2017 (4) TMI 1508 - AT - Income Tax

TP Adjustment - Comparable selection - turnover filter - turnover range for selection of comparable - HELD THAT - ITAT in the McAfee ruling 2016 (3) TMI 1200 - ITAT BANGALORE held that a range of upper limit at ten times and lower limit of ten times i.e., one tenth can be adopted - there could margin of variations but these broad parameters could be adopted on uniform basis. In the assessee s case, its turnover is 38.07 crores. Therefore, following McAfee ruling, the turnover range that could be taken in the comparables should be 3.8 crores to 380 crores. Therefore, any company not falling within the said range should be excluded on turnover filter. L T Infotech Ltd, Persistent Systems Ltd AND Mindtree Ltd are directed to be excluded from the list of comparables following above ruling. - Decided in favour of assessee.

Summary

Issues:
1. Reference made to TPO without opportunity of being heard
2. Communication of approval basis not provided
3. Rejection of comparables without cogent reasons
4. Failure to eliminate comparables with turnover over ?200 crores
5. Inclusion of giants as comparables
6. Failure to provide suitable risk adjustment
7. Non-compliance with Rule 10B(4) and Rule 10B(1)
8. Failure to determine ALP as per Rule
9. Failure to grant benefit under proviso to section 92C(2)
10. Incorrect levy of interest under sections 234B and 234C

Analysis:
1. The appeal was against the order passed by the AO under sections 143(3) and 144C for the assessment year 2012-13. The assessee, a software development service provider, filed objections before the DRP regarding transfer pricing adjustments made by the TPO. The DRP directed the exclusion of certain comparables, but the AO passed the order as per DRP's directions. The appellant raised various grounds challenging the reference to the TPO without a hearing opportunity, lack of communication on approval basis, and rejection of comparables without sufficient reasons.

2. The AR argued for the exclusion of certain comparables based on their turnover exceeding ?200 crores. The ITAT accepted the turnover range of ?1 to 200 crores and directed the exclusion of comparables with turnovers outside this range. The turnover of L & T Infotech Ltd, Persistent Systems Ltd, and Mindtree Ltd was found to be significantly higher, leading to their exclusion based on the turnover filter.

3. The ITAT relied on its own previous rulings and directed the exclusion of the three comparables based on turnover discrepancies. The decision was in line with the principles established in the McAfee ruling, emphasizing the importance of maintaining a reasonable turnover range for comparables in transfer pricing analysis.

4. The ITAT found merit in the assessee's submissions and allowed the appeal, directing the exclusion of the three comparables with turnovers exceeding the acceptable range. The judgment highlighted the importance of adhering to established principles in transfer pricing analysis and ensuring a fair comparison among companies.

5. In conclusion, the ITAT's detailed analysis and decision in this case underscored the significance of proper application of transfer pricing regulations, including the selection of comparables based on turnover ranges to ensure a fair assessment of the appellant's transfer pricing adjustments.