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2021 (12) TMI 1421 - AT - Income TaxTP Adjustment - Comparable adjustment - application of turnover filter - HELD THAT - We hold that the 8 companies listed in Sl.No.(a) to (i) in paragraph -13 of this order which the assessee seeks exclusion and whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. This Tribunal in the case of Barracuda Networks India Private Limited 2022 (5) TMI 322 - ITAT BANGALORE has also reiterated the application of turnover filter on the same lines as indicated above. This Tribunal in the case of Barracuda Networks India Private Limited 2022 (5) TMI 322 - ITAT BANGALORE has excluded R.S.Software (India) Ltd. from the list of comparable companies on the ground that the related party transaction of this company was above 15%. Following the said decision we direct exclusion of R.S.Software (India) Ltd. from the list of comparable companies. Determining the ALP the TPO did not allow proper adjustment towards Risk Adjustment Capacity utilization adjustment and working capital adjustment - We find that identical reasons assigned by the TPO for not allowing working capital adjustment was a subject matter of consideration by this Tribunal in the case of Barracuda Networks India Private Limited 2022 (5) TMI 322 - ITAT BANGALORE and this Tribunal following the decision in case of Huawei Technologies India Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE held that working capital adjustment has to be allowed to the assessee and directed the TPO/AO to examine the claim of the assessee in the light of the details of working capital adjustment furnished by the assessee which is given as annexure to this order. Grant of risk adjustment - Though the assessee has given a general note with regard to assessee s right to claim risk adjustment while computing ALP no specific details have been given with regard to allowing risk adjustment. In this scenario we are of the view that it would be just and appropriate to remand the issue to AO/TPO with a direction to the assessee to furnish computation of risk adjustment and the basis of claim for deduction on account of risk adjustment. The TPO will consider the same after affording the assessee opportunity of being heard and allow adjustment on account of risk in accordance with law. In this regard we find that the DRP has not called for the computation of manner of risk adjustment and has merely proceeded to hold that the risk adjustment cannot be granted unless it is established that differences has a material effect on the margin of the comparable companies and computation can be made on reliable data without calling for working of risk adjustment. Such conclusions in our view cannot be sustained. Adjustment towards capacity utilization - In case appropriate adjustments cannot be made to the uncontrolled transaction due to lack of data then in order to read the provisions of transfer pricing regulations in harmony the adjustments should be made on the tested party. On the question of the data and method of computation of under utilization capacity adjustment the tribunal held that the claim depends on acceptability of such adjustments being concerted being reasonably accurate in mechanism for such adjustments and as long as such an adjustment mechanism can be found no objection can be taken to the adjustment. The tribunal held that once it is accepted that the assessee has underutilized capacity during the subject AY and is accordingly factually and legally eligible to an adjustment for the same such a benefit cannot be denied to the assessee only for the reason that the data about comparable companies is not available. Requiring the assessee to produce such a data which is not available in public domain would tantamount to requiring the Appellant to perform an impossible task. The only way to get the data in the current case would be where the TPO collates the same from the comparable companies by exercising his powers under section 133(6) We are of the view that it would be just and appropriate to set aside this issue to the AO/TPO by directing the assessee to furnish required details and in the event of the assessee not being in a position to get the required details request the TPO to exercise his powers under section 133(6) of the Act and call for the required details form the comparable companies and if he finds that the capacity utilization differs between the assessee and the comparable companies to allow appropriate adjustment as per the relevant provisions of law and in accordance with the guidelines laid down above. Selecting foreign AE as a tested party was an appropriate method of determining ALP and the Revenue authorities were not justified in rejecting the plea of the assessee - The facts of the Assessee s case is similar to the case decided by the Hon ble Madras High Court Virtusa Consulting Services Pvt. Ltd 2021 (2) TMI 378 - MADRAS HIGH COURT in as much as the Assessee had in its Transfer Pricing Study chosen the foreign AE as a tested party and the TPO refused to examine the said claim. The decision of the Hon ble Madras High Court being the only decision available on the issue of a High Court judicial discipline requires us to follow the same in preference to the decisions of Tribunal to the contrary. Following the aforesaid decision of the Hon ble Madras High Court we remand the issue with regard to foreign AE being chosen as a tested party to the TPO for fresh consideration. The relevant ground of appeal of the assessee in this regard is treated as allowed for statistical purposes.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services. 2. Selection of the tested party in Transfer Pricing. 3. Application of turnover filter in choosing comparable companies. 4. Grant of adjustments for working capital, risk, and capacity utilization. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for Software Development Services: The primary issue in the appeal concerns the determination of the ALP for the international transaction of rendering Software Development Services (SWD services) to the Associated Enterprise (AE), Atmecs Inc., USA. The assessee used the Transaction Net Margin Method (TNMM) with the Operating Profit/Operating Revenue (OP/OR) as the Profit Level Indicator (PLI). The Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing (TP) study, which had chosen the foreign AE as the tested party and selected 7 comparable companies from North America. The TPO instead conducted an independent search for comparables using Indian companies and arrived at a set of 13 comparable companies, leading to an adjustment of Rs. 5,28,04,851/- to the assessee's total income. 2. Selection of the Tested Party in Transfer Pricing: The TPO rejected the assessee's choice of the foreign AE as the tested party, citing that the Indian transfer pricing regulations do not support selecting a foreign AE as the tested party. The TPO argued that the tested party should be the one with the least complex functional analysis and for which reliable data is available without significant adjustments. The Tribunal, however, referred to the OECD guidelines and the UN TP Manual, which allow for the selection of a foreign AE as the tested party if it is the least complex entity and reliable data is available. The Tribunal remanded the issue back to the TPO for fresh consideration, directing the TPO to examine the claim of the foreign AE as the tested party. 3. Application of Turnover Filter in Choosing Comparable Companies: The assessee challenged the inclusion of certain high-turnover companies as comparables, arguing that companies with high turnover should be excluded just as companies with low turnover were excluded. The Tribunal upheld the assessee's contention, citing various decisions, including those of the ITAT Bangalore Bench, which favored excluding companies with significantly higher turnover than the assessee. The Tribunal directed the exclusion of 8 companies with turnovers exceeding Rs. 200 Crores from the list of comparables. 4. Grant of Adjustments for Working Capital, Risk, and Capacity Utilization: The Tribunal addressed the assessee's grievances regarding the denial of adjustments for working capital, risk, and capacity utilization: - Working Capital Adjustment: The Tribunal, following previous decisions, directed the TPO to allow working capital adjustments after examining the details furnished by the assessee. - Risk Adjustment: The Tribunal remanded the issue to the TPO, directing the assessee to provide specific details and computations for risk adjustment. - Capacity Utilization Adjustment: The Tribunal recognized the need for capacity utilization adjustment, especially for newly established entities. It directed the TPO to obtain necessary data from comparable companies using powers under section 133(6) of the Act and allow appropriate adjustments. Conclusion: The Tribunal partially allowed the appeal, directing the TPO/AO to recompute the ALP for the international transaction, considering the directions provided, including the exclusion of certain high-turnover comparables and the allowance of adjustments for working capital, risk, and capacity utilization. The issue of selecting the foreign AE as the tested party was remanded for fresh consideration.
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