Comparables with turnover over Rs.200 crore excluded; AO/TPO directed to re-evaluate and recompute ALP under Section 92C

ITAT Bangalore (AT) held that comparables with turnover exceeding Rs.200 crore must be excluded and directed the AO/TPO to remove several listed comparables as functionally non-comparable or not in the TPO search matrix. The Tribunal remitted contested inclusions of two comparables to the AO/TPO for fresh consideration in light of public information and the assessee's submissions, following precedent, and similarly remitted another comparable's inclusion for re-examination. The assessee is to be given a reasonable hearing and the AO/TPO must recompute the ALP accordingly.

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Issues Involved:
1. Selection of comparables for determining the Arm's Length Price (ALP).
2. Application of turnover filter.
3. Functional dissimilarity of selected comparables.
4. Inclusion of additional grounds regarding turnover filters.
5. Rejection of certain comparables by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Selection of Comparables for Determining the ALP:
The assessee chose the Transaction Net Margin Method (TNMM) to determine the ALP, using Operating Profit by Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The PLI of the assessee was 15%. The TPO accepted only three out of nine comparables selected by the assessee and introduced new comparables, resulting in a higher median PLI of 26.36%. Consequently, a TP adjustment of Rs. 6,76,79,662 was made.

2. Application of Turnover Filter:
The assessee argued that the TPO erred by not applying an upper turnover filter, which would exclude high turnover companies. The Tribunal referenced decisions such as Autodesk India (P) Ltd. v. DCIT and Razorpay Software Pvt. Ltd., which supported the application of both lower and upper turnover filters. The Tribunal agreed with the assessee, excluding companies with turnovers exceeding Rs. 200 crores, such as Infosys Ltd., Larsen & Toubro Infotech Ltd., and others.

3. Functional Dissimilarity of Selected Comparables:
The assessee contested the inclusion of companies like R S Software (India) Ltd., Inteq Software Pvt. Ltd., and Infobeans Technologies Ltd., arguing they were functionally dissimilar due to diversified activities, significant intangibles, and wide fluctuations in margins. The Tribunal agreed, citing previous decisions like NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT, and directed the exclusion of these companies.

4. Inclusion of Additional Grounds Regarding Turnover Filters:
The Tribunal admitted additional grounds raised by the assessee regarding the non-application of upper turnover filters, referencing the Supreme Court judgment in M/s National Thermal Power Co. Ltd. Vs. CIT. The Tribunal upheld the relevance of turnover filters in selecting comparables, following the principle that high turnover is a valid ground for exclusion.

5. Rejection of Certain Comparables by the TPO:
The assessee sought the inclusion of Akshay Software Technologies Ltd., Evoke Technologies Private Limited, and Sagarsoft (India) Ltd., which were rejected by the TPO. The Tribunal remitted the issue back to the AO/TPO for fresh consideration, emphasizing the need to review public domain information and previous Tribunal decisions supporting the inclusion of these companies.

Conclusion:
The Tribunal directed the AO/TPO to recompute the ALP, excluding companies with turnovers exceeding Rs. 200 crores and those functionally dissimilar to the assessee. The Tribunal also remitted the issue of including Akshay Software Technologies Ltd., Evoke Technologies Private Limited, and Sagarsoft (India) Ltd. back to the AO/TPO for fresh examination. The appeal was partly allowed, with the rest of the grounds dismissed as not pressed.

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