2019 (4) TMI 1757 - AT - Income Tax

TP Adjustment - determination of Arm s Length Price (ALP) in respect of an international transaction of rendering Software Development services (SWD services) by the Assessee to it s Associated Enterprise (AE) - AO applied lower turnover filter of 1 Crore and rejected companies with turnover of less than 1 crore from the list of comparable companies - HELD THAT - We find that various aspects of application of turnover filter was considered by this Tribunal in the case of Autodesk India Pvt.Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE and it was held that turnover is a relevant criteria for deciding comparability of companies and that a company with huge turnover cannot be compared with a company with small turnover. The turnover criteria was based on classification of companies with turnover upto 200 Crores falling within one category and companies with turnover of 200 crores to 500 crores falling in another category and so on It would be appropriate while choosing comparable companies to exclude companies by application of turnover filter. We also observe that the TPO has himself applied lower turnover filter of excluding companies with turnover of less than 1 Crore and in such circumstances there is no reason as to why he should not apply the higher turnover limit. This tribunal in Assessee s own case for AY 2013-14 has upheld similar contention. For the reasons given above we uphold the order of the CIT(A). Direct the AO to re-compute ALP by excluding above six companies from the list of comparable companies by applying the turnover filter. Assessee at the time of hearing submitted that if turnover filter is applied to exclude high turnover companies then PLI determined by the TPO is within 3% range therefore other grounds of appeals becomes academic in nature and does not require specific adjudication.

Summary

Issues Involved:
1. Exclusion of certain companies as comparables for determining Arm's Length Price (ALP).
2. Application of turnover filter in selecting comparable companies.
3. Allowability of delayed payment of employees' contributions towards PF/ESI.

Detailed Analysis:

1. Exclusion of Certain Companies as Comparables:
The primary issue in Grounds 1 to 5 of the Revenue’s appeal and the grounds of the Assessee’s cross-objection pertains to the determination of ALP for the international transaction of rendering software development services by the Assessee to its Associated Enterprise (AE). The Assessee received ?17,56,78,482 for these services and claimed the price was at Arm's Length based on a Transfer Pricing study using the Transaction Net Margin Method (TNMM) with a profit margin of 15%. The Transfer Pricing Officer (TPO) selected 13 comparable companies with an average profit margin of 24.82%, leading to an addition of ?1,34,27,918 to the Assessee's income. The Dispute Resolution Panel (DRP) modified the list of comparables, excluding some companies chosen by the TPO.

2. Application of Turnover Filter:
The Assessee raised an objection that the TPO applied a lower turnover filter of ?1 crore but did not exclude companies with high turnover (above ?200 crores). The Tribunal agreed with the Assessee, citing previous decisions that turnover is a relevant criterion for comparability. The Tribunal noted that companies with significantly higher turnover than the Assessee (?17.56 crores) should be excluded. This decision was supported by various precedents, including the case of Autodesk India Pvt. Ltd., which held that a company with huge turnover cannot be compared with a company with small turnover. The Tribunal directed the AO to re-compute the ALP by excluding high turnover companies, making other grounds of appeal academic.

3. Allowability of Delayed Payment of Employees' Contributions towards PF/ESI:
The issue in Ground 6 of the Revenue’s appeal was whether the delayed payments of employees' contributions towards PF/ESI, which were deposited before the due date for filing the return of income under Section 139(1), should be disallowed under Section 36(1)(va). The Tribunal, following the Karnataka High Court’s decision in CIT Vs. Sabari Enterprises, held that such contributions are allowable deductions even if paid beyond the stipulated period, provided they are paid before the due date for filing the return.

Conclusion:
The Tribunal directed the AO to exclude high turnover companies from the list of comparables and re-compute the ALP, rendering other grounds academic. The Tribunal also upheld the allowability of delayed payments towards PF/ESI, dismissing the Revenue's appeal and partly allowing the Assessee's cross-objection. The decision emphasizes the importance of turnover as a criterion for comparability and aligns with judicial precedents on the treatment of delayed statutory payments.