Turnover filter must be applied to exclude giant companies from comparison

CLR Editorial Notes: The assessee-company is engaged in the business of software development services to its customers. The assessee also provides services to the Associated Enterprise AE namely Patni Telecom, U.S. and Patni Telecom, U.K. The assessee filed return of income for the assessment year 2008-2009 admitting total income of Rs.87,850/- under the normal provisions of the Income Tax Act, 1961 and book profit of Rs.14,75,22,331/- under section 115JB of the Act.

The assessee claimed that in determining the ALP under TNMM, Infosys Technologies & Wipro were not comparable entities given their extreme large turnover in comparison to that of the assessee. The Transfer Pricing Officer rejected the transfer pricing study done by the assessee. In addition to the filters employed by the assessee the TPO applied additional filters and further rejected 13 comparables out of 21 comparables submitted by the assessee. After various discussions the TPO finalised the list of comparables on 19 which included 6 comparables which were objected to by the assessee during the proceedings before the TPO.

To oppose this, the Department relied on Capgemini India (ITAT Mum) where it was held that the concept of economy of scale was not applicable to service oriented companies and that the turnover filter could not be applied to exclude companies with an extremely large turnover. The Tribunal held:

“Though in Capgemini it was held that the concept of economy of scale is relevant only for manufacturing concerns, which have high fixed assets, and not for service concerns and that the turnover filter cannot be applied to exclude companies with an extremely large turnover from comparison, a contrary view has been taken in Deloitte Consulting 145 TTJ 589 (Hyd) that giant companies like Wipro are not at all comparable with smaller pygmy companies. Consequently, giant companies line Wipro and Infosys cannot be taken as comparables as their turnover is multiple number of times higher compared to that of the assessee and the TPO erred in considering their PLI to arrive at the arithmetic mean.”


Case Files Available for download


Main Case File: 

  • Patni Telecom Solutions Pvt. Ltd vs. ACIT (ITAT Hyderabad)

Reference Case Files: 

  • DCIT vs. Deloitte Consulting India Pvt. Limited (ITAT Hyderabad)
  • Capgemini India Private Limited vs. ACIT (ITAT Mumbai)


Tags: CapgeminiIncome Tax Act 1961Infosystransfer pricingWipro

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