TaxTMI 
TaxTMI 
2026 (5) TMI 213
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....ain comparables by the TPO and by the learned DRP for computing the ALP of the international transactions carried out by the assessee with its AE. 2.2 The brief facts of the case on hand are that the assessee, a private limited company, is engaged in the business of providing Software Development Services (SWD) and Information Technology Enabled Services (ITeS) to its AEs on cost plus mark-up basis. At the outset, we note that the ITeS segment of the assessee is not disputed by the Revenue. The Assessee company filed the return of income for the A.Y. 2013-14 on 29.11.2013 declaring an income of Rs. 25,47,72,130/- only. Subsequently, the case of the assessee was selected for scrutiny through CASS. 2.3 The assessee benchmarked its international transactions under SWD segment by adopting TNMM as the most appropriate method and further PLI as OP/OC which was arrived at 16.2%. The assessee for the comparability analysis under SWD segment selected 07 comparables. 3. However, the TPO during the assessment proceedings rejected 05 comparables out of 07 comparables selected by the assessee. The assessee's comparables accepted by the TPO are detailed as under: (1) R S Softwa....
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.... 4.2 For inclusion of the comparables mentioned at S. Nos. 5 and 6, the assessee relied on the decision in Citrix R&D India Pvt. Ltd. v. DCIT for AY 2013-14, wherein these companies were included in the final set of comparables while determining the arm's-length price of international transactions in the software development segment. It was contended that the facts being similar, the said companies deserve to be retained in the present case as well. 4.3 The Ld. CIT(A), after considering the submissions of the assessee and placing reliance on the judicial precedents referred to above, accepted the contention of the assessee in respect of the inclusion and exclusion of the comparables. Accordingly, the Ld. CIT(A) directed the AO/TPO to exclude the comparables mentioned at S. Nos. 1 to 4 and to include the comparables mentioned at S. Nos. 5 and 6 while determining the arm's-length price of the international transactions carried out by the assessee with its AE. 5. Being aggrieved by the order of the ld. CIT-A, both the Revenue and assessee are in appeal and cross objection before us. 5.1 The Ld. DR before us submitted that the Ld. CIT(A) erred in excluding certain comparables ....
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....e advantages. The Ld. AR placed reliance on judicial precedents of the Bangalore Bench wherein a turnover filter of Rs. 0 to Rs. 200 crores has been applied in similar circumstances. 6.3 Both the ld. DR and AR before us vehemently supported the order of the authorities below as favourable to them. 7. We have considered the rival submissions of both the parties and perused the materials on record. At the outset, it is noted that in respect of CG-VAK Software Exports Ltd. and ICRA Techno Analytics Ltd. (S. Nos. 1 and 2), the Ld. AR submitted that the assessee is not pressing the issue. Accordingly, no adjudication is required in respect of the said companies. 7.1 The surviving issue raised by the Revenue is against the action of the Ld. CIT(A) in excluding Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., RS Software Ltd. and Tech Mahindra Ltd. It is well settled that turnover is a relevant criterion in determining comparability under the transfer pricing provisions. The scale of operations directly impacts profitability owing to economies of scale, market position, bargaining power, asset base and risk profile. Companies operating at a significantly hig....
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....on-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT v. Pentair Water India (P.) Ltd. Tax Appeal No. 18 of 2015 judgment dated 16-9-2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in the case of Genisys Integrating (supra) by the ITAT Bangalore Bench should continue to be followed. Since arguments were advanced on the correctness of the decisions rendered by the....
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....he of the Tribunal the revenue filed appeal before the Hon'ble Karnataka High Court in ITA No.146/2025). In the said case, the Hon'ble High Court did not admit the Revenue's grounds of appeal on this issue by observing as under: "10. Indisputably, a company that has a significantly large turnover cannot be considered as a comparable with an assessee, whose turnover is a small fraction of that of the said entity. 11. The question whether the entities are comparable is required to be determined on the basis of similar FAR [Functions, Assets and Risks] profile. It would be erroneous to assume that the size of an entity and its turnover has no bearing on the FAR profile. It is erroneous to suggest that a company of a huge size and a large turnover would be subjected to the same risks as that of a smaller entity, whose turnover is a small fraction of the other entity. The entities would also not be comparable when one considers the value of assets. Additionally entities having a large turnover, would have the benefit of economies of scale, which would not be available to companies with a relatively lower turnover. 7.6 In the light of the above facts, once the order ....
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....eads as under: (2) Whether on the facts and in the circumstances of the case the Tribunal is right in law in accepting the claim of assessee to adopt turnover filter of Rs. 200 Crores following the decision of Co-ordinate Bench in the case of M/s. Genisys Pvt. Ltd v. DCIT reported in 64 DTR page 225 even when said decision has not reached finality and without appreciating that the turnover is not a relevant filter in the software industry, as the size of the turnover and margins are not linked and the Economics of scale are relevant factor only in capital intensive companies which have substantive fixed assets in the form of plant and machinery? Regarding substantial question of law No.2: "20. We have to hold that assessee can seek exclusion of comparables which were a part of its own list, at a later stage, and therefore, we are constrained to reject the line of argument of the learned DR. Coming to the arguments of the learned AR that M/s Tata Elxsi Ltd., M/s Sasken Communication Ltd., M/s Persistent Systems Ltd., M/s L & T Infotech and M/s Infosys Ltd., had turnover in excess of Rs. 200 Crores and were to be excluded, we are of the opinion that turnove....
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....the case of service sector, the size of the company does not matter because, the infrastructure layout is very less and it will not affect the profit ratio in any way. He drew out attention to the particular portion of TPO's order wherein the TPO has the reasoning given for rejecting the turnover filter. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held....
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....annot be compared to the assessee company. Hence the view taken by the Tribunal in M/s Yokogawa Technology Solutions India Pvt. Ltd. (supra) is distinguishable from the present facts of the case. 7.12 In view of the above and following the binding decision of the Hon'ble Karnataka High Court (Supra) affirming the Bangalore ITAT order, we hold that companies having disproportionately high turnover compared to the assessee cannot be considered as valid comparables and are liable to be excluded by applying an appropriate upper turnover filter. 7.13 In the present case, the comparables excluded by the Ld. CIT(A) have turnover running into several hundreds and thousands of crores, whereas the assessee is a captive service provider operating at a much lower scale. The Revenue has not brought any material on record to demonstrate that such vast disparity in turnover does not affect profitability or FAR profile. 7.14 In view of the consistent judicial position and the factual matrix on record, we find no infirmity in the order of the Ld. CIT(A) in applying an upper turnover filter and excluding the aforesaid companies. Accordingly, the grounds raised by the Revenue on this issue a....
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....s (India) Pvt. Ltd., M/s Thirdware Solutions Ltd., M/s Infosys Ltd & M/s Nihilent Technologies Ltd. Comparables are functionally different, fails related party transactions filter, are engaged in diversified activities, presence of significant brand value and intangibles, significant onsite activity 2. M/s Persistent Systems Ltd., M/s Larsen and Toubro Infotech Ltd., M/s Mindtree Ltd. These comparable are functionally dissimilar and lack segmental data, has significant amount of intangible assets, has significant Brand value, has significant onsite activity 3. M/s Cybage Software Pvt. Ltd. Comparable is engaged in diversified operations and has non-availability of segmental information 4. I2T2 India Ltd. and M/s Cigniti Technologies Ltd. Comparables are functionally similar and passes the filters 5. Infomile Technologies Ltd. Comparables are functionally similar and passes the filters 12.1 For exclusion of the comparables mentioned at S. No. 1, the assessee placed reliance on the decision of the Bangalore Bench in M/s Marvell India Private Limited for AY 2015-16. For the exclusion of the comparable mentioned at S. No. 2, the assessee placed....
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....case. 14. Aggrieved by the order of the Ld. CIT(A), the revenue and the assessee preferred appeal and the CO before us. 15. The Ld. DR before us submitted that the Ld. CIT(A) erred in excluding certain comparables on the basis of turnover differences. It was contended that the Bangalore Bench of the Tribunal in the case of M/s Societe Generale Global Solution Centre Pvt. Ltd. in IT(TP)A No. 1188/Bang/2011 and in M/s Vmoksha Technologies Pvt. Ltd. in IT(TP)A No. 595/Bang/2013 dated 26.08.2016 for AY 2005-06 has categorically held that turnover, by itself, is not a relevant criterion for determining comparability under the transfer pricing provisions. 15.1 The Ld. DR further submitted that the Ld. CIT(A) was not justified in holding that there exists a co-relation between turnover and operating margin of an entity. According to the Revenue, no empirical material was brought on record to demonstrate that higher turnover necessarily results in materially different margins so as to warrant exclusion of such companies. It was also contended that the transfer pricing guidelines do not mandate exclusion of comparables merely on account of differences in turnover, unless it is esta....
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....8. We have considered the rival submissions of both the parties and perused the materials on record. As regards the issue relating to the difference in the amount of turnover of the assessee vis-a-vis of the comparable companies, we have already decided the identical issue in favour of the assessee in the revenue's appeal bearing No. 2512/Bangalore 2024 vide paragraph number 7 of this order. Accordingly, we dismiss the ground raised by the revenue relating to inclusion of certain comparables discussed above on account of difference in the turnover. 18.1 Moving further, at the outset, it is noted that in respect of Kals Information System Ltd., CG-VAK Software Exports Ltd., Rheal Software Pvt. Ltd., Infobeans Technologies Ltd., Aspire Systems (India) Pvt. Ltd. and Inteq Software Pvt. Ltd., the Ld. AR submitted that the assessee is not pressing the issue. Accordingly, no adjudication is required in respect of the said companies. Regarding the inclusion of the comparables namely I2T2 and Cigniti, from a perusal of the appellate order, it is seen that the learned CIT(A) has merely reproduced and relied upon the findings in the decisions i.e. M/s Citrix R & D India Pvt. Ltd. witho....