Introduction

The case of ANSR Global Corporation Private Limited, Bangalore v. Assistant Commissioner Of Income Tax, Circle-1(1)(1), Bangalore, adjudicated by the Income Tax Appellate Tribunal (ITAT) on April 19, 2022, marks a significant development in the realm of transfer pricing regulations in India. This case revolves around the determination of the Arm's Length Price (ALP) for Software Development Services (SWD) provided by ANSR Global to its Associated Enterprise (AE), thereby highlighting critical aspects of turnover and Related Party Transaction (RPT) filters in transfer pricing compliance.

Summary of the Judgment

ANSR Global Corporation Pvt. Ltd., a wholly-owned subsidiary of NI Group, UAE, appealed against the order of the Assistant Commissioner of Income Tax (AO) for the assessment year 2016-17. The AO had determined a shortfall in ALP for SWD services rendered to its AE, leading to a transfer pricing adjustment of ₹1,53,10,085. The AO employed the Transaction Net Margin Method (TNMM) using Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) and selected comparable companies to benchmark margins.

The primary contention of ANSR Global was the inappropriate selection of comparable companies based on turnover, asserting that high-turnover companies should be excluded to ensure comparability. Additionally, the assessee challenged the exclusion of R.S. Software (India) Ltd. due to exceeding the RPT filter threshold. The Tribunal upheld the AO's position, emphasizing the relevance of turnover and RPT filters in determining comparable companies, aligning with prevailing judicial precedents.

Analysis

Precedents Cited

The Tribunal extensively referenced existing judicial precedents to substantiate its decision:

• Chryscapital Investment Advisors India Pvt. Ltd. vs. DCIT: The Delhi High Court ruled that high turnover alone does not disqualify a company from being comparable, emphasizing functional comparability.
• Genisys Integrating Systems (India) Pvt. Ltd. vs. DCIT: Advocated for turnover-based classification, suggesting that companies within a specific turnover range (₹1 crore to ₹200 crores) are more comparable.
• CIT vs. Pentair Water India Pvt. Ltd.: The Bombay High Court supported the application of turnover filters, favoring the exclusion of high-turnover companies to maintain comparability.
• Yokogawa India Ltd.: The Supreme Court clarified the application of section 10AA, indirectly influencing the assessment of transfer pricing adjustments.

These cases collectively reinforced the importance of turnover and RPT filters in establishing comparability, guiding the Tribunal to uphold the AO's assessments.

Legal Reasoning

The Tribunal's legal analysis focused on the following key principles:

• Turnover Filter: It emphasized that turnover is a critical factor in determining comparability. The Tribunal upheld the exclusion of companies with turnovers exceeding ₹200 crores, aligning with the Genisys Integrating decision, thereby ensuring that only companies within a similar financial scale are considered comparable.
• Related Party Transaction (RPT) Filter: The Tribunal endorsed a 15% threshold for RPTs, diverging from the 25% applied by the TPO. This aligns with the Karnataka High Court's interpretation in the Yodlee Infotech case, ensuring that comparables maintain a reasonable level of independence in their transactions.
• Functionality over Turnover: While ANSR Global argued that certain companies were functionally dissimilar based on their activities, the Tribunal discounted peripheral claims, focusing on the principal business activities corroborated by financial statements and audit reports.
• Applicability of Circulars and Judicial Discretion: The Tribunal considered departmental circulars and judicial discretion in applying filters, ensuring a balanced approach that considers both regulatory guidance and judicial prudence.

By meticulously analyzing turnover and RPT filters, the Tribunal upheld the AO's method of selecting comparables, reinforcing the structured approach to transfer pricing compliance.

Impact

This judgment has substantial implications for future transfer pricing assessments:

• Refinement of Comparable Selection: Taxpayers must now rigorously ensure that their chosen comparables fall within the specified turnover range and meet RPT thresholds, reducing the likelihood of adjustments based on comparability disputes.
• Enhanced Compliance Framework: Companies engaged in international transactions will need to align their transfer pricing studies with these clarified filters, ensuring greater adherence to regulatory standards.
• Judicial Consistency: The alignment with multiple judicial precedents fosters consistency in transfer pricing assessments, providing clearer guidelines for both taxpayers and tax authorities.
• Operational Adjustments: Businesses may need to reassess their corporate structures and transaction flows to maintain compliance, potentially influencing strategic decisions regarding service provisions and inter-company transactions.

Complex Concepts Simplified

Conclusion

The ANSR Global v. ACIT judgment underscores the critical role of turnover and RPT filters in transfer pricing compliance. By adhering to established judicial precedents and regulatory guidelines, the Tribunal reinforced the necessity of selecting appropriate comparables to determine the Arm's Length Price accurately. This decision not only provides clarity for taxpayers and tax authorities alike but also ensures a more robust and fair framework for assessing international transactions. Companies must meticulously align their transfer pricing strategies with these evolving standards to mitigate risks and ensure compliance, thereby fostering a transparent and equitable tax environment.