TPO directed to apply Rs. 200 Crores upper turnover filter for transfer pricing comparables in software development segment

ITAT Bangalore directed TPO to apply upper turnover filter of Rs. 200 Crores for transfer pricing adjustment in software development segment. Assessee's turnover was Rs. 124 Crores, arguing companies exceeding Rs. 200 Crores should be excluded from comparable selection for ALP calculation. Following tribunal's earlier order in assessee's case for AY 2015-16, matter was restored to TPO with directions to exclude high-turnover companies from comparable list and recalculate ALP accordingly.

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Issues Involved:

1. Application of Turnover Filter in Transfer Pricing Adjustments.

Summary:

Application of Turnover Filter in Transfer Pricing Adjustments:

The appeal, filed by the assessee, a private limited company engaged in software design and development, challenges the Final Assessment Order dated 12.04.2021, passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the Assessment Year 2016-17. The primary issue pertains to the Transfer Pricing (TP) adjustment proposed by the Transfer Pricing Officer (TPO) amounting to Rs. 12,21,83,641/- related to the software development segment of international transactions with its Associate Enterprises (AE).

The assessee contended that the TPO/AO/DRP erred in not excluding uncontrolled comparables having a turnover exceeding Rs. 200 crores, despite several rulings of the Tribunal upholding the application of such a turnover filter. The assessee's turnover for the relevant Assessment Year was only Rs. 124 crores, and therefore, companies with a turnover exceeding Rs. 200 crores should have been excluded from the comparable list.

The Tribunal noted that in the assessee's own case for the Assessment Year 2015-16, the Tribunal had directed the TPO to exclude companies with a turnover exceeding Rs. 200 crores while recomputing the ALP of the international transaction in the software development segment. The Tribunal referenced several decisions, including the case of BORQS Software Solutions Pvt. Ltd., which supported the application of an upper turnover filter for excluding high-turnover companies from the list of comparables.

The Tribunal concluded that companies with a turnover exceeding Rs. 200 crores should be excluded from the comparable list, directing the TPO to adopt the upper turnover filter of Rs. 200 crores and recalculate the ALP accordingly. Consequently, the matter was restored to the TPO for recomputation, and the appeal was partly allowed. Other grounds raised by the assessee were not adjudicated and left open.

The judgment reinforces the principle that high turnover is a relevant criterion for excluding companies from the list of comparables in determining the ALP in transfer pricing cases, aligning with the Tribunal's consistent stance on applying an upper turnover filter.

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