Pr. CIT Vs M/s. Softbrands India P. Ltd. (Karnataka High Court)
Facts of the case:
- The assessee was engaged in providing software services to its associated enterprise (AE). During the assessment year, it earned an operating profit of 8.33% on cost. The assessee applied Comparable Uncontrolled Price (CUP) method for substantiating arm’s length price (ALP) of its international transactions.
- Transfer Pricing officer (TPO) rejected CUP method and applied Transactional Net Margin Method (TNMM). The TPO used a set of 20 comparables and determined ALP at cost plus 20.68%, which after giving effect to working capital adjustment was worked out to be at 18.86%.
- The assessee filed an appeal before the Commissioner of Income tax (Appeals)[CIT(A)] against the order of the Assessing Officer (AO)/TPO. The CIT(A) applied related party transaction (RPT) filter to the selection of the comparables made by the TPO along with turnover filter, and analyzed other comparables with abnormal margins. This exercise by the CIT(A) led to rejection of all, but three comparables selected by the TPO.
- Both the assessee and the revenue filed an appeal before the Income Tax Appellate Tribunal (the Tribunal), albeit for different reasons. The Tribunal after detailed analysis of all the comparables, including the ones selected by the TPO, rejected two comparables selected by the CIT(A) and instead included some comparables of the TPO, after applying RPT filter of 15% and other functional comparability criteria.
- Despite that, the revenue filed an appeal before the HC against the order of the Tribunal.
Issue
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