2021 (7) TMI 828 - AT - Income Tax

TP Adjustment - application of turnover filter in choosing comparable companies - HELD THAT - As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT 2018 (7) TMI 1862 - ITAT BANGALORE . The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores. The five companies Larsen Tourbo Infotech Ltd, Persistent Systems Ltd.,Tech Mahindra Ltd, Mindtree Ltd and RS Software India Pvt. Ltd.should be excluded from the list of comparable companies. We hold and direct accordingly. The learned DR however pointed out that the Assessee did not raise this issue of turnover filter before AO and raised it before DRP in which the turnover limit of ₹ 1000 crores alone is mentioned. In our opinion, this will not be very material, as the turnover filter of ₹ 200 crores has been applied in several cases by this Tribunal. The Assessee cannot be denied the right to seek its exclusion before the Tribunal and in this regard the learned counsel for Assessee has rightly placed reliance on the decision in the case of DCIT v. Quark Systems (P.) Ltd. 2009 (10) TMI 591 - ITAT, CHANDIGARH for the proposition that the Assessee cannot be precluded from seeking exclusion of a company selected by it in its TP study, when the company is otherwise not comparable to the Assessee. We therefore direct exclusion of the aforesaid 5 companies from the list of comparable companies. Treating provision for bad and doubtful debts as part of non operating expense while computing operating margin of comparables - On this issue, which is raised for the first time, we do not find any grounds raised before the lower authorities and hence this ground does not arise out of the order of the AO and hence dismissed.

Summary

Issues:
Transfer Pricing - Determination of Arms' Length Price (ALP) for Software Development Services

Analysis:

Issue 1: Determination of Arms' Length Price (ALP)
The appeal concerns the determination of Arms' Length Price (ALP) for Software Development Services provided by the assessee to its associated enterprise (AE). The assessee filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) to justify the price paid in the international transaction as at ALP. The Transfer Pricing Officer (TPO) accepted TNMM as the Most Appropriate Method (MAM) and identified comparable companies for comparison. The TPO made adjustments based on the average arithmetic mean of profit margins of selected companies, resulting in an addition to the total income of the assessee. The Disputes Resolution Panel (DRP) provided directions, and the final assessment order was passed by the Assessing Officer (AO). The appeal before the Tribunal challenges the addition made to the total income based on the ALP determination.

Issue 2: Exclusion of Comparable Companies
The assessee sought the exclusion of five comparable companies chosen by the TPO based on turnover criteria. The Tribunal considered the turnover filter issue in light of previous decisions and upheld the exclusion of the five companies with turnovers significantly higher than that of the assessee. The Tribunal relied on judicial precedents and held that turnover is a relevant criterion for selecting comparable companies in transfer pricing cases. The Tribunal directed the exclusion of the five companies from the list of comparables, following the principles established in previous cases.

Issue 3: Treatment of Bad and Doubtful Debts
Another ground raised was the TPO's treatment of provision for bad and doubtful debts as part of non-operating expenses while computing the operating margin of comparables. However, as this issue was raised for the first time at the Tribunal without being raised before lower authorities, the Tribunal dismissed this ground as it did not arise from the AO's order. The Tribunal directed the AO/TPO to compute the ALP in accordance with the directions provided in the order after granting an opportunity of hearing to the assessee.

In conclusion, the appeal was partly allowed by the Tribunal, with directions given for the computation of ALP in line with the Tribunal's rulings on the issues discussed.