2019 (6) TMI 1673 - AT - Income Tax

Tribunal excludes high-turnover firms from comparables list; turnover key in Transfer Pricing analysis.

Pearson India Support Services Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle 3 (1) (2), Bangalore.

The Tribunal directed the AO to re-compute the Arm's Length Price (ALP) by excluding companies with turnovers above Rs. 200 crores from the list of ... TP Adjustment - Comparable selection - application of turnover filter - HELD THAT:- We find that various aspects of application of turnover filter, was considered by this Tribunal in the case of Autodesk India Pvt. Ltd [2018 (7) TMI 1862 - ITAT BANGALORE] and it was held that turnover is a relevant criteria for deciding comparability of companies and that a company with huge turnover cannot be compared with a company with small turnover. The turnover criteria was based on classification of companies with turnover upto Rs. 200 Crores falling within one category and companies with turnover of Rs. 200 crores to Rs. 500 crores falling in another category and so on. We hold that it would be appropriate while choosing comparable companies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than Rs. 1 Crore and in such circumstances, there is no reason as to why he should not apply the higher turnover limit. We, therefore, direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. No other arguments were advanced on the determination of ALP. Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Selection of comparable companies based on turnover filter.Issue-Wise Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The core issue in the appeal was the determination of the Arm's Length Price (ALP) for the international transaction involving the rendering of Software Development services (SWD services) by the Assessee to its Associated Enterprise (AE). The Assessee received Rs. 15,70,68,882/- for these services and supported its claim that the price was at Arm's Length by filing a Transfer Pricing (TP) study. The Assessee adopted the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining ALP, with the profit level indicator (PLI) being the operating profit to operating cost (OP/OC). The Assessee's OP/OC was 15%, and it selected 42 comparable companies in its TP study, claiming the average profit margin was within the permitted range.The Assessing Officer (AO) referred the determination of ALP to the Transfer Pricing Officer (TPO), who accepted only two of the 42 comparables and selected 6 additional companies, arriving at an average profit margin of 29.40% for these 8 companies. Consequently, the TPO computed an addition of Rs. 1,96,67,755 to the Assessee's income based on this margin. The Assessee objected to this addition before the Dispute Resolution Panel (DRP), which resulted in a revised addition of Rs. 1,51,19,586 after DRP's directions.2. Selection of Comparable Companies Based on Turnover Filter:The Assessee contested the inclusion of six companies (Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., and Thirdware Solutions Limited) by the TPO, arguing that these companies had turnovers exceeding Rs. 200 crores, whereas the Assessee's turnover was only Rs. 15.71 crores. The Assessee contended that the TPO should have excluded these high-turnover companies just as it excluded companies with turnovers less than Rs. 1 crore.The Tribunal examined various precedents and concluded that turnover is a relevant criterion for deciding comparability. It noted that a company with a huge turnover cannot be compared with a company with a small turnover. This view was supported by decisions in cases like Autodesk India Pvt. Ltd. vs. DCIT and Genisys Integrating Systems (India) Pvt. Ltd. vs. DCIT, where it was held that companies with turnovers significantly higher than the Assessee's should be excluded from the list of comparables.The Tribunal also referenced the Hon'ble Bombay High Court's decision in CIT vs. Pentair Water India Pvt. Ltd., which supported the exclusion of companies with high turnovers from the list of comparables. The Tribunal emphasized that when the TPO applied a lower turnover filter, there was no reason not to apply a higher turnover limit.Conclusion:The Tribunal directed the AO to re-compute the ALP by excluding the six companies with turnovers above Rs. 200 crores from the list of comparables. This decision aligns with the principle that turnover is a significant factor in determining comparability for Transfer Pricing analysis. The appeal by the Assessee was allowed, and the judgment was pronounced in open court on June 28, 2019.