2023 (1) TMI 1417 - AT - Income Tax

TP Adjustment - comparable selection - applicability of turnover filter - AR submitted that the authorities have excluded companies having turnover of less than Rs. 1 crore however, the upper limit to turnover for exclusion of comparable companies has not been applied - HELD THAT - Companies that has turnover exceeding Rs. 200 crores deserves to be excluded from the final set of comparables. TPO modified the application of persistent loss filter by rejecting the companies which incurred loss in two out of three previous years instead of incurring losses in all the three previous AYs - Following the ratio laid down in Affinity Express India Pvt. Ltd. 2016 (3) TMI 1121 - ITAT PUNE we hold that companies should not be excluded for the purpose of comparability and computation of ALP, merely because there is loss in two out of three preceding A.Ys. AO should verify whether such companies were consistent loss making companies. AO is therefore directed to reconsider the comparable afresh that were rejected by applying the persistent loss making filter in the light of these above referred decision by Hon ble Pune Tribunal. Accordingly, this ground raised by the assessee stands allowed for statistical purposes. TPO committed arithmetic error in computing the operating margin of the assessee while passing the order u/s. 92C - In our view this needs to be verified by the Ld.AO/TPO. In the event, the forex loss has already been considered while computing the total expenses, the same deserves to be excluded.

Summary

Issues Involved:
1. Applicability of turnover filter for comparables.
2. Application of persistent loss filter.
3. Inclusion of additional comparables.
4. Arithmetic error in computing operating margin due to forex loss/gain.

Issue-wise Detailed Analysis:

1. Applicability of Turnover Filter for Comparables:
The primary contention of the assessee in ground no. 5.2 is the applicability of the turnover filter in respect of the comparables sought for exclusion. The authorities excluded companies with turnover less than Rs. 1 crore but did not apply an upper limit for exclusion. The assessee argued that companies with turnover greater than Rs. 200 crores should be excluded, citing decisions such as Galax-E-Solutions, Pentair Water India Pvt. Ltd., Blue Coat Network (India) Ltd., and MWYN Tech Pvt. Ltd. The Tribunal referenced a recent decision in M/s. Altair Engineering India Pvt. Ltd. vs. ACIT, which excluded companies with turnover exceeding Rs. 200 crores. Consequently, companies like Exilant Technologies Pvt. Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd., Mindtree Ltd., Persistent Systems Ltd., Wipro Ltd., Tata Elxsi Ltd., Infosys Ltd., and Cybage Software Pvt. Ltd. were excluded from the final set of comparables. Accordingly, Ground no. 5.2(b) raised by the assessee was allowed.

2. Application of Persistent Loss Filter:
The assessee contested the Ld.TPO's application of the persistent loss filter, which rejected companies incurring losses in two out of three previous years. The Ld.AR cited precedents such as Mindteck India Ltd. and KBACE Technologies Pvt. Ltd. The Tribunal referenced the Pune Tribunal's decision in Affinity Express India Pvt. Ltd., which held that companies should not be excluded merely for incurring losses in two out of three preceding years but should be verified for consistent loss-making. The Ld.AO was directed to reconsider the comparables afresh, and this ground was allowed for statistical purposes.

3. Inclusion of Additional Comparables:
The assessee sought the inclusion of additional comparables: Batchmaster Software Pvt. Ltd., Extentia Information Technology Pvt. Ltd., Orangespace Technologies Ltd., Yudiz Solutions Pvt. Ltd., and Celstream Technologies Pvt. Ltd. The Tribunal directed the Ld.TPO to verify the FAR (Functions, Assets, and Risks) of these comparables with that of the assessee. This ground was allowed for statistical purposes.

4. Arithmetic Error in Computing Operating Margin Due to Forex Loss/Gain:
The assessee raised an additional ground (Ground No-8) under Rule 11, arguing that the Ld.TPO committed an arithmetic error by adding forex loss/gain to the total expenses, which was already considered, thus reducing the actual margin. The Ld.DR did not object to the admission of this additional ground. The Tribunal admitted the additional ground, referencing the decisions of the Hon'ble Supreme Court in National Thermal Power Co. Ltd. Vs. CIT and Jute Corporation of India Ltd. Vs. CIT. The Ld.AO/TPO was directed to verify the computation and consider the claim in accordance with the law. This ground was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed, with specific grounds being allowed for statistical purposes and others being admitted for detailed verification and reconsideration. The Tribunal emphasized the importance of accurate comparability analysis and proper application of filters in transfer pricing assessments. The order was pronounced in the open court on 20th January 2023.