Appeal Partially Allowed with Specific Exclusions and Inclusions in Transfer Pricing Assessment

The appeal was partly allowed, with specific directions to exclude certain companies based on turnover and functional dissimilarity and to include others that were initially accepted but omitted in the final list. The Tribunal emphasized the importance of adhering to judicial precedents and ensuring accurate comparability in transfer pricing assessments.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Application of Turnover Filter
4. Functional Comparability
5. Inclusion/Exclusion of Specific Companies

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal concerns the assessee's challenge against the final assessment order dated 01.10.2019, which involves a transfer pricing adjustment for the assessment year 2015-2016. The assessee, a private limited company engaged in software development services to its Associate Enterprises (AEs), filed its return of income on 27th November 2015, declaring a total income of Rs.8,02,38,163. The case was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions. The TPO rejected the assessee's transfer pricing study and made an adjustment of Rs.4,18,31,197 in the software development segment.

2. Selection of Comparable Companies:
The assessee initially selected fourteen companies as comparable in its transfer pricing study using the Transactional Net Margin Method (TNMM). The TPO, however, rejected this study, conducted a fresh search, and selected thirteen comparables with a median operating margin of 31.69%, leading to the said adjustment. The assessee contested the inclusion of twelve companies and sought the inclusion of three others.

3. Application of Turnover Filter:
The assessee argued for the exclusion of nine companies based on the turnover filter, citing that companies with very high turnover cannot be compared to the assessee, whose turnover was only Rs.42.56 crore. The Tribunal referenced the judgment of the Hon’ble Bombay High Court in CIT v. Pentair Water Private Limited, which supports excluding companies with a turnover exceeding Rs.200 crore.

4. Functional Comparability:
The assessee sought the exclusion of Aspire Systems (India) Private Limited and Inteq Software Private Limited on the grounds of functional dissimilarity. Aspire Systems was involved in multifarious activities, including power generation, while Inteq Software provided a range of services beyond software development. The Tribunal restored these issues to the AO/TPO for verification.

5. Inclusion/Exclusion of Specific Companies:
The Tribunal directed the exclusion of Infosys Limited due to its significantly higher turnover. For the other eight companies, the Tribunal ordered the AO/TPO to verify their turnover and exclude them if it exceeded Rs.200 crore. The Tribunal also directed the exclusion of Infobeans Technologies Limited, following a precedent set in a similar case, Zynga Game Network India Private Limited, due to its diversified services.

Inclusion of Three Companies:
The Tribunal noted that the TPO had accepted Kals Information Systems Limited, E-Zest Solutions Limited, and CG-VAK Software & Exports Limited as comparables but omitted them in the final list. The Tribunal directed their inclusion in the final list of comparables.

Conclusion:
The appeal was partly allowed, with specific directions to exclude certain companies based on turnover and functional dissimilarity and to include others that were initially accepted but omitted in the final list. The Tribunal emphasized the importance of adhering to judicial precedents and ensuring accurate comparability in transfer pricing assessments.

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