2021 (7) TMI 897 - AT - Income Tax

TP Adjustment - comparable selection - Rejection of filter which was applied by the ld. TPO wherein companies having export sales less than 75% of the total sales - HELD THAT - We find that assessee is mainly into operations being a low risk captive service provider providing back office support services in the nature and operations of technology, oversight services and other share services to its associated enterprises. It is not in dispute that assessee s ITES segment is mainly catering to export market. Hence, there is absolutely no harm in ld. TPO applying the filter by rejecting the companies having export sales less than 75% of its total sales. The arguments of AR that the comparable companies having more domestic sales than the export sales could also be considered as comparable as per Rule 10A(a) of the Rules could be appreciated in the event, where the percentage of export sales and domestic sales are equal or the differences between them are not huge. As stated earlier in the instant case, there is no dispute that assessee in its ITES segment had been catering predominantly in export market to its AEs. Hence, it would be just and fair to have comparable companies which are also having more than 75% of its sales derived from export market. Hence, we hold that the filter adopted by the ld. TPO in this regard would be a valid filter. Rejection of filter which was applied by the ld. TPO wherein companies having related party transactions more than 25% of sales - We are unable to persuade to accede to these arguments of the ld. AR in view of the fact that any comparable company having more than 25% of related party transactions would be able to have advantage in prices negotiated between the controlled entities (that is related parties) and it becomes controlled transactions and that such negotiated advantageous pricing mechanism would certainly have a major bearing on the PLI of the said comparable company that is why the spirit of provisions of Chapter X of the Act mandate that a controlled transaction should be always comparable with uncontrolled transaction for the purpose of determination of arm s length price. Hence, it would be just and fair to apply a filter by rejecting comparable companies having related party transactions more than 25% of the operating revenues. Hence, we hold that this filter applied by the ld. TPO for the purpose of determination of arm s length price is to be considered as a valid filter.None of the observations considered by the ld. TPO were even addressed by the ld. CIT(A) in his order, as rightly pointed out by the ld. DR before us. Accordingly, the ground No.2B raised by the revenue is allowed. Rejection of filter which was applied by the ld. TPO wherein companies having consistent losses - We find that A.Y.2010-11 is the first year of operation of the assessee company. We are in agreement with the argument advanced by the ld. AR that consistent loss making companies are to be construed as those companies which are incurring operational losses year after year or atleast in the last three years including the year under consideration. We are also in agreement with the argument advanced by the ld. AR that if a particular comparable had made profits in the earlier two years and had incurred losses during the year under consideration alone, then, the said company would not fall under the ambit of persistent loss making company. Since assessee is in the first year of operation where due to heavy investments made in the initial year and claim of depreciation thereon, among other factors, the assessee is bound to incur losses and therefore, assessee indeed is justified in comparing the companies which had incurred losses during the year under consideration. Hence, the loss making company per se cannot be eliminated for the purpose of comparability. It has to be seen depending upon the facts and circumstances of each and every case. This filter applied by the ld. TPO would not be a valid filter for the purpose of comparability of benchmarking analysis vis- -vis assessee company. Hence, we hold that the ld. CIT(A) had rightly rejected this filter applied by the ld. TPO.

Issues Involved:
1. Delay in filing the appeal by the assessee.
2. Rejection of economic analysis and filters by the Transfer Pricing Officer (TPO) for selecting comparables.
3. Rejection of specific filters applied by the TPO for determining the Arm's Length Price (ALP) of the transaction.

Detailed Analysis:

Issue 1: Delay in Filing the Appeal by the Assessee
The assessee's appeal was delayed by 917 days. The reason for the delay was the subsequent decision of the Hon'ble Rajasthan High Court in the case of Chambal Fertilizers, which was followed by various Tribunals favoring the assessee. The Tribunal held that this was not a sufficient cause to explain the delay. The Tribunal noted that the assessee had adopted a "wait and watch" approach, waiting for a favorable decision from a higher forum. Despite the issue on merits being covered in favor of the assessee by the Hon'ble Jurisdictional High Court in the case of Sesa Goa Ltd., the Tribunal declined to condone the delay. Consequently, the appeal of the assessee was dismissed as unadmitted.

Issue 2: Rejection of Economic Analysis and Filters by the TPO
The revenue challenged the rejection of certain filters by the CIT(A) that were originally applied by the TPO. The Tribunal confined its order to the rejection of these filters and did not address the inclusion or exclusion of any comparables decided by the CIT(A). The assessee rendered support services to various affiliates and adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to determine the Arm's Length Price (ALP) for its international transactions. The TPO accepted the selection of the tested party and the MAM adopted by the assessee but applied specific filters for benchmarking the international transactions.

Issue 3: Rejection of Specific Filters Applied by the TPO
The Tribunal addressed the rejection of three specific filters by the CIT(A):

a. Filter of Export Sales Less Than 75% of Total Sales
The TPO had rejected companies with export sales less than 75% of total sales. The Tribunal found that since the assessee's ITES segment predominantly catered to the export market, it was just and fair to have comparable companies with more than 75% of sales derived from the export market. The Tribunal held that the filter applied by the TPO was valid and allowed the revenue's ground on this issue.

b. Filter of Related Party Transactions More Than 25% of Sales
The TPO had applied a filter rejecting companies with related party transactions more than 25% of operating revenues. The Tribunal agreed with the TPO's rationale that controlled transactions should be compared with uncontrolled transactions for determining the ALP. The Tribunal held that this filter was valid and allowed the revenue's ground on this issue.

c. Filter of Consistent Loss-Making Companies
The TPO had excluded companies with persistent losses or diminishing revenues over the last three years. The Tribunal agreed with the assessee that consistent loss-making companies should be construed as those incurring operational losses year after year. The Tribunal held that a company making profits in earlier years but incurring losses in the current year should not be considered a persistent loss-making company. The Tribunal found that the CIT(A) had rightly rejected this filter applied by the TPO and dismissed the revenue's ground on this issue.

Conclusion:
The Tribunal directed the TPO to recompute the arithmetic mean margin of the comparable companies in light of the observations on the applicability of filters and to recompute the ALP accordingly. The appeal of the revenue was partly allowed, and the appeal of the assessee was dismissed. The order was pronounced on 20/07/2021.

Note: The names of parties and individuals have been omitted to maintain privacy.

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