Tribunal directs exclusion of companies from comparables list, emphasizes functional dissimilarity & addresses Related Party Transactions

The Tribunal partly allowed the appeals for AYs 2006-07 and 2008-09, directing the AO/TPO to exclude certain companies from the comparables list, follow the earlier direction on deduction u/s. 10A, and re-examine the margin computation for Megasoft Ltd. The Tribunal emphasized functional dissimilarity of comparable companies and addressed the application of Related Party Transactions (RPT) filter. The common order was pronounced on July 19, 2023.

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Issues Involved:

1. Deduction under Section 10A of the Income-tax Act, 1961.
2. Exclusion of certain companies from the comparables for Transfer Pricing purposes.
3. Application of Related Party Transactions (RPT) filter.
4. Functional dissimilarity of comparable companies.
5. Error in margin computation of a comparable company.

Summary:

1. Deduction under Section 10A of the Income-tax Act, 1961:
The first common ground for AYs 2006-07 and 2008-09 was that the AO erred in not following the ITAT's direction to allow full deduction claimed u/s. 10A of the Act. The Tribunal had directed the AO to compute the deduction by considering expenses from both export turnover and total turnover. The AO failed to follow this direction. The Tribunal reiterated its earlier direction and ordered the AO to allow the deduction u/s. 10A in full for both AYs 2006-07 and 2008-09.

2. Exclusion of Certain Companies from the Comparables for Transfer Pricing Purposes:
Ground Nos. 2 to 14 for AY 2006-07 and Ground Nos. 2 to 15 for AY 2008-09 raised by the assessee were regarding the exclusion of certain companies from the comparables list. The Tribunal found that several companies, including iGate Global Solutions Ltd., Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communications Ltd., and Flextronics Software Systems Ltd., were not comparable due to their high turnover and functional dissimilarity. The Tribunal directed the AO/TPO to exclude these companies from the comparables list.

3. Application of Related Party Transactions (RPT) Filter:
The Tribunal addressed the issue of applying the RPT filter rate for companies like Aztec Software Ltd., Geometric Software Ltd., and Megasoft Ltd. The AO/TPO was directed to follow the judgment in PCIT v. Yodlee Infotech P. Ltd. for applying the RPT filter rate.

4. Functional Dissimilarity of Comparable Companies:
Several companies were found to be functionally dissimilar to the assessee, including Tata Elxsi Ltd., Bodhtree Consulting Ltd., Accel Transmatics Ltd., KALS Info Systems Ltd., Avani Cimcon Technologies Ltd., Celestial Biolabs Ltd., E-Zest Solutions Ltd., and others. The Tribunal directed the exclusion of these companies from the comparables list based on their different functional profiles.

5. Error in Margin Computation of a Comparable Company:
The Tribunal noted an error in the margin computation of Megasoft Ltd. The TPO had computed the PLI at 60.23%, whereas the correct margin was claimed to be 23.11%. The issue was remitted to the AO/TPO to verify the correct computation of the operating margin.

Conclusion:
The appeals for AYs 2006-07, 2007-08, and 2008-09 were partly allowed for statistical purposes. The Tribunal directed the AO/TPO to exclude certain companies from the comparables list, follow the earlier direction regarding the deduction u/s. 10A, and re-examine the issue of margin computation for Megasoft Ltd. The common order was pronounced on July 19, 2023.

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