ITAT upholds exclusion of transfer pricing comparables for functional differences and confirms Section 10A deduction for Unit II

The ITAT Bangalore upheld exclusion of multiple comparables for transfer pricing analysis due to functional dissimilarity, extraordinary events, size differences, and high turnover ratios. Companies excluded included Bodhtree Consulting Ltd., Exensys Software Solution Ltd., Syassaris Software P. Ltd., Thirdware Solutions Ltd., Tata Elxsi Ltd., and several others with turnover exceeding 10 times the assessee's turnover. The Tribunal remanded certain comparable selection issues to the TPO for re-examination with proper RPT filter application. Regarding Section 10A deduction for Unit II, the Tribunal confirmed the CIT(A)'s decision allowing the deduction, following previous Tribunal orders upheld by Karnataka HC.

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Issues Involved:
1. Exclusion of certain companies from the list of comparables.
2. Inclusion of certain companies in the list of comparables.
3. Rejection of diminishing revenue filter by CIT(A).
4. Rejection of employee cost filter by CIT(A).
5. Deduction under section 10A for Unit-II.

Detailed Analysis:

1. Exclusion of Certain Companies from the List of Comparables:
The revenue challenged the exclusion of several companies from the list of comparables by the CIT(A). The Tribunal examined each company individually:

- Bodhtree Consulting Ltd.: The Tribunal upheld the exclusion due to functional differences and erratic margins, as previously decided in similar cases.

- Exensys Software Solutions Ltd.: The Tribunal confirmed the exclusion due to an extraordinary event of amalgamation and lack of segmental results, following previous decisions.

- Sankhya Infotech Ltd.: The Tribunal upheld the exclusion due to involvement in both product development and training services, with no segmental information available, aligning with earlier rulings.

- Thirdware Solutions Ltd.: The Tribunal excluded this company, noting its involvement in product development and sales of software licenses, which made it functionally different from the assessee.

- Geometric Software Solutions Co. Ltd.: The Tribunal remanded the issue to the TPO for verification of related party transactions (RPT) filter applicability.

- Tata Elxsi Ltd.: The Tribunal upheld the exclusion due to functional differences, following the decision in Kodiak Network India Ltd.

2. Inclusion of Certain Companies in the List of Comparables:
The revenue and the assessee contested the inclusion of certain companies:

- iGate Global Solutions Ltd., Flextronics Software Systems Ltd., L&T Infotech Ltd., Satyam Computer Services Ltd., Infosys Technologies Ltd.: The Tribunal upheld their exclusion due to their turnover being more than ten times that of the assessee, aligning with previous decisions.

- Four Soft Ltd.: The Tribunal remanded the issue to the TPO for verification of RPT filter applicability.

- VJIL Consulting Ltd.: The Tribunal remanded the issue to the TPO to reconsider its inclusion in light of new data and previous Tribunal decisions.

- Melstar Information Technology Ltd.: The Tribunal remanded the issue to the TPO for re-examination of its inclusion based on the annual report and other details, following the decision in Novell Software Development (India) Pvt. Ltd.

3. Rejection of Diminishing Revenue Filter by CIT(A):
The Tribunal did not specifically address this issue in detail, indicating that the CIT(A)'s rejection of the diminishing revenue filter was not overturned.

4. Rejection of Employee Cost Filter by CIT(A):
Similarly, the Tribunal did not provide a detailed discussion on this issue, implying that the CIT(A)'s decision to reject the employee cost filter stood.

5. Deduction Under Section 10A for Unit-II:
The revenue challenged the CIT(A)'s decision to allow deduction under section 10A for Unit-II. The Tribunal noted that this issue had been previously decided in favor of the assessee by the Tribunal and upheld by the Karnataka High Court. Consequently, the Tribunal confirmed the CIT(A)'s order allowing the deduction.

Conclusion:
The Tribunal partly allowed the appeal of the revenue and the cross-objection by the assessee for statistical purposes, remanding certain issues back to the TPO for re-examination and verification. The Tribunal upheld several exclusions and inclusions of comparables based on prior decisions and functional differences, and confirmed the CIT(A)'s decision on the section 10A deduction for Unit-II.

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