2023 (3) TMI 1086 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Assessee in engaged in the business of provision of Information Technology enabled Services (ITeS), to its wholly owned holding company, thus companies functionally dissimilar with that of assessee need to be deselected. Application of turnover filter - We hold that 7 companies whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies - We direct the TPO/AO to compute the ALP of international transaction in question as per the directions contained in this order, after affording Assessee opportunity of being heard.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for the provision of Information Technology enabled Services (ITeS) to the Associated Enterprise (AE).
2. Rejection of comparable companies by the Transfer Pricing Officer (TPO).
3. Inclusion of Wizard E Marketing Pvt. Ltd. as a comparable company.
4. Application of the turnover filter for selecting comparable companies.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The core issue in the appeal was the determination of ALP for the ITeS provided by the Assessee to its AE. The Assessee used the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee's OP/OC was 10%. The TPO accepted the TNMM and PLI but identified additional comparable companies, leading to an average arithmetic mean of 26.34%. Consequently, an adjustment of Rs.1,37,61,135/- was added to the Assessee's income.

2. Rejection of Comparable Companies by the TPO:
The Assessee contested the TPO's rejection of 12 comparable companies due to the unavailability of data in the database, despite providing annual reports. The Tribunal noted that the TPO and the Disputes Resolution Panel (DRP) failed to consider the data provided by the Assessee. It was directed that the issue of comparability of these companies be reconsidered by the TPO/AO after providing the Assessee an opportunity to be heard.

3. Inclusion of Wizard E Marketing Pvt. Ltd.:
The TPO excluded Wizard E Marketing Pvt. Ltd. on the grounds of failing the export turnover filter. The Assessee argued that the company's export turnover was 97.65% of the total turnover, meeting the filter criteria. This submission was overlooked by both the TPO and the DRP. The Tribunal directed the TPO/AO to re-evaluate the inclusion of this company as a comparable, considering the Assessee's submissions.

4. Application of the Turnover Filter:
The Assessee argued for the exclusion of companies with a turnover exceeding Rs.200 Crores, citing that their turnover was only Rs.9.6 Crores. The Tribunal referenced various decisions, including those of the ITAT Bangalore and the Hon'ble Bombay High Court, supporting the exclusion of high turnover companies for comparability. The Tribunal concluded that companies with turnovers exceeding Rs.200 Crores should be excluded, listing seven such companies, including Microland Ltd., Infosys B P M Services Pvt. Ltd., and others.

Conclusion:
The Tribunal directed the TPO/AO to re-compute the ALP, considering the inclusion and exclusion directives provided, and after affording the Assessee an opportunity to be heard. The appeal was partly allowed, emphasizing the need for a thorough re-evaluation of comparable companies and adherence to turnover filters in determining ALP.