2019 (2) TMI 1890 - AT - Income Tax

Appeal partially allowed: exclusion of comparables, mark-up reconsideration, MAT credit granted

The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables, reconsideration of mark-up on recovery transactions, ... TP Adjustment - Determination of arm’s length price of international transactions - comparable selection - TPO applying arbitrary filters to arrive at a fresh set of companies as comparable to the Appellant - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected from final list. TP adjustment of charging mark up of recovery transaction with its AE - HELD THAT:- AR filed the details on this aspect which were overlooked by the TPO. Whereas the learned DR supported the orders of the lower authorities and could not controvert the submissions of the learned AR. We, on perusal of the material filed and the arguments of the learned AR and learned DR , are of the opinion that on the principles of natural justice, when the decision is being taken by TPO on mark-up in respect of the assessee-company, the submissions filed cannot be ignored and accordingly, we restore this disputed issue of the assessee to the file of the AO/TPO to consider and pass a reasoned order. Assessee is entitled for MAT credit u/s 115JAA which was not granted. Accordingly, we direct the AO to grant MAT credit as per provisions of law to the same. Issues Involved:1. Determination of Arm’s Length Price (ALP) of international transactions.2. Mark-up on recovery transactions.3. Variation of 5% from the arithmetic mean.4. Short grant of MAT credit under section 115JAA of the Act.Detailed Analysis:1. Determination of Arm’s Length Price (ALP) of international transactions:- Application of Arbitrary Filters: The Tribunal addressed the issue where the Transfer Pricing Officer (TPO) applied arbitrary filters to arrive at a fresh set of comparable companies without establishing functional comparability. The Tribunal found that the TPO's selection of comparables was flawed and directed the exclusion of certain companies (Universal Print Systems Ltd., Infosys BPO Ltd., TCS e-Serve Ltd., and Excel Infoways Ltd.) from the list of comparables due to various reasons such as functional dissimilarity, high turnover, and brand value.- Functional Comparability and Turnover: The Tribunal emphasized the importance of functional comparability and turnover in selecting comparable companies. It was noted that companies like Infosys BPO Ltd. and TCS e-Serve Ltd. had significantly higher turnovers and brand values, making them unsuitable for comparison with the assessee.- Employee Cost Filter: The Tribunal upheld the exclusion of companies that failed the employee cost filter, stating that companies with employee costs less than 25% of turnover should be rejected.2. Mark-up on recovery transactions:- The Tribunal found that the TPO erred in determining the transfer pricing adjustment after charging a mark-up on recovery transactions with associated enterprises without appreciating the submissions filed by the assessee. The Tribunal restored this issue to the file of the AO/TPO to consider and pass a reasoned order, ensuring that the assessee's submissions are taken into account.3. Variation of 5% from the arithmetic mean:- The Tribunal noted that the TPO/AO erred in not granting the benefits of the proviso to section 92C(2) of the Act, which allows for a variation of 5% from the arithmetic mean. This issue was restored to the file of the AO/TPO for reconsideration.4. Short grant of MAT credit under section 115JAA of the Act:- The Tribunal directed the AO to grant appropriate MAT credit under section 115JAA of the Act, as the assessee was entitled to it but had not been granted.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the exclusion of certain comparables, reconsideration of the mark-up on recovery transactions, and granting of MAT credit. The Tribunal emphasized the importance of functional comparability, turnover, and employee cost filters in determining the ALP of international transactions.