Tribunal directs modification of order, partially allowing both Assessee's and Revenue's appeals.

The Tribunal directed the AO/TPO to modify the order in accordance with the findings. Both the Assessee's appeal and the Revenue's appeal were partly allowed.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Application of Related Party Transaction (RPT) Filter
3. Functional Dissimilarity of Comparables
4. Standard Deduction under Section 92C(2)
5. Exclusion of Expenditure from Total Turnover

Detailed Analysis:

Transfer Pricing Adjustment:
The primary issue in transfer pricing was the adjustment made to the software services provided by the Assessee to its associated enterprise (AE). The Assessee earned a 15% margin on an operating income of Rs. 63.05 Crores. The Transfer Pricing Officer (TPO) rejected the Assessee’s Transfer Pricing (TP) study, which included nine companies, and instead selected 17 comparables with a mean margin of 26.59%. After adjustments, the final Arithmetic Mean was 23.74%, leading to a TP adjustment of Rs. 5,11,73,398/-. Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] excluded several comparables, resulting in an adjustment of Rs. 3,94,20,026/-. Both the Assessee and Revenue were aggrieved by this decision.

Application of Related Party Transaction (RPT) Filter:
The CIT(A) excluded 10 companies from the TPO’s list based on a zero percent RPT filter. However, the Revenue argued that the Co-ordinate Benches have accepted RPT filters up to 15% or 25%. The Assessee's Counsel admitted that the RPT filter and turnover filter issues should be reconsidered based on functional comparability. Consequently, the companies excluded by the CIT(A) on the RPT filter were reconsidered, and the Revenue's ground on this matter was allowed. The final list of comparables was adjusted accordingly.

Functional Dissimilarity of Comparables:
Several companies were excluded or retained based on functional dissimilarity:

- Excluded Companies:
- Satyam Computers Ltd.: Excluded due to non-reliability of financial data.
- Infosys Technologies Ltd. and Exensys Software Solutions Ltd.: Excluded due to functional dissimilarity and extraordinary events.
- Bodhtree Consulting Ltd.: Excluded due to RPT of more than 25% and functionality issues.
- Four Soft Ltd.: Excluded as it derived income from software licenses and AMCs.
- Geometric Software Solutions Company Ltd.: Excluded due to product development and lack of segmental profit data.
- Flextronics Software Systems Ltd.: Excluded due to functional dissimilarity and product development activities.

- Retained Companies:
- Lanco Global Systems Ltd.: Retained despite low profit margin as it did not meet criteria for exclusion.
- Sankhya Infotech Ltd., Thirdware Solution Ltd., and Tata Elxsi Ltd.: Excluded based on functional dissimilarity.
- Sasken Network Systems Ltd., R S Software (India) Ltd., Visualsoft Technologies Ltd., and Sasken Communication Technologies Ltd.: Retained as there were no objections and were selected by TPO.
- Igate Global Solutions Ltd. and L&T Infotech: Retained as they were within the acceptable turnover range.

Standard Deduction under Section 92C(2):
The Revenue contested the CIT(A)’s decision to grant a standard deduction of (+) or (-) 5% as per the pre-amended proviso to Section 92C(2). The Assessee argued that the amendments effective from 01-04-2009 do not apply to their case, as the assessment order was passed on 28-11-2008. The Tribunal upheld the CIT(A)’s decision, confirming that the Assessee is entitled to the standard deduction of 5%.

Exclusion of Expenditure from Total Turnover:
The CIT(A) directed the exclusion of certain expenditures from the total turnover, which were excluded from the export turnover by the AO. This decision was based on the principles laid down by the jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. The Tribunal upheld the CIT(A)’s decision, rejecting the Revenue’s grounds on this matter.

Conclusion:
The Tribunal directed the AO/TPO to modify the order in accordance with the findings. Both the Assessee’s appeal and the Revenue’s appeal were partly allowed. The judgment was pronounced in the open court on 18th March 2016.

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