to include these companies in the list of comparables and recalculate the weighted average mean of the comparables.

2. Cherry-Picking of High Margin Companies:
The assessee contended that the TPO engaged in cherry-picking by selecting high margin companies while rejecting low margin ones. Specifically, the TPO retained V M F Soft Tech Ltd., which had an abnormally high profit margin of 35.70%, while excluding loss-making companies. The Tribunal noted that if loss-making companies are excluded, then super-profit companies should also be excluded, as held in the case of Bindview India Pvt. Ltd. However, since the Tribunal directed the inclusion of loss-making companies, it allowed the retention of V M F Soft Tech Ltd. in the list of comparables, thereby rejecting this ground of appeal.

3. Inconsistent Application of Benchmarking Criteria:
The TPO applied a Related Party Transactions (RPT) filter of 25% to reject companies with substantial related party transactions. The assessee argued that Compucom Software Ltd. should be excluded from the list of comparables because its RPT exceeded 25%. The Tribunal found that the assessee had provided extracts of the annual report showing RPTs above 25%, and similar exclusions were made in the assessee's own cases for subsequent assessment years. The Tribunal criticized the TPO's incorrect approach in calculating RPTs and directed the Assessing Officer to re-examine this issue in light of previous Tribunal decisions.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes. It directed the inclusion of the three loss-making companies in the list of comparables and remitted the issue of Compucom Software Ltd.'s inclusion back to the Assessing Officer for reconsideration. The Tribunal upheld the inclusion of V M F Soft Tech Ltd. in the list of comparables. The order was pronounced on January 18, 2016.