Tribunal grants partial relief to assessee by excluding high-turnover comparables and correcting margins

The Tribunal partly allowed the appeal filed by the assessee, directing the exclusion of certain high-turnover comparables deemed not functionally similar and instructing the AO/TPO to adopt correct margins of the remaining comparables. The decision resulted in partial relief for the assessee, with the order pronounced on 28th September 2021.

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Issues Involved:
1. Total addition under Section 92CA(3) for software services to Associated Enterprise (AE).
2. Legality of reference to Transfer Pricing Officer (TPO) for determining arm's length price.
3. Disregard of benchmarking analysis and comparable companies selected by the assessee.
4. Errors in recomputing operating margin, applying filters, and selecting/rejecting comparable companies.

Issue-wise Detailed Analysis:

1. Total Addition Under Section 92CA(3):
The assessee challenged the addition of Rs. 2,21,22,670 made by the AO/TPO and confirmed by the DRP under Section 92CA(3) for software services provided to its AE. The TPO had rejected the comparability analysis carried out by the assessee and applied fresh filters, resulting in a final set of 13 comparables with a 35th percentile margin of 24.83%. The DRP excluded SQS India BFSI Ltd. from the list of comparables but retained the remaining ones. The Tribunal, relying on the decision in LSI India Research Development (P.) Ltd. v. DCIT, directed the exclusion of certain high-turnover comparables like Persistent Systems Ltd., L&T Infotech Ltd., Thirdware Solutions Ltd., Infosys Ltd., and others, as they did not satisfy the turnover filter and were functionally dissimilar.

2. Legality of Reference to TPO:
The assessee argued that the reference made by the AO to the TPO for determining the arm's length price was bad in law, and consequently, the transfer pricing order, DRP directions, and final assessment order should be quashed. However, the Tribunal did not specifically address this issue in detail, focusing instead on the comparability analysis and the correctness of the margins of the comparables.

3. Disregard of Benchmarking Analysis:
The assessee contended that the AO/TPO and DRP erred in disregarding the benchmarking analysis and comparable companies selected by the assessee based on contemporaneous data requirements in the transfer pricing study report. The Tribunal noted that the TPO had rejected the comparability analysis and applied fresh filters, leading to the selection of 13 comparables. However, the Tribunal found that certain comparables selected by the TPO did not meet the turnover filter and were functionally dissimilar, thereby directing their exclusion.

4. Errors in Recomputation and Selection of Comparables:
The assessee claimed that the AO/TPO and DRP made several errors, including recomputing the operating margin, applying modified and additional filters without cogent reasons, and incorrectly selecting/rejecting comparable companies. The Tribunal observed that the TPO had not applied an upper turnover limit and had included high-margin companies that were not functionally comparable. The Tribunal directed the AO/TPO to exclude these comparables and adopt the correct margins of the remaining comparables in accordance with the law.

Judgment Summary:
The Tribunal partly allowed the appeal filed by the assessee. It directed the exclusion of certain high-turnover comparables that were not functionally similar to the assessee, a captive service provider. The Tribunal also instructed the AO/TPO to adopt the correct margins of the comparables retained in the final list, ensuring compliance with the law. The grounds raised by the assessee were thus partly allowed, resulting in a partial relief for the assessee. The order was pronounced in the open court on 28th September 2021.

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