2020 (3) TMI 872 - AT - Income Tax

TP Adjustment - comparable selection - whether the turnover filter cannot be a criteria for exclusion of comparable companies? - HELD THAT - In the case of Neilsen Sports India P Ltd 2019 (6) TMI 1396 - ITAT BANGALORE the co-ordinate bench, by following the decisions rendered by other co-ordinate benches, has applied the turnover filter for examining the comparability of companies. In the instant case, the assessee shall fall under the category of companies having turnover of 1 200 crores, while the two comparable companies referred above do not fall under the above said category. Accordingly, by following the decision rendered by the co-ordinate bench in the case of Genisys Integrating Systems 2011 (8) TMI 952 - ITAT BANGALORE we direct the AO/TPO to exclude both M/s Larsen Toubro Infotech Ltd and M/s Persistent Systems Ltd.

Summary

Issues:
Transfer pricing adjustment in Software development services - Exclusion of comparable companies Larsen & Toubro Infotech Limited and Persistent Systems Ltd based on turnover filter.

Analysis:
1. Transfer Pricing Adjustment: The appeal concerned an assessment order passed by the assessing officer for the assessment year 2013-14 regarding Transfer pricing adjustment in Software development services. The assessee contested the Transfer pricing adjustment made and focused on the exclusion of two comparable companies, Larsen & Toubro Infotech Limited and Persistent Systems Ltd.

2. Exclusion of Comparable Companies: The assessee, engaged in providing Software development services to overseas affiliates, contested the inclusion of Larsen & Toubro Infotech Limited and Persistent Systems Ltd as comparable companies. The assessee argued that these companies should be excluded based on functional dissimilarity and turnover differences. The argument was supported by a decision from a coordinate bench in a similar case.

3. Judicial Precedents: The Tribunal referred to conflicting decisions by different coordinate benches regarding the comparability of Larsen & Toubro Infotech Limited and Persistent Systems Ltd. One bench excluded these companies based on functional dissimilarity, while another upheld their inclusion. The turnover disparity between the assessee and these companies was a crucial point of contention.

4. Turnover Filter Criteria: The debate centered on the application of a turnover filter as a criterion for excluding comparable companies. The assessee argued that turnover differences were significant and should lead to exclusion, citing a decision by another coordinate bench. The Tribunal acknowledged that turnover filter was a relevant criterion in determining comparability, as consistently held by other coordinate benches in similar cases.

5. Decision and Ruling: After considering the arguments and precedents, the Tribunal directed the assessing officer to exclude Larsen & Toubro Infotech Limited and Persistent Systems Ltd from the list of comparable companies based on turnover criteria. The appeal was partly allowed in favor of the assessee, emphasizing the importance of turnover filter in Transfer pricing analysis.

This detailed analysis of the judgment highlights the key issues, arguments presented, conflicting judicial precedents, and the ultimate decision of the Tribunal regarding the exclusion of comparable companies based on turnover filter in Transfer pricing assessment.