ITAT excludes multiple companies from transfer pricing comparables due to turnover disparities and functional differences

The ITAT Bangalore ruled on transfer pricing adjustments regarding comparable company selection and notional interest on outstanding receivables. The tribunal directed the AO/TPO to exclude several companies from comparables list based on turnover disparities, functional differences, and diversified business activities. Companies like Tata Elxi Ltd, Persistent Systems Ltd, and Infobeans Technologies Ltd were excluded due to functionality mismatches or high turnover differences. Several matters including Cybage Software Ltd and Sagar Soft India Ltd were remitted back for fresh consideration. The tribunal also set aside the issue of notional interest on outstanding receivables to AO/TPO for determination whether such receivables constitute international transactions, following precedents from MetricStream Infotech and Kusum Healthcare cases.

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Issues Involved:
1. Determination of Arm's Length Price & Adjustment
2. Natural Justice

Detailed Analysis:

1. Determination of Arm's Length Price & Adjustment:

Ground 1(iii): The appellant contested the inclusion of high-turnover companies like L&T Infotech Ltd., Infosys Ltd., and Tata Elxsi Ltd. as comparables, arguing that their turnovers were significantly higher than the appellant's. The Tribunal agreed, citing precedents where high-turnover companies were excluded from comparables due to their disproportionate size. The Tribunal directed the AO to exclude these companies.

Ground 1(vi): The appellant sought the exclusion of Tata Elxsi Ltd., Persistent Systems Ltd., Infobeans Technologies Ltd., Thirdware Solutions Ltd., and Cybage Software Ltd. based on functionality. Tata Elxsi Ltd. was already excluded due to the turnover filter. Persistent Systems Ltd. was excluded as it was engaged in product development services, which differed from the appellant's services. Infobeans Technologies Ltd. was excluded due to its diversified activities and lack of segmental details, as supported by various Tribunal decisions. Thirdware Solutions Ltd. and Cybage Software Ltd. were remitted to the AO/TPO for fresh consideration based on specific issues raised by the appellant.

Ground 1(vii): This ground was deemed infructuous as the comparable Tata Elxsi Ltd. was already excluded.

Ground 1(viii): The appellant argued that Sagar Soft India Ltd. should not have been rejected for persistent losses as it reported profits in the relevant financial year. The Tribunal remitted this issue to the AO/TPO for fresh consideration.

Ground 1(ix): The appellant sought the inclusion of 8k Miles Software Solutions Ltd., arguing that the TPO should have obtained segmental data. The Tribunal remitted this issue to the AO/TPO to procure relevant data and decide afresh.

Ground 1(x): The appellant contended that the TPO did not follow the DRP's direction to verify the export turnover criteria for ASM Technologies Ltd. The Tribunal remitted this issue to the TPO for reconsideration as per the DRP's directions.

Ground 1(xi): The appellant's general objections regarding functionality, diversified activity, and presence of intangibles for certain comparables were noted but did not require specific adjudication.

Grounds 1(xii), (xiii), (xiv), and (xv): These grounds related to adjustments for interest on alleged delays in receivables. The Tribunal referred to the decision in MetricStream Infotech (India) Pvt. Ltd., which emphasized the need for a detailed inquiry into the impact of receivables on working capital. The Tribunal remitted these issues to the AO/TPO for fresh consideration, ensuring conformity with the relevant judicial precedents.

2. Natural Justice:

Ground 2(i): The appellant argued that the TPO and DRP did not consider all submissions and failed to justify the rejection of certain comparables. The Tribunal's detailed analysis and remittances for fresh consideration addressed these concerns.

Ground 2(ii): The appellant claimed that information collected under section 133(6) was not furnished, violating principles of natural justice. The Tribunal's directions for fresh consideration and obtaining relevant data aimed to rectify this procedural lapse.

Ground 2(iii): The appellant contended that the TPO's selection process was arbitrary. The Tribunal's directions for re-examination and adherence to judicial precedents ensured a fairer process.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remitted to the AO/TPO for fresh consideration in line with the Tribunal's detailed directions and relevant judicial precedents. The Tribunal emphasized the importance of functional comparability, appropriate turnover filters, and adherence to principles of natural justice.

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