Tribunal directs inclusion of comparables, remits Compucom Software Ltd. for reconsideration

The Tribunal partially allowed the appeal by directing the inclusion of three loss-making companies in the list of comparables and remitting the issue of Compucom Software Ltd.'s inclusion back to the Assessing Officer for reconsideration. The Tribunal upheld the inclusion of V M F Soft Tech Ltd. in the list of comparables. The order was pronounced on January 18, 2016.

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Issues Involved:
1. Rejection of comparable companies due to losses.
2. Cherry-picking of high margin companies.
3. Inconsistent application of benchmarking criteria, specifically related party transactions (RPT) filter.

Detailed Analysis:

1. Rejection of Comparable Companies Due to Losses:
The primary issue raised by the assessee was the rejection of comparable companies by the Transfer Pricing Officer (TPO) on the grounds that these companies had incurred losses. The TPO rejected Astro Bio Systems Limited, Maars Software International Limited, and Megasoft Ltd. solely because they had losses in the year under consideration. The Tribunal referred to previous decisions, notably in the cases of M/s. Bobst India Private Limited and Goldman Sachs (India) Securities Private Limited, which held that a company making persistent losses for the past three years is not a good comparable. Since the rejected companies had losses only in one year, the Tribunal found the exclusion unjustified. The Tribunal directed the Assessing Officer to include these companies in the list of comparables and recalculate the weighted average mean of the comparables.

2. Cherry-Picking of High Margin Companies:
The assessee contended that the TPO engaged in cherry-picking by selecting high margin companies while rejecting low margin ones. Specifically, the TPO retained V M F Soft Tech Ltd., which had an abnormally high profit margin of 35.70%, while excluding loss-making companies. The Tribunal noted that if loss-making companies are excluded, then super-profit companies should also be excluded, as held in the case of Bindview India Pvt. Ltd. However, since the Tribunal directed the inclusion of loss-making companies, it allowed the retention of V M F Soft Tech Ltd. in the list of comparables, thereby rejecting this ground of appeal.

3. Inconsistent Application of Benchmarking Criteria:
The TPO applied a Related Party Transactions (RPT) filter of 25% to reject companies with substantial related party transactions. The assessee argued that Compucom Software Ltd. should be excluded from the list of comparables because its RPT exceeded 25%. The Tribunal found that the assessee had provided extracts of the annual report showing RPTs above 25%, and similar exclusions were made in the assessee's own cases for subsequent assessment years. The Tribunal criticized the TPO's incorrect approach in calculating RPTs and directed the Assessing Officer to re-examine this issue in light of previous Tribunal decisions.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes. It directed the inclusion of the three loss-making companies in the list of comparables and remitted the issue of Compucom Software Ltd.'s inclusion back to the Assessing Officer for reconsideration. The Tribunal upheld the inclusion of V M F Soft Tech Ltd. in the list of comparables. The order was pronounced on January 18, 2016.

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