Transfer pricing ALP: exclude loss-making/super-profit comparables, use similar-size turnover band, allow rebuttal, adjust infrastructure utilisation

ITAT, Bangalore (AT) held that for determining ALP in software/ITES transactions loss-making comparables must be excluded and equally super-profit making companies should be excluded; comparables should be of similar size - here a turnover band of Rs.1 crore to Rs.200 crore was appropriate for an assessee with Rs.8.15 crore turnover. The revenue officer may collect contemporaneous market data from third parties without prior disclosure to the assessee, but the assessee must be given an opportunity to rebut material once relevance is established. Adjustments for under-utilisation of infrastructure must be afforded to the assessee as done for manpower.

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Issues Involved:
1. Natural Justice and Procedure
2. Transfer Pricing Adjustments and Comparables
3. Data and Information Used by TPO
4. ALP Adjustments for ITES Segment
5. Low Capacity Utilization Adjustments

Detailed Analysis:

1. Natural Justice and Procedure:
The assessee raised concerns about the principles of natural justice and procedural aspects followed by the AO in making a reference to the TPO and the order passed by the DRP. However, these grounds were not pressed by the assessee and were accordingly rejected.

2. Transfer Pricing Adjustments and Comparables:
The assessee, engaged in software development and IT-enabled services, challenged the TPO's rejection of its selected comparables and the adoption of new comparables. The TPO had applied additional filters and selected 20 comparables, resulting in a transfer pricing adjustment of Rs. 2,20,12,927/- for the software segment and Rs. 66,38,48/- for the ITES segment. The assessee argued that the transfer pricing adjustments should be restricted to transactions with AE only and that the operating costs and revenues referable to AE transactions should be considered. The Tribunal agreed with the assessee, directing the AO to restrict the adjustments to AE transactions only.

3. Data and Information Used by TPO:
The assessee contended that the TPO's use of data obtained through notices u/s 133(6) was not transparent and lacked fairness. The Tribunal held that the TPO is authorized to gather information and issue notices to relevant parties under sec.92CA and sec.133(6). However, the assessee must be given an opportunity to rebut any material used against it. The Tribunal found that the TPO had provided all information to the assessee in the form of a CD and allowed the assessee to present its objections. The Tribunal also directed that the assessee should be given an opportunity to cross-examine parties whose replies are used against it.

4. ALP Adjustments for ITES Segment:
The Tribunal directed the TPO to consider the assessee's objections and compute the ALP for the ITES segment, following the same directions given for the software development service segment. This included considering only the operating revenue and costs of AE transactions, applying a turnover filter of Rs. 1 crore to 200 crores, and providing the assessee an opportunity to cross-examine relevant parties.

5. Low Capacity Utilization Adjustments:
The assessee argued for adjustments due to under-utilization of infrastructure, which was rejected by the TPO. The Tribunal agreed with the assessee, noting that similar adjustments for under-utilization of manpower were allowed in other cases. The Tribunal directed the AO to consider the adjustment for under-utilization of infrastructure while determining the ALP.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the TPO to:
- Consider only the operating revenue and costs of AE transactions.
- Apply a turnover filter of Rs. 1 crore to 200 crores.
- Provide all relevant information to the assessee.
- Allow the assessee to cross-examine parties whose replies are used against it.
- Consider the assessee's objections to additional comparables.
- Grant a standard deduction of 5% under the proviso to sec.92C(2).
- Consider adjustments for under-utilization of infrastructure in the ITES segment.

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