2025 (3) TMI 832 - AT - Income Tax

TP adjustment made to the arm s length price (ALP) of the international transactions carried out by the assessee with its Associate Enterprises (AE) in terms of section 92C - comparable selection - HELD THAT - We direct the AO to include Nimbus Pipes Ltd. in the final comparable sets and thereafter determine whether international transactions of the assessee were at ALP in accordance with law and rules in this regard.

ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal questions:

1. Whether the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) erred in recomputing the arm's length price (ALP) of the international transactions of import/export of raw materials/traded goods by proposing an upward adjustment.

2. Whether the AO and DRP erred in applying a turnover filter of 10 times the tested party's turnover, leading to the rejection of certain comparable companies from the Transfer Pricing Study Report (TPSR).

3. Whether the provision for doubtful debts should be treated as an operating expense, thereby affecting the operating margin calculation.

4. Whether the AO and DRP erred in not considering the updated margins submitted by the appellant for the financial year 2019-20.

5. Whether the AO and DRP erred in not considering the updated margin of Signet Industries Ltd at the entity level.

6. Whether Nimbus Pipes Ltd should be included as a comparable company in the final set of comparable companies.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Re-computation of ALP and Upward Adjustment

The Tribunal examined whether the AO and DRP correctly recomputed the ALP of the international transactions, leading to an upward adjustment of INR 13,68,21,254. The relevant legal framework involves Section 92C of the Income Tax Act, which mandates that international transactions with associate enterprises (AEs) be conducted at arm's length. The Transfer Pricing Officer (TPO) found discrepancies in the comparables selected by the assessee, leading to the proposed adjustment. The Tribunal focused on whether the correct comparables were used and whether the adjustments were justified based on the facts presented.

Issue 2: Application of Turnover Filter

The Tribunal considered the AO's application of a turnover filter, which led to the rejection of three comparable companies. The assessee argued that this filter was erroneously applied, affecting the comparability analysis. The Tribunal analyzed whether the turnover filter was appropriate under the circumstances and whether it adhered to established precedents in transfer pricing cases.

Issue 3: Treatment of Provision for Doubtful Debts

The Tribunal examined whether the provision for doubtful debts should be treated as an operating expense. The DRP's directions suggested treating it as a non-operating expense, but the AO considered it an operating expense, affecting the calculation of the operating margin. The Tribunal reviewed the evidence and legal precedents to determine the correct treatment of such provisions.

Issue 4: Consideration of Updated Margins

The Tribunal evaluated whether the AO and DRP erred in not considering the updated margins submitted by the assessee for the financial year 2019-20. The assessee argued that these updated margins were crucial for an accurate determination of the ALP. The Tribunal assessed the relevance and admissibility of the updated data in the context of the case.

Issue 5: Consideration of Updated Margin of Signet Industries Ltd

The Tribunal reviewed whether the AO and DRP should have considered the updated margin of Signet Industries Ltd at the entity level. The assessee contended that this updated margin was significant for the comparability analysis. The Tribunal analyzed the evidence and arguments to decide on the inclusion of this updated margin.

Issue 6: Inclusion of Nimbus Pipes Ltd as Comparable

The Tribunal focused on whether Nimbus Pipes Ltd should be included in the final set of comparable companies. The DRP found Nimbus Pipes Ltd to be functionally similar to the assessee, but the AO did not include it in the final comparables. The Tribunal evaluated the functional comparability and the DRP's findings to determine if Nimbus Pipes Ltd should be included.

SIGNIFICANT HOLDINGS

The Tribunal held that Nimbus Pipes Ltd should be included in the final set of comparables. The Tribunal directed the AO to include Nimbus Pipes Ltd in the final comparable set and to reassess whether the international transactions were at ALP in accordance with the law. The Tribunal did not adjudicate the remaining grounds as they were not pressed by the assessee.

Key principles established include the importance of accurate comparability analysis and the need to consider all relevant data and functional similarities in determining the ALP of international transactions. The Tribunal emphasized adherence to the legal framework under Section 92C and the necessity of using appropriate filters and comparables in transfer pricing cases.

The appeal was allowed in terms of the inclusion of Nimbus Pipes Ltd, with the Tribunal directing a reassessment of the ALP based on the updated set of comparables.

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