Exclusion of comparables based on Turnover and size filter is valid

1. M/s. Logitech Engineering & Designs India P. Ltd is the successor of the erstwhile Lifesize Communications P. Ltd which is a 100 % subsidiary of Lifesize Communications Inc. The assessee is a captive service provider and has been set up as a captive off shore software development centre for catering to the needs of the Lifesize group. Lifesize India is responsible for the research, software development and support services for Lifesize Inc’s products and services.

2. The assessee bench marked the software development services selecting Transactional Net Margin Method (TNMM”) as the most appropriate method and using Net Operating margins based on cost (“NCP) as the Profit Level Indicator (“PLI). On a set of 4 comparables, it arrived the average NCP at 13.01 percent. Since it had earned NCP of 14.34% in this segment, it considered its transactions are at arm’s length. However, out of 4 comparables selected by the assessee , the TPO rejected 3 of them and introduced 10 additional comparables and determined the average margin at 22.71%. After giving working capital adjustment of 1.98%, the TPO proceeded to make an adjustment of Rs.72,25,614 for the software development services. Aggrieved, the assessee filed its objections before the DRP. The DRP upheld the action of the TPO in not accepting the comparables chosen by the assessee . Out of 11 comparables chosen by the TPO , the DRP rejected; 6 comparables on turnover filter, 2 comparables on RPT filter, 2 comparables on non availability of segmental results and retained only one comparable.

3. Aggrieved by the DRP order, the Revenue also filed an appeal with following grounds :

IT(TP)A.127/Bang/2015 – By the Revenue :

4. On the following comparables, the AR submitted that the appellant’s turnover is just 13.23 crores, while the turn over of each of the comparable is multiple times higher (say from 28 times to 1601 times higher) than its turnover and hence the DRP correctly excluded them. The summary of AR ’s contentions on each of the comparable is extracted as under :

1 . Infosys Ltd : The DRP rejected this comparable on the ground that the turnover of the company is very high, INR 21,140 crores which is 1601 times the turnover of the assessee from ITES business . The assessee submitted that Infosys is an industrial giant with an extremely high turnover and has substantial intangible assets. The size, functions performed, stage of business cycle, and growth cycle of Infosys is not comparable with the assessee which is a low risk captive service provider and relied on

• DCIT vs Ikanos Communications: ITA No. 137/Bang/2015 (AY 2010-11)

• ACIT vs Broadcom India Research Private Limited: [2016] 49 ITR(T) 79 (Bangalore) [AY 2010-11]

• Bearing Point Business Consulting Pvt. Ltd. – ITA No- 1124/Bang/2011

• DCIT vs Electronics for Imaging Pvt. Limited: ITA No. 212/Bang/2015 (AY 2010-11)

• Insilica Semiconductors India Pvt. Ltd. vs ITO: [2012]53 SOT 157 (Bangalore)

• Logica Pvt. Ltd. vs ACIT: IT(TP)A No. 1621&1664 (Bang) of 2014

• Orange Business Services India Solutions (P.) Ltd. vs DCII: ITA No. 869 (Delhi) of 2016

• 24/7 Customer.com Pvt. Ltd : ITA No. 227/Bang/2010

• DCIT vs PMC – Sierra India Pvt. Ltd. : lT(TP)A No. 882/Bang/2013

• Lam Research vs DCIT: IT(TP)A No. 1437/Bang/2014

• Telecordia Technologies India Pvt. Ltd. vs ACII: [2012] 137 ITD 1 (Mumbai) CIT vs Agnity India Technologies (P.) Ltd: [2013] 262 CTR 291 (Delhi)

2. Larsen & Turbo Infotech Ltd : The DRP rejected this company on the ground that the turnover of the company is very high i.e. INR 1,777 crores which is 134 times the turnover of the assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following decisions:

– Sysarris Software (P.) Ltd. vs SCIT ITA No. 1360/Bang/2011

– ITO vs M/s. Vendio Technologies (k) Pvt. Ltd: ITA No.1374/Bang/2011

3. Mindtree Ltd (seg) : The DRP rejected this company on the ground that the turnover of the company is very high ie INR 698 crores which is 53 times the turnover of the assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following decision:

– Bearing Point Business Consulting P Ltd. – ITA No.1124/Bang/2011

– Lam Research vs DCIT: IT(TP)A No 1437/Bang/2014

4. Persistent Systems Ltd : The DRP rejected this company on the ground that the turnover of the company is very high i.e. INR 504 crores which is 38 times the turnover of the assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following cases:

– ION Trading India (P.) Ltd vs ITO: 1035 (Delhi) of 2015 (AY 2010-11)

-Bearing Point Business Consulting Pvt. Ltd. – ITA No. 1 124/Bang/2011

– Trilogy E-Business Software India Pvt. Ltd: [2013} 140 lTD 540 (Bangalore)

5. Sasken Communication Technologies : The DRP rejected this company on the ground that the turnover of the company is very high i.e INR 402 crores which is 30 times the turnover of the assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following cases:

-Bearing Point Business Consulting Pvt. Ltd. – ITA No.1124/Bang/2011

-DCIT vs Kodiak Networks India Pvt Ltd: ITA No. 532/Bang/2013

-Lam Research vs DCIT: IT(TP)A No. 1437/Bang/2014

-DCIT vs Hellosoft India (P.) Ltd: (2013] 23 ITR(T) 1 (Hyderabad)

6. Tata Elxsi Ltd (seg) : The DRP rejected this company on the ground that the turnover of the company is very high i.e. INR 376.37 crores which is 28 times the turnover of the Assessee from ITES business and therefore it was correctly excluded from the list of comparables. Reliance is placed on the following cases:

-Bearing Point Business Consulting Pvt. Ltd.: ITA No.1124/Bang/2011

-Lam Research vs DCIT : IT(TP)A No-:1437/Bang/2014

5. However, against the application of the turnover filter, the DR relied on the decision of this Tribunal in LSI Technologies India Private Ltd & LSI Research & Development P Ltd in IT (TP) A No 1380 & 1381 /Bang/ 2010 for ay 2006-07 dt 13.5.2016. We heard the rival submissions. It is seen that the DRP rejected the above comparables based on the turnover filter, size etc relying on various Tribunal decisions Viz Bangalore, Delhi, Hyderabad, Mumbai and Pune. This Tribunal in the case of Obopay Mobile

6. Technolgy India P Ltd in IT(TP) A Nos 388 & 469/ Bang/ 2015 dt 08.01.2016, after considering the Delhi and Bombay High Court decisions in Chryscapital Investment Advisors India P Ltd 376 ITR 183(Del), CIT vs Pentair Water India P Ltd (Mumb) in tax appeal no 18 of 2015 and Agnity India Technologies P Ltd (Del) 36 taxmann.com 289/219 taxman 26, the principle of judicial discipline etc , following the Bombay High Court decision upheld the DRP order in excluding 6 companies, from the list of comparables chosen by the TPO, on the basis of turnover and size. Following it , we uphold the DRP order in excluding the above 6 companies, from the list of comparables chosen by the TPO, on the basis of turnover and size. Thus, the corresponding grounds of the Revenue fail.