Tribunal excludes comparables, directs TPO to recalculate margins. Assessee's appeal allowed.

The Tribunal allowed the appeal of the assessee, directing the TPO to exclude seven comparables identified as functionally different or affected by exceptional circumstances and to re-calculate the arm's length margin. The Tribunal found merit in the assessee's objections regarding the selection of comparables and upheld the exclusion of certain companies. Other issues raised by the assessee, such as deferred revenue expenses and risk allowance claim, were considered academic due to the exclusion of the comparables. The appeal was allowed, and the order was pronounced on 28th February 2014.

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Issues Involved:
1. Use of additional filters in selection of comparables.
2. Selection of comparables by TPO/rejection of comparables suggested by the company.
3. Exclusion of deferred revenue expenses.
4. Risk allowance claim.
5. Variation of 5% in determining the Arms Length Price (ALP).

Detailed Analysis:

1. Use of Additional Filters in Selection of Comparables:
The assessee objected to the additional filters used by the Transfer Pricing Officer (TPO) in the selection of comparables. The TPO had analyzed various issues in detail and identified 17 comparables. After adjustments, the arithmetic mean of the Profit Level Indicator (PLI) was arrived at 24.26%. The CIT(A) deleted one company from the list, reducing the comparables to 16. The Tribunal found merit in the assessee's objections and directed the exclusion of certain comparables that did not meet the functional similarity criteria.

2. Selection of Comparables by TPO/Rejection of Comparables Suggested by the Company:
The assessee raised objections to the selection of seven comparables by the TPO and the rejection of two comparables suggested by the assessee. The Tribunal analyzed the objections and found that several comparables selected by the TPO were functionally different or had exceptional circumstances affecting their profitability. For instance:
- Bodhtree Consulting Ltd. was rejected due to related party transactions and functional differences.
- Exensys Software Solutions Ltd. was excluded due to an amalgamation that significantly impacted its financial results.
- Infosys Technologies Ltd. was excluded due to its diversified activities and significant brand value.
- Sankhya Infotech Ltd. and Thirdware Solutions Ltd. were also excluded due to functional differences and involvement in software products.

The Tribunal directed the TPO to exclude these comparables and re-work the arm's length margin accordingly.

3. Exclusion of Deferred Revenue Expenses:
The assessee contended that the TPO erroneously excluded deferred revenue expenditure while computing the net margin of certain comparables. The Tribunal acknowledged this issue but deemed it academic in nature due to the exclusion of the seven comparables, which already brought the assessee's PLI within the arm's length range.

4. Risk Allowance Claim:
The assessee claimed a risk allowance adjustment. However, this issue was also rendered academic due to the exclusion of the seven comparables, which resolved the primary dispute regarding the arm's length margin.

5. Variation of 5% in Determining the Arms Length Price (ALP):
The assessee raised a ground regarding the variation of 5% in determining the ALP. The Tribunal did not specifically address this issue, as the exclusion of the seven comparables resolved the primary dispute, making this ground academic.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the TPO to exclude the seven comparables identified as functionally different or affected by exceptional circumstances and to re-work the arm's length margin accordingly. The other grounds raised by the assessee, including the treatment of deferred revenue expenditure and risk adjustment, were deemed academic and not adjudicated. The appeal was allowed, and the order was pronounced in open court on 28th February 2014.

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