Income Tax Act, 1961

--Transfer pricing--Computation of ALP Selection of comparables--Assessee-company provided software development services exclusively to its group companies at cost plus 12 per cent margin. It selected 12 comparables companies and adopted TNMM method to compute ALP. As the arithmetic mean of comparables was lower than that of assessee transactions were claimed to be at arm's length. However, TPO selected 26 comparable companies and made adjustment accordingly, which was sustained by DRP. Assessee objected that TPO did not apply upper turnover limit and took into consideration functionally dissimilar, transaction level difference, non-consideration of inter-company payables non-adjustment for risk, etc Held: Acceptable. Where lower turnover limit (filter) was adopted of Rs. 1 crore upper turnover limit of Rs.200 crores, would be adopted and functionally similar companies would be selected. Further, segmental profit margin, instead of entity level margin would be reckoned, while computing operating margin of assessee and comparables foreign exchange gain or loss should be considered as operating revenue or cost. Moreover, where assessee was operating in risk mitigated environment and it assumed lesser risk than comparables, risk adjustment would be made.

Bangalore Tribunal had recently delivered a decision in the case of Trilogy E-Business Software India (P.) Ltd. herein referred to Trilogy E -Business. In the said case, the assessee was engaged in the business of rendering software development business, just like the assessee in the instant case. The comparables selected by the TPO in the case of Trilogy E-Business Software and the assessee of this case are identical. [Para 5] For the year under consideration, the operating cost in the case of Trilogy E-Business was `Rs.43.16 crores whereas the assessee's operating cost for the same period was Rs. 41.46 crores. The cost base of the assessee and Trilogy E-Business being similar, the order of the Tribunal in the case of Trilogy E - Business is squarely applicable to the assessee's case. The, objections raised by the assessee are dealt with chronologically as under. [Para 5] The TPO had, while selecting the above 26 above comparables, applied a lower turnover filter of Rs. 1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs. 1,000 crores company cannot be compared with the transaction altered into by a Rs. 10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO's range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. relying on Dun and Bradstreet's analysis had held that turnover range of Rs. 1 crore to 200 crores is appropriate. [Para 5.1] In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the eight companies will have to be eliminated from the list of comparables selected by the TPO. [Para 5.1.3] There was improper selection of comparables by the TPO for the reasons that they were functionally different as observed by the earlier Bench in the case of Trilogy E-Business. A. Accel Transmatic Ltd. (Seg) : The selection of this company as comparable by the TPO was duly considered by the Tribunal in the case of Trilogy E-Business and reason recorded in its finding is extracted as under: '50. Tribunal considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgentini India Ltd. where the assessee was software developer. The Tribunal, in the said decision referred to by the learned counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the learned counsel for the assessee, we hold that the aforesaid company should be excluded as comparables'. B. Avani Cimcon Technologies Ltd. : The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in Trilogy E-Business for the reasons that- '41. We have given a careful consideration to the submissions made on behalf of the assessee and are of the view that the same deserves to be accepted. The reasons given by the assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt Ltd v. Asstt. CIT (supra) also supports the plea of the assessee. We therefore accept the plea of the assessee to reject this company as a comparable'. C. Celestial Labs. Ltd. : This Company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench of this Tribunal in Trilogy E-Business had opined that this company cannot be as comparable on the ground that :