Tribunal excludes high-turnover companies from comparable list in transfer pricing analysis, emphasizes turnover relevance.

The Tribunal directed the Tax Authorities to compute the Arms' Length Price (ALP) for Software Development Services, excluding companies with turnover exceeding Rs. 200 Crores from the list of comparable companies. The Assessee's appeal was partly allowed, emphasizing the relevance of turnover as a criterion for comparability in transfer pricing analysis.

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Issues Involved:
1. Determination of Arms' Length Price (ALP) for Software Development Services.
2. Selection of Comparable Companies for Transfer Pricing Analysis.
3. Application of Turnover Filter in Comparability Analysis.

Detailed Analysis:

1. Determination of Arms' Length Price (ALP) for Software Development Services:

The Assessee, engaged in providing Software Development Services (SWD services) to its wholly owned holding company, filed a Transfer Pricing Study (TP Study) to justify the price paid in the international transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM). The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for comparison. The OP/OC of the Assessee was 15.95%, with an operating income of Rs. 1,21,34,35,876 and an operating cost of Rs. 1,05,51,61,631. The Assessee identified 8 comparable companies with an average arithmetic mean of profit margin comparable to its own.

The Transfer Pricing Officer (TPO) accepted TNMM as the MAM and the same PLI but identified additional comparable companies, arriving at a set of 16 comparable companies with a reworked PLI of 27.37%. The TPO computed the addition to total income on account of adjustment to ALP as Rs. 12,05,05,346, which was added to the Assessee's total income.

2. Selection of Comparable Companies for Transfer Pricing Analysis:

The main grievance of the Assessee was the choice of comparable companies by the TPO, affirmed by the Disputes Resolution Panel (DRP). The Assessee argued for the exclusion of certain companies based on the turnover filter. Specifically, the Assessee sought the exclusion of companies with entirely different functional and risk profiles, such as Tata Elxsi Limited, Mindtree Limited, RS Software (India) Limited, Larsen & Toubro Infotech Limited, Infobeans Technologies Limited, Persistent Systems Limited, Nihilent Technologies Limited, Aspire Systems (India) Private Limited, Inteq Software Private Limited, and Infosys Limited.

The Assessee eventually narrowed its request to exclude only 7 companies. The DRP, relying on the decision of the Hon'ble Delhi High Court in Chryscapital Investment Advisors India Pvt. Ltd Vs. DCIT, held that high turnover does not automatically exclude a company from being a comparable if it is otherwise comparable on a functional analysis.

3. Application of Turnover Filter in Comparability Analysis:

The Tribunal examined the issue of applying the turnover filter and considered several decisions from the ITAT Bangalore Benches. It noted that the ITAT Bangalore Bench in Dell International Services India (P) Ltd. Vs. DCIT supported the exclusion of companies with high turnover compared to the Assessee. The Tribunal concluded that the Assessee's turnover was around Rs. 110 Crores, and thus, companies with turnover exceeding Rs. 200 Crores should be excluded from the list of comparable companies.

The Tribunal upheld the exclusion of companies with high turnover, following the principle that where two views are available, the view favorable to the Assessee should be adopted. It cited the decision of the Hon'ble Bombay High Court in CIT Vs. Pentair Water India Pvt. Ltd., which supported the relevance of turnover as a criterion for comparability.

Conclusion:

The Tribunal directed the TPO/AO to compute the ALP of the international transaction of rendering SWD services by the Assessee to its AE, excluding the companies with turnover exceeding Rs. 200 Crores from the list of comparable companies. The appeal by the Assessee was partly allowed.

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