2018 (5) TMI 588 - AT - Income Tax

TPA - ALP determination - application of Turnover Filter and functional comparability of the comparables - Held that - A perusal of nature of business carried on by assessee reveal that the assessee was engaged in supply of imported biomedical diagnostic equipments which was not a normal line of business but a specialized kind of business requiring not only business skills but also technical skills as well. Upon consideration of material before us, this pertinent question has remained unanswered. As a logical consequence, if turnover filter was, at all, found to be a relevant factor for the margins earned by the assessee then the next pertinent question would be the upper / lower range thereof so as to arrive at meaningful TP study as envisaged by law. So far as the issue of comparables is concerned, we find that under TNMM method, only a broad functional comparability is required and the statute, itself, has provided for a tolerance range of /-5% to weed out the dissimilarities since no two entities could exactly be the identical / similar in all respect. It is noteworthy that all the comparables under dispute has been selected by the assessee itself and no comparable has been introduced by the revenue and therefore, the more onus was on assessee to justify exclusion / inclusion of two comparables namely Ashco Industries Ltd. & Frontline. AR has brought to our notice the judicial pronouncements to contend that the comparables initially selected by the assessee could be excluded subsequently, finding them to be functionally or otherwise un-comparable in the circumstances. At the same time, we are of the opinion that there could not be any cherry picking to suit the requirement of the assessee. Remit the matter back to the file of Ld. AO / TPO for fresh determination of ALP of the transactions under dispute keeping in view the aforesaid factors

Summary

Issues:
1. Determination of Arm's Length Price of International Transactions
2. Consideration of qualitative data of comparables
3. Rejection of certain comparables based on high turnover

Issue 1: Determination of Arm's Length Price of International Transactions

The appeal contested the final assessment order passed by the Additional Commissioner of Income Tax-Range pursuant to the directions of the Dispute Resolution Panel. The dispute revolved around the determination of the Arm's Length Price (ALP) of the appellant's international transactions with its Associated Enterprises in the trading segment. The Transfer Pricing Officer (TPO) did not consider the fresh benchmarking requested during assessment proceedings. The appellant argued that certain comparables were not considered, leading to a Transfer Pricing (TP) adjustment. The ALP was computed based on the transactions with Associated Enterprises, resulting in a TP adjustment of ?7.55 crores. The matter was raised before the DRP, but the objections were not successful. The final assessment order was contested through the present appeal.

Issue 2: Consideration of Qualitative Data of Comparables

The appellant argued that the authorities erred in not considering qualitative data of certain comparables during the assessment proceedings. Specifically, the appellant highlighted the exclusion of Frontline Electro Medical Ltd. from the list of comparables and the inclusion of Ashco Niulab Industries Ltd., despite its trading income being only 49.96%. The appellant contended that certain comparables were rejected based on high turnover without proving its influence on operating margins. The dispute centered around the functional comparability of the selected comparables and the application of the turnover filter in the Transfer Pricing study.

Issue 3: Rejection of Certain Comparables Based on High Turnover

The controversy involved the rejection of certain comparables deemed functionally comparable to the appellant due to their high turnover. The appellant argued that the high turnover of comparables did not unduly influence their operating margins. Both parties presented arguments regarding the relevance of the turnover filter in the Transfer Pricing study. The Tribunal observed that the turnover filter's relevance and its impact on margins in the appellant's specialized business remained unanswered. The issue of comparables selection under the TNMM method was crucial, emphasizing the need for functional comparability within the tolerance range of +/-5%. The Tribunal directed a fresh determination of the ALP by the AO/TPO, considering the factors discussed, and instructed the appellant to substantiate their position with a fresh TP study if necessary.

In conclusion, the Tribunal partly allowed the appellant's appeal for statistical purposes, remitting the matter back to the AO/TPO for a fresh determination of the Arm's Length Price of the disputed transactions. The decision highlighted the importance of functional comparability and the application of turnover filters in Transfer Pricing studies, emphasizing the need for a thorough analysis to ensure compliance with the law.