2017 (2) TMI 802 - AT - Income Tax

TPA - selection of comparable - inclusion of M/s. Anshuni Commercials Ltd in the final set of comparables - Held that - Turnover filter is being selectively sought to be used by the Revenue to exclude M/s.Anshuni Commercials Ltd., whereas the surviving comparables have not been put to such a test by the Transfer Pricing Officer. Therefore, following the decision of the Hon ble Delhi High Court in the case of M/s. Nortel Networks India A. Pvt. Ltd.(2015 (3) TMI 14 - DELHI HIGH COURT ), the stand of the Revenue seeking exclusion of M/s. Anshuni Commercials Ltd. from the set of final comparables is quite untenable and is hereby rejected.

Summary

Issues Involved:
1. Whether the DRP erred in ignoring turnover as a valid criterion in choosing comparables.
2. Whether the DRP failed to appreciate the importance of the turnover filter as per Section 92C and Rule 108(2) of the Income Tax Act and Rules.
3. Whether the DRP failed to consider judicial precedents like Sony India 114 ITO 448 (Del)(2008) regarding turnover filter.
4. Whether the Assessing Officer erred in not reducing the Exchange Difference from the total income despite the DRP's specific direction.

Detailed Analysis:

1. Ignoring Turnover as a Valid Criterion:
The Revenue's primary grievance was against the DRP's direction to include M/s. Anshuni Commercials Ltd. in the final set of comparables, despite its significantly lower turnover compared to the assessee. The DRP had directed this inclusion on the grounds of functional comparability, stating, "difference in turnover cannot be regarded as valid criteria to exclude a comparable." The Tribunal noted that the Revenue's contention was "misconceived" as the DRP's decision was based on functional comparability, which was not challenged by the Revenue. Thus, the Tribunal found the Revenue's appeal unsustainable.

2. Importance of Turnover Filter:
The Tribunal acknowledged that the turnover filter is a relevant factor for comparability, referencing the Hon'ble Bombay High Court's observation in CIT v. M/s. Pentair Water India Pvt. Ltd. However, it emphasized that the DRP's decision to include M/s. Anshuni Commercials Ltd. was based on functional comparability, which the Revenue did not challenge. The Tribunal further cited the Hon'ble Delhi High Court's decision in CIT vs. Nortel Networks India A. Pvt. Ltd., which stated that the turnover filter should not be applied inconsistently. The Tribunal found that the turnover filter was not applied by any party at any stage and that the Transfer Pricing Officer had included other comparables with significant turnover differences. Therefore, the Tribunal rejected the Revenue's appeal.

3. Judicial Precedents:
The Revenue cited various judicial precedents, including Sony India 114 ITO 448 (Del)(2008), to support the importance of the turnover filter. However, the Tribunal found that these precedents did not alter the functional comparability of M/s. Anshuni Commercials Ltd. with the assessee. The Tribunal emphasized that the turnover filter was not applied consistently, and thus, the Revenue's reliance on these precedents was misplaced.

4. Exchange Difference:
The assessee's cross-objection included a ground that the Assessing Officer erred in not reducing the Exchange Difference of ?11,79,872 from the total income despite a specific direction by the DRP. The Tribunal directed the Assessing Officer to "give effect to the directions of the DRP to exclude Exchange Difference of ?11,79,872 from the total income of the current year in order to arrive at the taxable income." This direction was upheld, allowing the assessee's cross-objection for statistical purposes.

Conclusion:
The Tribunal dismissed the Revenue's appeal, finding that the DRP's inclusion of M/s. Anshuni Commercials Ltd. in the final set of comparables was based on functional comparability, and the turnover filter was not applied consistently. The Tribunal also directed the Assessing Officer to exclude the Exchange Difference from the total income as per the DRP's direction. Thus, the assessee's cross-objection was partly allowed.