2017 (12) TMI 124 - AT - Income Tax

TPA - selection of comparables - Held that - The assessee was engaged in the business of software development which requires highly skilled manpower, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues:
1. Exclusion of three companies by the DRP based on the Wages to sale ratio filter.

Analysis:
1. Sasken Communication Technologies Ltd.: The DRP excluded the company due to a Wages to sale ratio of 61.85%. The contention was made to exclude certain Employee costs from the calculation, but the Tribunal upheld the exclusion, stating that all costs related to revenue generation should be considered. The exclusion was upheld as the company failed to meet the filter criteria.

2. SQL Star International Ltd.: The DRP excluded this company based on a Wages to sale ratio calculation. The argument to exclude revenue from certain sources was rejected, as all Personnel expenses were considered at the entity level. As the company failed to meet the filter criteria, the exclusion was justified.

3. Space Computer and Systems Ltd.: The Tribunal verified that the company was not in its first year of operation but was excluded due to a Wages to sale ratio of 22.99%. The DRP only included basic salaries and wages in the Employee cost calculation, excluding other relevant expenses. Upon including all related expenses, the Wages to sale ratio met the filter criteria. The Tribunal overturned the exclusion and ordered the company to be included in the list of comparables.

In conclusion, the Tribunal set aside the order on the transfer pricing adjustment issue and remitted the matter for a fresh determination. The appeal was partly allowed for statistical purposes, with the assessee granted a reasonable opportunity to be heard in the fresh proceedings.