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2020 (9) TMI 1155 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Assessee is into services rendered under the title Technical Support Services and Research and Development Services . Both these services have been clubbed together as Software Development Services segment for bench marking.The assessee adopted TNM method as most appropriate method and Operating Profit/Operating Cost as Profit level indicator (PLI). We direct the AO/TPO to apply the upper turnover filter and exclude comparable companies, which are having turnover of more than ₹ 200/- crores. Companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Transfer Pricing Adjustment 2. Exclusion of Comparable Companies 3. Inclusion of Comparable Companies 4. Application of Upper Turnover Filter Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee challenged the assessment order for the year 2013-14, which included a transfer pricing adjustment of ?1,67,94,970/-. The primary issue was the selection of comparable companies for benchmarking the assessee's international transactions under the "Software Development Services" segment using the TNM method. The Transfer Pricing Officer (TPO) accepted only one comparable company from the assessee's study and included additional companies, resulting in a higher arithmetic mean margin of 20.90%, adjusted to 18.10% after working capital adjustments. 2. Exclusion of Comparable Companies: The assessee sought the exclusion of three companies: Persistent Systems Ltd, Larsen & Toubro Infotech Ltd, and Mindtree Ltd, on the grounds that these companies had turnovers exceeding ?200 crores, whereas the assessee's turnover was ?22.50 crores. The assessee argued that companies with turnovers more than ?200 crores should not be considered comparable, citing previous tribunal decisions in similar cases. The Tribunal agreed with the assessee, directing the AO/TPO to apply an upper turnover filter and exclude companies with turnovers exceeding ?200 crores. 3. Inclusion of Comparable Companies: The assessee requested the inclusion of R Systems International Ltd and Akshay Software Technologies Ltd. The TPO had rejected R Systems International Ltd due to its different accounting year. However, the Tribunal, referencing the Punjab & Haryana High Court's decision in Mercer Consulting (India) (P) Ltd, held that companies should not be excluded solely for following a different accounting year if relevant financial data is available. The Tribunal directed the AO/TPO to re-examine R Systems International Ltd based on the collated financial data provided by the assessee. For Akshay Software Technologies Ltd, the TPO had rejected it on the grounds of functional dissimilarity, as it was engaged in providing professional services, procurement, installation, implementation, and support & maintenance of ERP products and services. The Tribunal noted that the assessee needed to demonstrate that the functions performed by Akshay Software Technologies Ltd were similar to its own. The Tribunal restored the examination of this company to the AO/TPO to verify the functional similarities. 4. Application of Upper Turnover Filter: The Tribunal emphasized the application of an upper turnover filter across the board, not selectively. This filter should exclude companies with turnovers exceeding ?200 crores from the list of comparables. This decision aligns with previous tribunal rulings and the principle that companies with significantly higher turnovers are not suitable comparables for those with much lower turnovers. Conclusion: The Tribunal allowed the appeal of the assessee, directing the AO/TPO to exclude companies with turnovers exceeding ?200 crores and to re-examine the inclusion of R Systems International Ltd and Akshay Software Technologies Ltd based on the provided financial data and functional analysis. The order was pronounced in the open court on 11th September 2020.
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