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TMI Blog2015 (9) TMI 1476X X X X Extracts X X X X X X X X Extracts X X X X ..... d its return of income on 29th September 2010, declaring total income of Rs. 34,99,90,400. During the assessment proceedings, the Assessing Officer noticing that the assessee has entered into international transactions with its A.E., made a reference to the Transfer Pricing Officer for determining the arm's length price of the international transaction entered with the A.E. In the course of proceedings before him, the Transfer Pricing Officer, after examining various documents submitted before him including the transfer pricing study prepared by assessee found that the assessee has adopted transactions net margin method (TNMM) as most appropriate method with operating profit to operating cost (OP/OC) as profit level indicator (PLI) for bench marking the arm's length margin of the international transaction with the A.E. He further found that assessee conducting a search in the data bases has identified 19 companies as comparable with average arithmetic mean of 8.94% considering financial results of the current year and preceding two years and profit margin of 10.52% in case of 11 companies by using data for the financial year 2009-10 alone. Since in both the cases, the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee relating to selection of certain comparables by the Transfer Pricing Officer, the DRP accepting the objections of the assessee, directed the Transfer Pricing Officer to exclude the following companies from the list of comparables:- i) Bodh Tree Consulting Ltd. ii) KALS Information System Ltd. iii) Igate Global Solution Ltd. iv) Tata Elxsi Ltd. v) Wipro Ltd. vi) Infosys Ltd. 4. The DRP, however, rejected the assessee's contentions for including CG-Vak Software and Exports Ltd. as comparable and for excluding Third Ware Solutions Ltd. and Persistent Systems Ltd., from the list of comparable. That besides, the DRP on its own, found some companies to be functionally similar to the assessee, hence, directed the Transfer Pricing Officer to consider them as comparables. Thus, the final list of comparable selected by the DRP with average operating margin of 21.04% is as under:- S.no. Name of Company Operating Margin for F.Y. 2009-10 1. R.S. Software (India) Limited 9.16% 2. Thirdware Solutions Limited 32.09% 3. Persistent Systems Limited 30.56% 4. Larsen & Toubro Infotech 19.94% 5. Mindtree Limited 20.79% 6. Sasken Communicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company on a totally different ground by observing that the turnover of the company during the relevant previous year was only Rs. 7.16 crores compared to assessee's turnover of Rs. 317 crores. Therefore, in terms of size and level of operation, it cannot be considered as a comparable to the assessee. In this context, the DRP observed that the turnover of CG- Vak Software and Exports Ltd. is less than 1/20th of the assessee's turnover. The learned Counsel for the assessee submitted, it is a settled principle of law that turnover has no impact or effect over the profit margin of a company. Hence, a company which is otherwise functionally similar cannot be excluded merely on the basis of turnover. Moreso when neither the assessee nor the Transfer Pricing Officer has applied the turnover filter for selecting comparable. For such proposition, the learned Counsel relied upon the following decisions:- i) Techbooks Internationals Pvt. Ltd. v/s DCIT, ITA no.240/Del./2015, order dated 6th July 2015; ii) Nortel Networks India Pvt. Ltd. v/s ACIT, ITA no.4765/Del./2011 and ITA no.472/Del./2013, order dated 25th February 2014; and iii) CIT v/s Nortel Networks India Pvt. Ltd., ITA no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores as compared to assessee's turnover being Rs. 317 crores, it cannot be considered as a comparable to the assessee. In our view, when neither the assessee nor the Transfer Pricing Officer have applied the turnover filter while selecting the comparable, it is not at all relevant to apply the filter for rejecting or selecting any comparable. Moreover, it is a principle well settled in a number of decisions of this Tribunal, low turnover alone may not have an impact on profitability unless there are other factors impacting the profitability. In the present case, nothing has been brought by the DRP on record to show that along with the turnover there are other relevant factors also which may have impacted the profit margin of the company. The Tribunal, Delhi Bench, in Techbooks Internationals Pvt. Ltd. (supra), while considering the comparability of the very same company for the same assessment year by applying the turnover filter, has observed in the following manner:- "12.3.2 We do not find any reason to exclude this company from the list of comparables merely on the ground that its turnover is less. The reasons given above while considering the comparability of CG-VAK Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are concededly part of the record. For the above reasons, no question of law arises." As could be seen in the present case also, neither the assessee nor the Assessing Officer applied the turnover filter for selecting / rejecting comparables. No specific fact has been brought to our notice by the learned Departmental Representative also to show that apart from turnover, there are any other relevant factors which could have impacted the profit margin of CG-Vak Software and Exports Ltd. or whether it is functionally dissimilar to the assessee, hence, cannot be considered as comparable. Therefore, keeping in view the principles laid down in the decisions referred to above, we find no reason to sustain the order of the DRP in rejecting CG-Vak Software and Exports Ltd. as a comparable. Accordingly, we direct the Transfer Pricing Officer to include this company as comparable and determine the arm's length price. In the course of hearing, learned Counsel for the assessee submitted a working indicating the margin of comparables finally selected after including CG-Vak Software and Exports Ltd. as comparable. It was submitted, if CG-Vak Software and Exports Ltd. is included as a co ..... 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