2020 (5) TMI 73 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of companies by application of RPT filter of 0% - HELD THAT - In ordinary circumstances when there is no difficulty of selecting the comparable companies the tolerance range of 15% of related party is considered to be proper. Only in extreme and exceptional circumstances when the comparable companies are not easily available or found then this tolerance range is relaxed up to 25%. Therefore in the case of the assessee where neither the TPO nor the assessee has made out a case of exceptional difficulty in searching the comparable companies then the normal tolerance range of 15% shall be taken as proper. Hence we set aside the order of the CIT(A) qua this issue of related party transaction filter and also modify the order of the TPO on this issue and hold that 15% tolerance range of related party is reasonable and proper in the case of the assessee. By applying this filter the companies which are having the related party transaction upto 15% will be restored to the set of comparable however, subject to our finding on the functional comparability of those companies. High profit margin was taken by the CIT(A) for exclusion of certain companies namely Exensys Solutions Ltd., and Thirdware Solutions Ltd. - This issue is now settled that high profit or loss cannot be a criteria for inclusion or exclusion of companies in the set of comparables - if the high profit or loss is by the reason of some extraordinary circumstances then those extraordinary circumstances which has led to the high profit or loss can be considered as a criteria for inclusion or exclusion of the companies in the list of comparables. Therefore, the mere high profit margin or loss cannot be considered as a parameter or criteria for selection of comparable companies as held by the special bench of this Tribunal in case of Maersk Global Centres (India) (P.) Ltd. Vs ACIT 2014 (3) TMI 891 - ITAT MUMBAI Functional dissimilarity - Referring to software development services provider companies like assessee companies functionally dissimilar with that of assessee need to be deselected from final list. Eligibility of deduction u/s. 10A in respect of the amount of provision for management charges payable to its AE - HELD THAT - The assessee has stated that this amount was allowed as business expenditure in the earlier year and therefore the business profit of the assessee for the purpose of deduction u/s. 10A was reduced by this amount in the earlier year. During the year under consideration the assessee has reversed the provision which has resulted increase in the business income of the assessee and therefore it is eligible for deduction u/s.10A. Since this fact of provision being allowed as business expenditure in the earlier year has not been verified by the authorities below and therefore in the absence of any finding on this issue by the authorities below it is not possible to give a concluding finding at this stage. Thus in the facts and circumstances of the case we set aside this issue to the record of the AO for verification of the relevant facts and then decide the claim of the assessee as per law.

Issues Involved
1. Exclusion of comparable companies by the CIT(A) based on related party transaction (RPT) filter.
2. Exclusion of companies due to high turnover and abnormal profits.
3. Determination of Arm's Length Price (ALP) and associated adjustments.
4. Eligibility of deduction under section 10A for reversed provision of management charges.

Detailed Analysis

1. Exclusion of Comparable Companies by the CIT(A) Based on RPT Filter
The CIT(A) excluded 12 out of the 17 comparable companies chosen by the Transfer Pricing Officer (TPO) by applying a 0% RPT filter. The Tribunal found that a 0% RPT filter is impractical and instead, a tolerance range of 15% is reasonable. The Tribunal directed that companies with RPT up to 15% should be included in the set of comparables, subject to functional comparability.

2. Exclusion of Companies Due to High Turnover and Abnormal Profits
The Tribunal addressed the exclusion of companies like Exensys Solutions Ltd. and Thirdware Solutions Ltd. due to high-profit margins. It was established that high profit or loss alone cannot be a criterion for exclusion unless it results from extraordinary circumstances. The Tribunal cited the Special Bench decision in Maersk Global Centres (India) (P.) Ltd. vs ACIT, which held that extraordinary circumstances leading to high profit or loss could justify exclusion.

3. Determination of Arm's Length Price (ALP) and Associated Adjustments
The TPO had determined the ALP by comparing the assessee's profit margins with those of selected comparables, leading to an addition of ?1,52,11,661. The CIT(A) had excluded several comparables, reducing the addition to ?27,89,013. The Tribunal upheld the CIT(A)'s decision to exclude certain companies based on functional dissimilarity and extraordinary events, directing the TPO to recompute the ALP with the revised set of comparables.

4. Eligibility of Deduction Under Section 10A for Reversed Provision of Management Charges
The assessee claimed a deduction under section 10A for the reversal of a provision for management charges. The AO disallowed the claim, stating that the reversal did not constitute income derived from the export of computer software. The Tribunal remanded the issue to the AO for verification, directing that if the provision was allowed as a business expenditure in earlier years, its reversal should enhance the business income eligible for deduction under section 10A.

Conclusion
The Tribunal provided a detailed examination of the issues, emphasizing the need for practical application of RPT filters, the irrelevance of high profits as a sole exclusion criterion, and the importance of verifying facts before denying deductions. The Tribunal's directions ensure a balanced approach to determining ALP and eligibility for deductions, adhering to established legal principles and precedents.

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