Tyco Fire & Security India v ACIT: ITAT Bangalore on Transfer Pricing Comparables under Section 92C

M/s. Tyco Fire and Security India Private Limited's appeal before the Income Tax Appellate Tribunal, Bangalore, for Assessment Year 2016-17 turned on a single, recurring tension in Indian transfer pricing litigation: whether the Transfer Pricing Officer applied appropriate filters — particularly an upper turnover cap — when selecting comparable companies to benchmark the arm's length price of software development services rendered to an associated enterprise. The Tribunal remanded the comparable-selection issue to the AO/TPO for fresh consideration, making this order a useful reference point for researchers studying how ITAT Bangalore has approached the application of Section 92C in the software development segment.

This page is a research summary of one specific Indian tax judgment, NOT legal advice. Always verify against the full judgment and consult a professional for case-specific guidance.

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The case at a glance

• Parties: Tyco Fire And Security India Private vs Assistant Commissioner Of Income Tax
• Bench: Income Tax Appellate Tribunal - Bangalore
• Date: 28 November 2022
• Court level: Tribunal (ITAT)
• Sections engaged: 143(3), 144C(13), 35, 40, 92(1), 92B(1), 92C
• Outcome: Remanded for fresh consideration

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Facts of the case

M/s. Tyco Fire and Security India Private Limited, headquartered in Bengaluru, is engaged in the provision of Software Development Services (SWD services) to its wholly owned holding company. Because both entities qualify as Associated Enterprises under the Act, the transaction of providing SWD services constitutes an "international transaction" within the meaning of Section 92B(1), and any income arising therefrom must be computed having regard to the arm's length price under Section 92(1).

For AY 2016-17, the assessee filed a Transfer Pricing Study adopting the Transactional Net Margin Method (TNMM) as the Most Appropriate Method and used Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator. The assessee computed its own OP/OC at 12.70%, with operating income of Rs. 40,39,51,067/- and operating cost of Rs. 35,84,15,952/-. The assessee's TP Study identified 13 comparable companies, yielding an arm's length range of 9.83% to 15.49% with a median of 10.97%, within which the assessee's margin fell.

The TPO, to whom ALP determination was referred by the AO, accepted TNMM as the MAM and the same PLI, but identified 17 comparable companies. The TPO's set produced a 35th percentile of 18.50%, a median of 25.64%, and a 65th percentile of 30.89%. Using the median of 25.64% as the arm's length margin and applying the formula ALP = (1 + M) × OC, the TPO computed an ALP of Rs. 45,03,13,802/-, against the price actually received of Rs. 40,39,51,067/-, resulting in a shortfall — treated as a transfer pricing adjustment — of Rs. 4,63,62,735/-. This sum was added to the assessee's total income. The assessee filed objections before the Dispute Resolution Panel (DRP), which issued directions; the AO passed the final assessment order under Section 143(3) read with Section 144C(13). To the extent relief was not granted by the DRP, the assessee appealed before the Tribunal.

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Issues raised

• Whether the TPO erred in selecting comparable companies without applying an appropriate upper turnover cap, thereby including entities significantly larger than the assessee in the comparables set.
• Whether specific companies — including R.S. Software (India) Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., Infosys Ltd., Nihilent Ltd., Aspire Systems (India) Pvt. Ltd., Cybage Software Pvt. Ltd., and Thirdware Solution Ltd. — should be excluded from the comparable set on the basis of turnover dissimilarity.
• Whether Akshay Software Technologies Ltd. should be included as a comparable company in the assessee's favour.
• Whether the TPO erred in denying a working capital adjustment to the margins of the comparable companies.

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What the court held

The Tribunal, per Vice President N.V. Vasudevan (with Accountant Member Shri Chandra Poojari on the bench), remanded the issue regarding the inclusion/exclusion of comparable companies and the related ALP determination to the AO/TPO for fresh consideration. The operative outcome — remand — reflects that neither the assessee nor the Revenue obtained a conclusive adjudication on the merits of each comparability dispute before the Tribunal itself; instead, the AO/TPO was directed to reconsider the comparable selection exercise.

The source order records that before the Tribunal, the assessee's arguments were restricted to: the exclusion of seven comparable companies from the TPO's set; the exclusion of R.S. Software (India) Ltd.'s margins for FY 2014-15 and FY 2015-16; the inclusion of Akshay Software Technologies Ltd. as a comparable; and the question of working capital adjustment. The assessee's core submission on exclusion was that while the TPO applied a lower turnover filter (rejecting companies with turnover below Rs. 1 crore), no corresponding upper turnover cap was applied — and that seven of the TPO's comparables carried turnover exceeding Rs. 200 crores in AY 2016-17, rendering them incomparable in terms of size and scale with the assessee.

The Tribunal's remand on the comparable-inclusion issue is consistent with the established supervisory function ITAT exercises under Section 92C: where the comparability analysis conducted by the TPO is found to require re-examination — whether on account of filter application, functional comparability, or data adequacy — the matter is returned for fresh fact-finding rather than substituted by the appellate forum's own comparables selection.

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Strategy observations

1. The assessee's grounds of appeal before the Tribunal numbered ground Nos. 1 to 16, but at the hearing the arguments were restricted to specific comparability sub-issues — exclusion of seven companies, exclusion of R.S. Software margins for two financial years, inclusion of Akshay Software Technologies, and working capital adjustment — per the source order.

2. The exclusion challenge was framed around the absence of an upper turnover cap in the TPO's filter methodology. The assessee tabulated turnover data for each contested comparable across three financial years (FY 2013-14, FY 2014-15, FY 2015-16), presenting a company-by-company quantitative argument that seven of the TPO's comparables exceeded Rs. 200 crores in turnover for AY 2016-17 — per the source order.

3. The assessee also raised the question of inclusion of Akshay Software Technologies Ltd. as a comparable, which the DRP had not admitted. The remand order covers this issue as well, directing the AO/TPO to consider it afresh — per source.

4. The denial of working capital adjustment by the TPO was contested as a separate ground. Researchers reviewing this order should verify the full judgment to confirm whether the Tribunal addressed the working capital ground separately or subsumed it in the general remand.

5. The final assessment order had been passed by the National e-Assessment Centre (NFAC), Delhi, acting as the AO, under Section 143(3) read with Section 144C(13) — the procedural path through DRP. Researchers should note that the DRP directions form part of the adjudicatory chain and should be examined alongside the ITAT order when assessing the full relief history.

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Why this case matters

This order is illustrative of a recurring pattern in ITAT Bangalore's transfer pricing docket for the software development segment: where the TPO's comparable selection methodology is challenged on the ground that no upper turnover filter was applied, the Tribunal has remanded such issues for fresh consideration rather than ruling on comparability as a pure question of law. The factual matrix here — assessee OP/OC of 12.70% against a TPO-computed median of 25.64% from a 17-company set that included entities with turnover ranging up to Rs. 53,983 crores (Infosys Ltd.) — illustrates the magnitude of the ALP gap that can arise when size filters are asymmetrically applied.

For researchers, the significance of this order lies in its contemporaneous documentation of the TPO's computation methodology (the full ALP computation table is reproduced in the order), the specific companies contested, and the financial-year-wise OP/OC margins used by the TPO. The case also demonstrates the interaction between the DRP process under Section 144C(13) and the subsequent appellate jurisdiction of the ITAT — a procedural sequence that is standard in transfer pricing disputes but worth tracking across AYs to identify whether the same comparables recur in related-year litigation for the same assessee.

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Source

This case is drawn from the TaxNoticeAI structured legal corpus (16,101 Indian tax judgments, CBIC circulars, ITAT rulings, AAR rulings, GSTAT rulings), sourced from indiankanoon.org and official court portals. Original document: https://indiankanoon.org/doc/9521129/