2022 (6) TMI 1526 - AT - Income Tax

TP Adjustment - Adjustment on depreciation to the assessee - HELD THAT - Issues stands covered by the order of this Tribunal passed in assessee s own case for A.Y. 2004-05 2022 (2) TMI 1500 - ITAT BANGALORE wherein it has been held that the depreciation adjustment is to be granted whereby the rates of depreciation is different vis-a-vis the comparable companies. Further as regards whether adjustment should be made in the hands of the tested party i.e. the assessee or the comparable companies the Mumbai Tribunal decision in the case of Pangea 3 Legal Database Systems (P) Ltd. 2021 (2) TMI 1322 - ITAT MUMBAI held that where rates of depreciation were different in case of assessee and comparable companies Rule 10B(1) permits an adjustment in the hands of the tested party also and depreciation adjustment has to be allowed. Excluding comparables by applying turnover filter excluding certain comparables from the final list - Exclusion of Maple e Solutions Ltd Nucleous Netsoft GIS Ltd. Wipro BPO Solutions Ltd., Cosmic Global Ltd Vishal Information Technology Ltd and Saffron Global Ltd. as functionally dissimilar. Risk adjustment - As no details were furnished by assessee in respect of risk assumed by the comparable companies with that of the assessee that needs to be adjusted while computing the ALP. Principally we agree that the adjustment is to be computed in accordance with Rule 10D however the details are to be furnished by the assessee in respect of the comparables without which the risk cannot be computed. We therefore modify the directions of the Ld.CIT(A) by directing the assessee to provide all relevant information to the AO/TPO for computing the risk undertaken by the comparables vis- -vis that of the assessee for adjustment to be granted.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

a) Whether the CIT(A) erred in seeking exact comparability under the Transactional Net Margin Method (TNMM).

b) Whether the CIT(A) ignored the parameters of analysis prescribed under Rule 10B, and if it is legally permissible to bypass them.

c) Whether the CIT(A) was correct in excluding certain comparables by applying a turnover filter, ignoring prior jurisdictional ITAT decisions.

d) Whether the CIT(A) erred in not acknowledging the relationship between brand value and profit margin.

e) Whether the CIT(A) erred in granting a risk adjustment without quantifiable differences in risk.

f) Whether the CIT(A) failed to follow previous ITAT decisions in similar cases.

g) Whether the CIT(A) erred in granting depreciation adjustment when the taxpayer's profit margin before depreciation was not at arm's length.

h) Whether the CIT(A) erred in granting depreciation adjustment without considering three years of data.

ISSUE-WISE DETAILED ANALYSIS

Comparability under TNMM and Turnover Filter (Issues a-d):

The legal framework involves the application of the TNMM and the use of comparables to determine the arm's length price. The CIT(A) excluded certain comparables based on the turnover filter, which was contested by the revenue. The Tribunal noted that the CIT(A) had valid reasons for exclusion, such as fraudulent activities or differences in business models, which were supported by precedents from other Tribunal decisions. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in excluding the comparables.

Risk Adjustment (Issues e-f):

The CIT(A) granted a risk adjustment to the assessee, but the Tribunal noted that the assessee did not provide sufficient details to quantify the risk differences between the assessee and the comparables. The Tribunal agreed in principle with the need for risk adjustment but required the assessee to furnish necessary information to compute the adjustment accurately. The Tribunal modified the CIT(A)'s directions, allowing the revenue to reassess the risk adjustment based on additional information from the assessee.

Depreciation Adjustment (Issues g-h):

The Tribunal referred to previous decisions, which allowed depreciation adjustments when there were differences in depreciation rates between the assessee and comparables. The Tribunal found that the CIT(A)'s decision to grant depreciation adjustment was consistent with these precedents. The Tribunal dismissed the revenue's grounds on this issue, affirming the CIT(A)'s decision.

SIGNIFICANT HOLDINGS

The Tribunal upheld the CIT(A)'s exclusion of certain comparables based on valid reasons, such as fraudulent activities and differences in business models. The Tribunal emphasized the importance of providing sufficient details for risk adjustment, modifying the CIT(A)'s directions to require the assessee to furnish necessary information. The Tribunal affirmed the CIT(A)'s decision on depreciation adjustment, consistent with previous Tribunal decisions.

In summary, the Tribunal partly allowed the revenue's appeal for statistical purposes, requiring further information for risk adjustment, while dismissing other grounds raised by the revenue.