Transfer Pricing: Turnover filter must be applied to exclude giant companies from comparison

The assessee, a provider of software development services, 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. 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. HELD by the Tribunal:

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.