2022 (12) TMI 532 - AT - Income Tax

TP Adjustment - determination of Arms Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE - Comparable selection - turnover filter - HELD THAT - We hold that the 7 companies listed whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. TPO is directed to compute the ALP of the international transaction of rendering SWD services by the Assessee to its AE as per the directions contained in this order after affording opportunity of being heard to the Assessee.

Summary

Issues Involved
1. Determination of Arm's Length Price (ALP) for the provision of Software Development Services (SWD services).
2. Application of turnover filter for selecting comparable companies.

Detailed Analysis

Determination of Arm's Length Price (ALP)
The Assessee, engaged in providing Software Development Services to its wholly owned holding company, filed a Transfer Pricing Study (TP Study) adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee's OP/OC was 16.45%. The Transfer Pricing Officer (TPO) accepted TNMM and used the same PLI but identified 20 comparable companies, resulting in an average arithmetic mean of profit margins higher than the Assessee's. The TPO computed an adjustment to the ALP, adding Rs.3,63,29,138/- to the Assessee's total income.

Application of Turnover Filter
The Assessee objected to the inclusion of companies with turnovers exceeding INR 200 crores, arguing that such high turnover companies should be excluded just as companies with turnovers less than INR 1 crore were excluded. The Dispute Resolution Panel (DRP) upheld the TPO's inclusion of high turnover companies, relying on the Delhi High Court decision in Chryscapital Investment Advisors India Pvt. Ltd Vs. DCIT, which held that high turnover alone does not justify exclusion if the company is otherwise functionally comparable.

The Tribunal, however, referenced multiple ITAT Bangalore Bench decisions favoring the Assessee's position, including Dell International Services India (P) Ltd. Vs. DCIT and Autodesk India Pvt.Ltd. Vs. DCIT, which held that high turnover is a valid criterion for exclusion. The Tribunal emphasized that the principle of comparability adjustments requires excluding companies whose differences materially affect the net profit margin.

Conclusion
The Tribunal concluded that the seven companies listed by the Assessee with turnovers exceeding INR 200 crores should be excluded from the list of comparables. The TPO was directed to recompute the ALP of the international transaction of rendering SWD services by the Assessee to its AE, adhering to the Tribunal's directions and providing an opportunity for the Assessee to be heard.

Result
The appeal of the Assessee was partly allowed, with the Tribunal directing the exclusion of high turnover companies from the list of comparables and a recomputation of the ALP.