Tribunal Overturns Transfer Pricing Adjustment, Excludes Companies with High Turnovers

The Tribunal allowed the appellant's appeal challenging the Transfer Pricing Adjustment for the assessment year 2013-14. The Tribunal directed the Assessing Officer to exclude five companies with turnovers exceeding Rs.200 crores, in line with the turnover filter criteria established in a previous case. This exclusion led to the appellant's transactions with its Associated Enterprise being considered at arm's length, resulting in the successful appeal.

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Issues:
Transfer Pricing Adjustment - Selection of Comparable Companies - Exclusion of Companies Based on Turnover Criteria

Transfer Pricing Adjustment:
The appellant challenged the order related to the assessment year 2013-14, specifically focusing on Transfer Pricing Adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the Commissioner of Income Tax (CIT). The appellant, engaged in software services, adopted the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as its Profit Level Indicator (PLI). The appellant claimed that transactions with its Associated Enterprise (AE) were at arm's length, with an OP/OC of 17.98%. The TPO, however, selected comparables with an average PLI of 20.90%, proposing a Transfer Pricing Adjustment of Rs.114.75 lakhs. The TPO's working capital adjustment was added to the comparables' PLI instead of being deducted, resulting in the proposed adjustment. The Assessing Officer (AO) added this amount to the appellant's total income, leading to the appeal.

Selection of Comparable Companies:
The appellant sought exclusion of five companies based on various criteria, primarily focusing on turnover. The appellant's turnover for the year was Rs.32.12 crores, while the turnover of the selected companies exceeded Rs.200 crores. The appellant argued that these companies should be excluded as they did not fall within the Rs.1 crore to Rs.200 crores turnover bracket, deemed comparable by Dun and Bradstreet's analysis. The appellant's contention was supported by the argument that the turnover filter should be applied as per the decision in Genisys Integrating Systems (India) P Ltd vs. DCIT, where companies with turnovers between Rs.1 crore to Rs.200 crores were considered comparable. The Tribunal modified the CIT(A)'s order, directing the AO to exclude the five companies based on the turnover filter criteria, ultimately allowing the appeal.

Exclusion of Companies Based on Turnover Criteria:
The Tribunal relied on previous decisions and the turnover filter criteria established in Genisys Integrating Systems (India) P Ltd vs. DCIT to support the exclusion of the five comparable companies with turnovers exceeding Rs.200 crores. The Tribunal emphasized the importance of consistency in applying turnover filters for comparability analysis, aligning with the decision of a co-ordinate bench regarding turnover criteria. By following established legal precedents and maintaining consistency in applying turnover filters, the Tribunal upheld the appellant's plea for the exclusion of the specified companies, resulting in the appeal being allowed.

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