2024 (11) TMI 1198 - AT - Income Tax

TP Adjustment - Rejection of comparable companies selected by the assessee in its TP study analysis - HELD THAT - Unfortunately, the assessee has sought inclusion of these companies in the TP Study Report, however, for the reasons best known to the TPO, it was stated that these companies were not meeting the search matrix and accordingly, they were rejected by the TPO. Since the assessee has shown us that these companies are appearing in search matrix, therefore, it would be in the interests of justice the issue of inclusion of these companies are remanded back to the file of TPO with a direction to examine whether these companies are functionally comparable with the assessee company or not after applying the applicable filters. If these companies were functionally comparable, then the TPO is directed to include these companies for the purpose of computing the ALP. Thus, these grounds are allowed for statistical purposes. Rejection of comparable on the ground of higher turnover - There is no dispute that while selecting the comparable companies, the TPO has applied one filter of turnover but only minimum turnover filter of Rs. 1 crore was applied by the TPO and no maximum turnover filter was applied. Once the turnover is applied as a filter while selecting the comparables, then there should be a consistent parameter of such turnover filter like 10 times of the turnover of the assessee in both higher as well as lower side. Therefore, applying one side turnover filter by the TPO is not proper and justified. Accordingly, this issue of applying the turnover filter is set aside to the record of the TPO for carrying out necessary exercise for exclusion and inclusion of the comparable companies in the set of comparables while determining the ALP. We may clarify that once the turnover filter is applied as 10 times on the higher side and 1/10th of the lower side, then the same would be applicable to the entire set of comparables and not on the selective companies. Treating deferred receivables as international transaction and adjustments made by the TPO on notional interest - To maintain rule of consistency, this issue is remanded to the record of the AO/TPO for applying savings Bank rate of 6%on the deferred receivables after allowing credit period of 60 days. This issue is partly allowed.

Issues Involved:

1. Rejection of comparable companies by the Transfer Pricing Officer (TPO).
2. Inclusion of certain companies by the TPO in the set of comparables.
3. Application of related party filter by the TPO.
4. Treatment of deferred receivables as international transactions.
5. Consideration of foreign exchange currency fluctuation gain/loss as operating in nature.

Detailed Analysis:

Issue 1: Rejection of Comparable Companies

The assessee challenged the TPO's rejection of eight comparable companies in its Transfer Pricing (TP) study analysis. The assessee argued that these companies were functionally comparable and met all filters applied by the TPO. However, the TPO rejected these comparables and selected a new set of 21 companies, resulting in a proposed transfer pricing adjustment. The Tribunal noted that in the assessee's own case for the previous assessment year, a similar issue was remanded to the TPO for reconsideration. Therefore, to maintain consistency, the Tribunal remanded the issue of rejection of six comparables (excluding Sasken Technologies and E-Zest Solutions) back to the Assessing Officer for fresh examination and determination of the Arm's Length Price (ALP).

Issue 2: Inclusion of Certain Companies by the TPO

The assessee contested the inclusion of 16 companies by the TPO, arguing that these companies had significantly higher turnover, related party transactions (RPT), and onsite revenues, making them incomparable. The Tribunal observed that the TPO applied only a minimum turnover filter of Rs. 1 crore without considering a maximum turnover filter. The Tribunal referenced its previous decision, which applied a consistent turnover filter of 10 times on both the higher and lower sides. Consequently, the Tribunal remanded the issue back to the TPO to apply the turnover filter consistently and determine the ALP accordingly.

Issue 3: Application of Related Party Filter

The TPO applied a related party filter of 25%, while the assessee applied a filter of 15%. During the hearing, the assessee chose not to press this ground, and the Tribunal dismissed it as not pressed.

Issue 4: Treatment of Deferred Receivables as International Transactions

The TPO treated deferred receivables from Associated Enterprises as international transactions and proposed notional interest adjustments. The assessee referenced a previous Tribunal decision, which applied a 6% interest rate with a 60-day credit period. The Tribunal, maintaining consistency, remanded the issue to the Assessing Officer/TPO to apply the savings bank rate of 6% on deferred receivables after allowing a 60-day credit period.

Issue 5: Consideration of Foreign Exchange Currency Fluctuation Gain/Loss

The assessee initially contested the TPO's consideration of foreign exchange currency fluctuation gain/loss as operating in nature. However, during the hearing, the assessee chose not to press this ground, and the Tribunal dismissed it as not pressed.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with several issues remanded back to the Assessing Officer/TPO for reconsideration and determination in light of the Tribunal's directions. The order was pronounced in the Open Court on 25th November 2024.

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