Tribunal Directs Arm's Length Price Calculation, Allows Partial Appeal

The Tribunal directed the Assessing Officer/TPO to work out the Arm's Length Price (ALP) in accordance with its directions. If the differential in the margin of the assessee and comparables exceeded the 5% bandwidth, an adjustment was required. The assessee's appeal was partly allowed.

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Issues Involved:
1. Transfer pricing adjustment of Rs.3,25,82,272/- made by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Transfer Pricing Adjustment:

Background:
The assessee, a subsidiary of Somero Enterprise Inc., Mauritius, engaged in software services, had international transactions with associated enterprises. The assessee adopted the Transaction Net Margin Method (TNMM) and selected 17 comparables, arriving at an operating margin of 11.81%. The TPO, however, selected 26 comparables and fixed the arithmetical mean at 25.07%, resulting in an adjustment of Rs.3,25,82,272/- under section 92CA of the Act.

Assessee's Contentions:
- The TPO's rejection of multiple years' data and reliance on Section 133(6) without cross-examination was erroneous.
- The TPO's application of the Related Party Transactions (RPT) filter (>25%) was against the Tribunal's reasonable limit of 15%.
- The TPO's failure to apply an upper limit to sales turnover and selection of functionally dissimilar comparables was against Tribunal rulings.
- The TPO's reduction of Rs.6,19,336/- from operating income was unwarranted as the assessee had already excluded this amount in its TP study.

Tribunal's Findings:

Turnover Filter:
The Tribunal emphasized the importance of the turnover filter, referencing the ICAI TP guidance note and previous Tribunal decisions. Companies with turnover exceeding Rs.200 crores were excluded, including:
- Flextronics Software Systems Limited
- iGate Global Solutions Limited
- Mindtree Limited
- Persistent Systems Limited
- Sasken Communication Technologies Limited
- Tata Elxsi Limited
- Wipro Limited
- Infosys Technologies Limited

Functional Dissimilarity:
The Tribunal rejected the following companies for functional dissimilarity, aligning with previous Tribunal decisions:
- Accel Transmatic Ltd. (Seg)
- Avani Cimcon Technologies Ltd
- Celestial Labs. Ltd
- KALS Information Systems Ltd (Seg)
- Lucid Software Limited

Related Party Transactions:
The Tribunal directed the exclusion of Ishir Infotech Limited due to RPT exceeding 15%, following the Tribunal's decision in 24/7 Customer Com (P.) Ltd.

Calculation of Operating Income and Net Margin:
The Tribunal directed the TPO to verify the assessee's claim that Rs.6,19,336/- was already excluded from the operating income. If verified, no further reduction was warranted, potentially adjusting the net margin to 12.2%.

Conclusion:
The Tribunal directed the Assessing Officer/TPO to work out the ALP in accordance with the Tribunal's directions. If the differential in the margin of the assessee and comparables exceeded the 5% bandwidth, an adjustment was required. The assessee's appeal was partly allowed.

Final Pronouncement:
The order was pronounced on the 22nd day of February, 2013 at Bangalore.

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