2023 (6) TMI 23 - AT - Income Tax

TP Adjustment - comparable selection - AR submitted that the turnover of the assessee is Rs.52 crores and the TPO while applying the turnover filter did not apply the upper turnover filter of Rs.200 crores - HELD THAT - The Tribunal in the case of Autodesk India Pvt.Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE took note of all the conflicting decision on the issue and rendered its decision held as that high turnover is a ground for excluding companies as not comparable with a company that has low turnover. Thus we hold that companies whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Working capital adjustment - As decided in Huawei Technologies India P. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore, in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore, the working capital adjustment as claimed by the Assessee should be allowed. We remit the issue of TP adjustment made back to TPO for a denovo consideration with a direction to keep in mind the above decisions of the coordinate bench with regard to application of turnover filter and working capital adjustment for determination of ALP, taking into account the details submitted by the assessee after allowing an opportunity of hearing to the assessee. Inclusion of non-AE transactions for the purpose of ALP - contention of the revenue is that the terms of transaction between the assessee and the other person is influenced by the AE and accordingly the transactions with local vendors is a deemed international transaction - HELD THAT - DRP has upheld that decision of the TPO without analysing the provisions under which the transaction is deemed as international transaction and without calling for any relevant documents in this regard. As further notice that the DRP has stated that no segregation of accounts for AEs and Non-AEs was available and segment-based information pertaining to AE and Non-AE sales and purchases was to be provided. As submitted by the ld AR we see no merit in this contention since the raw materials procured from AEs and non-AEs have been consumed in making sale of finished goods to only one customer who is not an AE u/s 92 and accordingly the question of providing a break-up of revenue and cost pertaining to AEs and Non- AEs segments does not arise. Transactions with the local vendors the terms of which are not influenced by Comer SpA cannot be treated as deemed international transaction and accordingly cannot be included for the purpose of ALP adjustment. TPO is directed accordingly to consider only the transaction with AE for the purpose of determination ALP in accordance with the directions given in this order. Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. General opposition to the impugned order.
2. Inclusion of non-AE transactions for the purpose of ALP.
3. Inclusion and exclusion of comparables based on turnover filter, functional similarity/dissimilarity, and persistent loss filter.
4. Working capital adjustment.
5. Consideration of incorrect margin of comparables.

Detailed Analysis:

General Opposition to the Impugned Order:
- Issue: The appellant argued that the impugned order is opposed to law and facts, prejudicial to their interest.
- Judgment: This ground was deemed general and did not warrant specific adjudication.

Inclusion of Non-AE Transactions for the Purpose of ALP:
- Issue: The appellant contended that the inclusion of transactions with non-associated enterprises (AEs) for ALP adjustments is invalid and bad in law.
- Judgment: The Tribunal held that transactions with local vendors, where terms are not influenced by Comer SpA, cannot be treated as deemed international transactions. The TPO's finding was unsupported by evidence, and the report of the auditor cannot be the sole basis for adjustments. Only transactions with AEs should be considered for ALP determination.

Inclusion and Exclusion of Comparables:
- Issue: The appellant contested the inclusion of certain companies as comparables due to functional dissimilarity, failure to meet turnover criteria, and persistent loss.
- Judgment: The Tribunal cited the decision in the case of Autodesk India Pvt. Ltd. vs. DCIT, emphasizing that high turnover is a valid ground for excluding companies as comparables. Companies with turnover exceeding Rs.200 Crores were excluded. The Tribunal remitted the issue back to the TPO for a de novo consideration, directing the application of the upper turnover filter and re-evaluation of comparables.

Working Capital Adjustment:
- Issue: The appellant argued that the working capital adjustment was not considered in the computation of the ALP.
- Judgment: The Tribunal referred to the case of Huawei Technologies India P. Ltd., which upheld the necessity of working capital adjustments to account for differences in time value of money between the tested party and comparables. The Tribunal directed the TPO to allow the working capital adjustment based on the appellant's submissions.

Consideration of Incorrect Margin of Comparables:
- Issue: The appellant claimed that the Operating Margin of Comparables computed by the AO was erroneous.
- Judgment: This ground became academic due to the Tribunal's decision to remit the issue of TP adjustment back to the TPO for re-evaluation, considering the turnover filter and working capital adjustment.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to re-evaluate the TP adjustment by excluding companies with turnover exceeding Rs.200 Crores, considering working capital adjustments, and limiting ALP adjustments to transactions with AEs. The Tribunal emphasized the need for evidence to support the inclusion of non-AE transactions and upheld the appellant's right to contest deemed international transactions reported in Form 3CEB.