Tribunal Upholds Turnover Filter in Transfer Pricing Analysis, Affirms Reduction of Foreign Currency Expenditure

The Tribunal upheld the application of the turnover filter in Transfer Pricing analysis, confirming the exclusion of companies with turnover below Rs. 200 crores and above Rs. 2000 crores. Additionally, the Tribunal affirmed the reduction of expenditure incurred in foreign currency from export turnover and total turnover for the purpose of section 10A deduction, following the precedent set by the Hon'ble Karnataka High Court. The revenue's appeal was dismissed, and the Cross Objection by the assessee on functional comparability was deemed academic and dismissed.

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Issues Involved:
1. Reduction of expenditure incurred in foreign currency from export turnover and total turnover for deduction u/s. 10A.
2. Application of turnover filter for selecting comparable companies in Transfer Pricing analysis.

Issue-wise Detailed Analysis:

1. Reduction of Expenditure Incurred in Foreign Currency:
The revenue's appeal raised the issue of whether the expenditure incurred in foreign currency should be reduced from both the export turnover and the total turnover for the purpose of computing the deduction under section 10A of the Income-Tax Act, 1961. The revenue argued that the judgment of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd., which supported such reduction, should not be followed because an SLP had been filed in the Hon'ble Supreme Court. However, the Tribunal noted that since the Supreme Court had not stayed the operation of the High Court's judgment, all subordinate authorities were bound to follow it. Consequently, the Tribunal found no infirmity in the order of the Dispute Resolution Panel (DRP) and confirmed it.

2. Application of Turnover Filter in Transfer Pricing Analysis:
The assessee, a wholly owned subsidiary providing Information Technology enabled Services (ITeS), used the Transactional Net Margin Method (TNMM) to justify the arm's length price (ALP) of international transactions with its Associate Enterprise (AE). The Transfer Pricing Officer (TPO) accepted only one of the assessee's selected comparables and added nine new comparables, leading to an adjustment in the total income of the assessee.

The assessee objected to the TPO’s selection, arguing that companies with turnover less than Rs. 200 crores should be excluded from the comparability analysis, as the assessee's turnover was Rs. 328 crores. The DRP accepted this argument, following the decision of the Bangalore ITAT in the case of Genisys Integrating Systems, which categorized companies based on turnover into small, medium, and large.

The revenue challenged this decision, citing a Karnataka High Court judgment in the case of M/s. Acusis Software, which suggested that a comparable company’s turnover should not be less or more than 10 times the assessee’s turnover. However, the Tribunal clarified that the High Court did not lay down a strict 10 times turnover criterion and upheld the DRP’s decision to exclude companies with turnover less than Rs. 200 crores and more than Rs. 2000 crores, following the Genisys Integrating Systems case.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the DRP's application of the turnover filter and confirming the reduction of expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of section 10A deduction. The Cross Objection by the assessee regarding functional comparability became academic and was dismissed.

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