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2019 (1) TMI 1194 - AT - Income TaxTPA - comparable selection - Held that:- It is observed that assessee included companies having financial data of at least 2 years prior for which Ld.TPO observes that as per Rule 10 B (4) it is mandatory to use current year data, unless it is shown by assessee that such earlier years data has an influence in determining transfer price and that, use of earlier year data is in addition to current year data. Ld.TPO rejected company, where current year data was not available and assessee had sought to rely upon preceding two years data, which in our considered opinion is appropriate as assessee has not been able to establish what is required under rule 10 B (4) of Income Tax Rules 1963. Next filter that has been modified by TPO is in respect of turnover. Assessee had included companies with an average sales of less than 1 crore during the year and companies with more than 50 crores were rejected. TPO observed that companies whose income is less than 5 crore would be appropriate as otherwise analysis may not lead to proper compatibility. It is observed that TPO modified lower limit of turnover filter from less than 1 crore to less than 5 crore. TPO rejected companies which are making losses as comparables. This shows that there is a limit for lower end for identifying comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be an appropriate upper limit is another factor to be considered. Big company would be in a position to bargain 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, turnover also would come down reducing profit margin. Thus, as held by various benches of this Tribunal, when companies which are loss making are excluded from comparables, then super profit making companies should also be excluded. Thus in present case, rage of 1 crores to 200 crores would be ideal. For purposes of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. In our opinion companies with revenues less than 75% from software development services would be ideal to be excluded, as economic circumstances of such companies would be different. We draw our support from Rule 10 B (2) in respect of this view. Assessee is into rendering of software development services like that of assessee thus these companies functionally dissimilar with that of assessee need to be deselected from final list.
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