2021 (2) TMI 138 - HC - Income Tax

TP Adjustment - Comparable selection - Whether tribunal is right in law in excluding certain comparable-companies on the ground of functional dissimilarity even when the comparable-companies satisfied all the qualitative and quantitative tests applied by Transfer Pricing Officer? - HELD THAT - We find sufficient force in the submission made by the assessee that the first substantial question of law framed is vague inasmuch as particulars of the companies whose exclusion was being challenged has not been mentioned in the aforesaid substantial question of law. From perusal of the order passed by the tribunal, it is evident that the tribunal has placed reliance on in the case of Thirdware Solutions Ltd., which pertain to the same Assessment Year and thus, the tribunal has followed its own order in the same Assessment Year. From perusal of the order passed by the tribunal and in particular from para 11.1 to 11.8, it is evident that the tribunal has recorded the findings for exclusion of the companies pertaining to ITE services segment by assigning cogent reasons. Similarly, in paragraphs 12 and 13 of the order passed by the tribunal, the tribunal has excluded the companies of SWD services segment by assigning valid and cogent reasons. The revenue has not assailed the reasons assigned by the tribunal to be perverse no any material has been brought on record to indicate the perversity recorded by the tribunal. The aforesaid question is a question of fact and this court cannot interfere with the same in the absence of perversity. Therefore, the first substantial question of law is answered against the revenue and in favour of the assessee. Excluding certain comparable companies on the ground of RPT filter - Tribunal did not apply the Related Party Transaction filter and in fact, has rejected the same - Therefore, the second and third substantial questions of law in fact, do not arise for consideration in the fact situation of the case. Therefore, it is not necessary for us to answer the same.

Issues:
1. Exclusion of comparable companies based on functional dissimilarity.
2. Exclusion of comparable companies based on RPT filter.
3. Exclusion of comparable companies based on turnover filter.

Issue 1: Exclusion of Comparable Companies Based on Functional Dissimilarity
The case involved an appeal under Section 260A of the Income Tax Act, 1961 regarding the Assessment Year 2007-08. The assessee, engaged in software development services and IT-enabled services, filed a return of income which led to a transfer pricing adjustment by the Assessing Authority. The tribunal directed the Transfer Pricing Officer to exclude certain comparables from the list, which the revenue challenged. The revenue contended that the tribunal's findings were perverse as it did not consider the material brought on record by the Transfer Pricing Officer. The revenue argued that turnover should not impact margins in the service sector, and comparables should not be excluded based solely on turnover differences. The revenue also emphasized the need for an inquiry under Rule 10B(3) to eliminate material differences between entities for comparability. However, the court found that the tribunal's exclusion of certain comparables was based on valid and cogent reasons, and since the revenue did not demonstrate any perversity in the tribunal's findings, the court could not interfere with the factual determination.

Issue 2: Exclusion of Comparable Companies Based on RPT Filter
The tribunal did not apply the Related Party Transaction (RPT) filter and rejected it in its order. Therefore, the substantial questions of law related to the RPT filter did not arise for consideration in the case. The court noted that the tribunal's decision not to apply the RPT filter rendered the specific issues moot, and hence, there was no need to address them further.

Issue 3: Exclusion of Comparable Companies Based on Turnover Filter
The court found that turnover could be a relevant criterion for determining comparability of companies, especially in the service sector. It was argued that a company with high turnover could not be compared to a captive service provider like the assessee. The court cited relevant case law to support this position. However, since the tribunal had already excluded certain comparables based on valid reasons, including turnover differences, the court did not delve deeper into this issue.

In conclusion, the court dismissed the appeal, finding no merit in the revenue's arguments. The judgment upheld the tribunal's decision to exclude certain comparables based on functional dissimilarity and clarified that the RPT filter was not applied. The court also acknowledged the relevance of turnover in determining comparability but did not delve further into this aspect due to the tribunal's valid reasons for exclusion.

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