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2022 (10) TMI 1102 - AT - Income TaxTP Adjustment - comparable selection - Whether high turnover is a ground for excluding companies as not comparable with a company that has low turnover? - HELD THAT - As relying on case of Autodesk India Pvt.Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE . we hold that the following 3 companies viz., Exiliant Technologies Pvt. Ltd., Tata Elxsi Ltd., and Mindtree Ltd., whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Action of the TPO in not giving effect to the directions of the DRP directing Devita Engineering (India) Ltd., as a comparable company - It is undisputed that the DRP in its directions directed Devita Engineering (India) Ltd., to be included as a comparable company (vide Paragraph 2.3.20.1 of the DRP s direction). The TPO, while giving effect to the order of the DRP, failed to give effect to this direction. We are of the view that it would be just and appropriate to direct the TPO/AO to include this company also as a comparable company in the list of comparable companies. We hold and direct accordingly. Grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal in the case of Huawei Technologies India Pvt. Ltd 2018 (10) TMI 1796 - ITAT BANGALORE after affording opportunity of being heard to the assessee.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for provision of Engineering Design Services (EDS) to Associated Enterprises (AEs). 2. Application of turnover filter in selecting comparable companies. 3. Inclusion of specific comparable companies as directed by the Disputes Resolution Panel (DRP). 4. Grant of working capital adjustment. Issue-wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP): The assessee, engaged in providing Engineering Design Services (EDS) to its Associated Enterprises (AEs), filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee identified 14 companies for comparison, claiming the price charged in the international transaction was at Arm's Length. The Transfer Pricing Officer (TPO) accepted TNMM and OP/OC but identified 9 additional comparable companies, leading to an adjustment of Rs.1,90,21,902/- to the total income of the assessee. 2. Application of Turnover Filter: The assessee contested the inclusion of three companies (Exilant Technologies Pvt. Ltd., Mindtree Ltd., and Tata Elxsi Ltd.) with turnovers exceeding Rs.200 Crores, arguing for their exclusion based on the turnover filter. The DRP upheld their inclusion, citing functional comparability as the primary criterion. However, the Tribunal referenced multiple decisions, including Dell International Services India Pvt. Ltd. vs. DCIT, which supported the exclusion of companies with significantly higher turnovers. Consequently, the Tribunal directed the exclusion of the three companies with turnovers above Rs.200 Crores from the list of comparables. 3. Inclusion of Specific Comparable Companies: The DRP directed the inclusion of Devita Engineering (India) Ltd. as a comparable company. The TPO failed to comply with this direction. The Tribunal found this omission unjust and directed the TPO/AO to include Devita Engineering (India) Ltd. in the list of comparable companies. 4. Grant of Working Capital Adjustment: The assessee sought a working capital adjustment, which the DRP denied, citing lack of demonstrated impact on costs, price, or profit. The Tribunal referred to the case of Huawei Technologies India Pvt. Ltd. vs. JCIT, which supported the necessity of working capital adjustments to account for differences in the time value of money. The Tribunal directed the TPO/AO to re-examine the issue of working capital adjustment in light of the relevant guidelines and afford the assessee an opportunity to present their case. Conclusion: The Tribunal partially allowed the appeal, directing the exclusion of high-turnover companies from the comparables, inclusion of Devita Engineering (India) Ltd., and re-examination of the working capital adjustment by the TPO/AO. The TPO/AO was instructed to compute the ALP of the international transaction after giving effect to these directions, ensuring the assessee is heard.
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