Revenue appeal dismissed for low tax effect. Tribunal modifies comparables. Appellant's additional ground admitted for review.

The Revenue's appeal was dismissed due to low tax effect falling below the prescribed monetary limit. The appellant's benchmarking analysis was rejected, leading to the exclusion of certain comparables and inclusion of others. The Tribunal partially allowed the appellant's appeal, directing the inclusion of specific companies in the final set of comparables and the exclusion of others due to functional disparities. An additional ground raised by the appellant was admitted for review by the Transfer Pricing Officer.

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Issues Involved:
1. Dismissal of Revenue's appeal due to low tax effect.
2. Rejection of benchmarking analysis performed by the appellant.
3. Inappropriate approach adopted by the TPO.
4. Inclusion and exclusion of comparables in the final list to determine arm's length price.

Detailed Analysis:

1. Dismissal of Revenue's Appeal Due to Low Tax Effect:
The Department's appeal was dismissed on account of low tax effect as per CBDT Circular No. 17/2019 dated 08.08.2019. The tax effect involved in the appeal was Rs. 11,90,734/-, which is less than the prescribed monetary limit of Rs. 50 lacs for filing appeals before the Tribunal. Consequently, the cross objection filed by the assessee became infructuous and was also dismissed.

2. Rejection of Benchmarking Analysis Performed by the Appellant:
The appellant contended that the AO erred in confirming the rejection of the benchmarking analysis and independent comparable companies selected by the appellant in its Transfer Pricing documentation without providing any cogent reasons. The appellant argued that the fresh benchmarking analysis conducted by the TPO should be quashed as it did not adhere to the rules of natural justice and used data not available on the specified date.

3. Inappropriate Approach Adopted by the TPO:
The appellant argued that the TPO's approach was inappropriate as it did not consider the functions performed, assets employed, and risks assumed. The TPO also failed to share complete details of the benchmarking analysis and used data not available on the specified date. The appellant sought the exclusion of certain comparables that were functionally different.

4. Inclusion and Exclusion of Comparables:
The appellant sought the inclusion of PSI Data Systems Ltd., SIP Technologies & Exports Ltd., and TVS Infotech Ltd., which were excluded by the DRP for being loss-making companies. The Tribunal held that only persistent loss-making companies should be excluded, and since these companies were not persistent loss-makers, they should be included.

The appellant also sought the exclusion of KALS Information Systems Ltd. and E-Zest Solutions Ltd. on the grounds of functional disparity. The Tribunal found merit in the appellant's contentions, noting that KALS is a product development company and E-Zest is engaged in KPO and ITeS services, making them functionally different from the appellant's software development services.

Additional Ground of Appeal:
The appellant raised an additional ground seeking the exclusion of Acropetal Technologies Ltd., Cepha Imaging Pvt. Ltd., and Polaris Retail Infotech Ltd., which were selected as comparables in the Transfer Pricing study but later found to be functionally different. The Tribunal admitted the additional ground and restored it to the TPO for de novo examination.

Conclusion:
The appeal of the Revenue and the cross objection of the assessee were dismissed. The appeal of the assessee was partly allowed, with directions to include PSI Data Systems Ltd., SIP Technologies & Exports Ltd., and TVS Infotech Ltd. in the final set of comparables and to exclude KALS Information Systems Ltd. and E-Zest Solutions Ltd. from the list of comparables. The additional ground raised by the assessee was allowed for statistical purposes and restored to the TPO for fresh examination.

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