2023 (3) TMI 459 - AT - Income Tax

TP Adjustment - Comparable selection - DR submitted that the multiple of 10 times of the turnover should be adopted while adopting the turnover filter - HELD THAT - We hold that the DRP was justified in its directions to include only those companies having turnover of Rs.200 crore to Rs.2000 crore as a comparable for making the TP study in the assessee s case. It is ordered accordingly. Our order will have impact only on non-US AE s transactions since the international transaction of the assessee with its US based AE had already been settled under the MAP Resolution. It is ordered accordingly.

Issues Involved:
1. Legality of the Dispute Resolution Panel's (DRP) directions.
2. Applicability of size and turnover as deciding factors for treating a company as a comparable.
3. Exclusion of uncontrolled comparables with turnover more than Rs.2000 crores.
4. Adoption of a multiple of 10 times the turnover as a turnover filter.

Detailed Analysis:

1. Legality of the Dispute Resolution Panel's (DRP) Directions:
The Revenue challenged the DRP's directions, arguing they were opposed to law and facts. The Tribunal noted that the DRP had followed established precedents and provided a reasonable basis for its directions. The DRP had considered the turnover filter and excluded companies not falling within the Rs.200 crore to Rs.2000 crore range, aligning with the Tribunal's earlier rulings. Consequently, the Tribunal found no merit in the Revenue's contention and upheld the DRP's directions.

2. Applicability of Size and Turnover for Comparability:
The DRP's decision to use size and turnover as criteria for comparability was scrutinized. The Tribunal referenced the Dun & Bradstreet Classification of Software Industry, which categorizes companies based on turnover: small (less than Rs.200 crores), medium (Rs.200 crores to Rs.2000 crores), and large (more than Rs.2000 crores). The Tribunal affirmed that the assessee, with a turnover of Rs.332 crores, fell within the medium size category. Therefore, it was appropriate to exclude companies outside the Rs.200 crore to Rs.2000 crore range. This approach was consistent with previous Tribunal decisions in cases like Genisys Integrating Systems and Trilogy E-Business Software India.

3. Exclusion of Uncontrolled Comparables with Turnover More than Rs.2000 Crores:
The Revenue argued against excluding comparables with turnover exceeding Rs.2000 crores. However, the Tribunal upheld the DRP's decision, emphasizing the importance of a reasonable classification based on turnover. The Tribunal cited earlier cases, reinforcing that companies with significantly higher turnover could not be considered comparable due to their ability to negotiate better prices and attract more customers. The Tribunal found the DRP's exclusion of such companies justified.

4. Adoption of a Multiple of 10 Times the Turnover as a Turnover Filter:
The Revenue proposed adopting a multiple of 10 times the turnover as a turnover filter. The Tribunal rejected this plea, referencing its decision in Northern Operating Services Pvt. Ltd., where it was held that such a criterion was not appropriate. The Tribunal clarified that neither the Hon'ble High Court of Karnataka nor the Tribunal had established a rule that comparables must be within 10 times the turnover of the assessee. The Tribunal reiterated that the correct approach was to follow the turnover range of Rs.200 crore to Rs.2000 crore for medium-sized companies, as established in previous rulings.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the DRP's directions and affirming the use of the Rs.200 crore to Rs.2000 crore turnover filter for comparability. The Tribunal's order specifically impacted non-US AE transactions, as the assessee's transactions with US-based AEs had already been settled under the MAP Resolution. The Tribunal's decision was pronounced on December 16, 2022.

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