9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2023 (4) TMI 674 - AT - Income TaxTP Adjustment - comparability of companies - application of turnover filter - HELD THAT - We hold that companies listed in original grounds of appeal whose turnover in the current year is admittedly more than Rs.200 Crores should be excluded from the list of comparable companies. Three sixty Logica Testing Services Pvt.Ltd. - As this company fails RPT filter and hence should not be regarded as a comparable company. Comparability for ITES Segment - Rejection of Companies not functionally similar to ITES segment as companies being in the field of KPO which cannot be equated or compared with a company rendering ITeS.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD services). 2. Determination of ALP for Information Technology Enabled Services (ITeS). 3. Application of turnover filter in the selection of comparable companies. 4. Exclusion of specific comparable companies based on Related Party Transaction (RPT) filter. 5. Re-computation of segmental margins. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD services): The Assessee, engaged in providing SWD services to its wholly owned holding company, filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) accepted TNMM as the Most Appropriate Method (MAM) and used the same PLI. The TPO identified 20 comparable companies and computed the average arithmetic mean of their profit margins. The TPO made an addition of Rs.22,47,06,883/- to the total income of the Assessee based on the ALP determination. 2. Determination of ALP for Information Technology Enabled Services (ITeS): Similar to the SWD services, the Assessee used TNMM and OP/OC for the ITeS segment. The TPO identified 17 comparable companies and computed the average arithmetic mean of their profit margins. The TPO made an addition of Rs.1,73,88,614/- to the total income of the Assessee based on the ALP determination for ITeS. 3. Application of turnover filter in the selection of comparable companies: The Assessee argued for the exclusion of companies with turnover exceeding Rs.200 crores, citing that such companies are not comparable due to significant differences in size and operational scale. The Tribunal referred to previous decisions, including those of the ITAT Bangalore Bench and Hon'ble Bombay High Court, which supported the application of a turnover filter. The Tribunal directed the exclusion of companies with turnover above Rs.200 crores from the list of comparables. 4. Exclusion of specific comparable companies based on Related Party Transaction (RPT) filter: The Assessee contested the inclusion of Three sixty Logica Testing Services Pvt. Ltd. due to its RPT exceeding the 25% threshold. The Tribunal agreed with the Assessee, noting that the combined RPT filter of both sub-expenses and revenue amounted to 28.57%, thus failing the RPT filter. The Tribunal directed the exclusion of this company from the list of comparables. 5. Re-computation of segmental margins: The Tribunal found that the TPO incorrectly allocated non-AE revenue and expenses between SWD AE and ITES AE segments, resulting in artificially inflated operating costs. The Tribunal accepted the Assessee's computation of segmental margins, which were 16.18% for SWD AE and 9.37% for ITES AE, as opposed to the TPO's recomputed margins of 11.32% for both segments. The Tribunal directed the TPO to recompute the ALP based on the correct segmental margins. Conclusion: The Tribunal partly allowed the appeal of the Assessee, directing the TPO to recompute the ALP for both SWD services and ITeS segments after excluding companies with high turnover and those failing the RPT filter. The Tribunal emphasized the importance of accurate comparability analysis and adherence to the provisions of Chapter X of the Income Tax Act. The final order was pronounced in the open court.
|
