ITAT rejects 10 companies from comparable selection citing turnover filter and functional dissimilarity issues

ITAT Bangalore rejected 10 companies from comparable selection for failing turnover filter, noting high turnover companies cannot be compared with low turnover entities. Several companies were excluded for functional dissimilarity - Great Software Laboratory for rendering different services, Elveego Circuits for chip design versus basic software development, Acewin Agritech for being IT outsourcing company versus captive service provider, and Threesixty Logica for software testing versus contract services. Some companies were retained as functionally comparable. Multiple comparables were remanded to TPO for fresh FAR analysis verification. Regarding outstanding receivables, matter was remanded to TPO with directions to apply LIBOR + 300 basis points for receivables outside working capital adjustment.

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Issues Involved:
1. Incorrect appreciation of facts and interpretation of law by AO/TPO and DRP.
2. Natural justice in passing the order.
3. Transfer pricing adjustment relating to software development segment.
4. Transfer pricing adjustment relating to interest on notional receivables.
5. Inclusion and exclusion of specific comparables.
6. Consequential relief of interest under section 234B & 234C.

Summary:

Issue 1: Incorrect Appreciation of Facts and Interpretation of Law
The Tribunal addressed the general grounds raised by the assessee, which included the claim that the AO/TPO and DRP's order was based on an incorrect appreciation of facts and misinterpretation of law. The Tribunal noted that these grounds did not require specific adjudication.

Issue 2: Natural Justice
The Tribunal dismissed the grounds related to natural justice, specifically the need to provide a copy of the reference to the assessee and the claim that the AO erred in referring the case to the TPO without proper approval.

Issue 3: Transfer Pricing Adjustment Relating to Software Development Segment
The Tribunal considered the assessee's request to exclude certain comparables based on the turnover filter and functional dissimilarities. It directed the exclusion of comparables like Great Software Laboratory Pvt. Ltd., Elveego Circuits Pvt. Ltd., and Threesixty Logica Testing Services Pvt. Ltd. due to lack of segmental details and functional dissimilarities. However, it upheld the inclusion of Blackpepper Technologies Pvt. Ltd. and Aptus Software Labs Pvt. Ltd., finding them functionally comparable.

Issue 4: Transfer Pricing Adjustment Relating to Interest on Notional Receivables
The Tribunal addressed the issue of interest on outstanding receivables, considering it an international transaction as per the retrospective amendment to section 92B. It remitted the matter to the AO/TPO for fresh consideration, directing that if working capital adjustment subsumes the outstanding receivables, no separate adjustment is needed. For receivables outside the working capital adjustment, interest should be charged at LIBOR + 300 basis points.

Issue 5: Inclusion and Exclusion of Specific Comparables
The Tribunal remanded the inclusion of comparables like Kcube Consultancy Services Pvt. Ltd., Jindal Intellicom Ltd., Isummation Technologies Pvt. Ltd., Virinchi Ltd., Evoke Technologies Pvt. Ltd., CG-Vak Software & Exports Ltd., Sagarsoft Ltd., and Maveric Systems Ltd. to the AO/TPO for fresh verification based on FAR analysis.

Issue 6: Consequential Relief of Interest under Section 234B & 234C
The Tribunal noted that the ground related to consequential relief of interest under section 234B & 234C did not require adjudication.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific directions for the exclusion and inclusion of comparables and remanding certain issues for fresh consideration by the AO/TPO. The Tribunal emphasized the need for a detailed functional analysis and adherence to judicial precedents in transfer pricing matters.

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