2022 (12) TMI 1258 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - We exclude the companies whose turnover is not within the range of Rs.200 crores to 2000 crores. Exclusion of companies as functionally dissimilar with that of assessee engaged in the provision of software development services to its Associated Enterprise AE RPT filter has to be applied adopting the threshold limit of 15%.

Issues Involved:
1. Addition to total income by Assessing Officer/Transfer Pricing Officer/Dispute Resolution Panel.
2. Rejection of transfer pricing documentation.
3. Computation of profit-level indicators.
4. Computation of Arm's Length Price.
5. Adoption of incorrect turnover filter.
6. Adoption of incorrect related party transactions filter.
7. Rejection of comparables.
8. Selection of incorrect comparables.
9. Directions of the Dispute Resolution Panel being non-speaking.

Issue-wise Detailed Analysis:

1. Addition to Total Income:
The learned authorities added Rs. 38,26,58,668 to the appellant's total income. This addition was based on the Transfer Pricing Officer's (TPO) adjustment of the Arm's Length Price (ALP) of the international transactions.

2. Rejection of Transfer Pricing Documentation:
The authorities rejected the appellant's transfer pricing documentation maintained under rule 10D of the Income-tax Rules, 1962, read with section 92D of the Income-tax Act, 1961. The Tribunal noted that the authorities should have considered the merit of comparables irrespective of their presence in the TPO's search database.

3. Computation of Profit-Level Indicators:
The authorities erred in their computation of the profit-level indicators of the comparables. The appellant's Profit Level Indicator (PLI) was computed at 10.92%, which was within the arm's length range of 7.93% to 11.43% with a median of 9.22%.

4. Computation of Arm's Length Price:
The authorities did not follow rule 10B(1)(e)(ii) of the Income-tax Rules, 1962, in computing the ALP. The TPO conducted an independent search and included 15 fresh comparables, computing the revised margin at 26.18%, leading to a TP adjustment of Rs. 38,26,58,668.

5. Adoption of Incorrect Turnover Filter:
The authorities adopted the wrong turnover filter. The Tribunal, referencing the decision in the case of Autodesk India Pvt. Ltd., upheld that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. The Tribunal excluded companies with turnover not within the range of Rs. 200 crores to Rs. 2000 crores.

6. Adoption of Incorrect Related Party Transactions Filter:
The authorities adopted the wrong related party transactions (RPT) filter. The Tribunal, following the decision in the case of ANSR Global Corporation (P.) Ltd., held that the RPT filter should be applied adopting a threshold limit of 15% when a good number of comparables are available. Persistent Systems Ltd. was excluded as its RPT percentage was 39.15%.

7. Rejection of Comparables:
The authorities erred in rejecting certain comparables. For instance, Cybage Software Pvt. Ltd. was excluded due to its abnormally high margin, and R Systems International Ltd. was excluded due to a different financial year.

8. Selection of Incorrect Comparables:
The authorities erred in selecting certain comparables. For example, Nihilent Ltd. was excluded as it was not functionally comparable, and Tata Elxsi Ltd. was excluded as it was not a pure software development company. The Tribunal remitted the issue of considering the comparability of Sasken Technologies Ltd. back to the TPO for fresh consideration.

9. Directions of the Dispute Resolution Panel:
The directions of the Dispute Resolution Panel (DRP) were considered non-speaking. The Tribunal upheld the exclusion of companies with high turnover and those not functionally comparable, directing the TPO to re-compute the ALP in accordance with the Tribunal's directions.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the TPO to re-compute the ALP by excluding certain comparables and applying the correct filters. The decision emphasized the importance of following judicial precedents and ensuring that comparables are functionally similar and within the appropriate turnover range.

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