Tribunal allows appeal on Transfer Pricing adjustments, excludes high-turnover firms, considers forex fluctuations

The Tribunal allowed the assessee's appeal against the assessment order, focusing on Transfer Pricing adjustments. The Tribunal directed the exclusion of companies with turnovers exceeding 200 crores and functionally incomparable companies. It also instructed the AO to consider foreign exchange fluctuations in determining the Arm's Length Price (ALP) for both the assessee and comparable companies. As a result, the appeal was allowed in favor of the assessee, with the order pronounced on 25th October 2019.

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Issues:
Transfer Pricing Adjustment

Analysis:
The assessee appealed against the assessment order passed by the AO under section 143(3) r.w.s. 144C(13) of the Act for the assessment year 2010-11, focusing on the Transfer Pricing adjustment of Rs. 1,08,58,381. The assessee, a 100% export-oriented unit providing Software Development services to its Associated Enterprises, faced a Transfer Pricing adjustment only on the income from Software development Services. The assessee adopted the TNMM as the most appropriate method with the PLI as Operating Profit/Operating Cost. The TPO selected eleven comparable companies with an average margin of 22.71%, proposing the Transfer pricing adjustment. The DRP confirmed the selection of comparable companies by the TPO.

Regarding the turnover filter, the assessee argued that it falls under the 1-200 crores category, citing relevant case laws. The assessee contended that companies with turnovers exceeding 200 crores should be excluded. The Tribunal agreed with the assessee, directing the AO/TPO to exclude companies with turnovers exceeding 200 crores. Additionally, companies functionally not comparable were to be excluded as per the decision in another case. The Tribunal upheld the exclusion of companies based on turnover and functional comparability criteria.

The Ld. A.R. also raised the issue of foreign exchange fluctuation, urging compliance with the DRP's directions. The Tribunal found merit in the request, directing the AO to consider foreign exchange fluctuations in determining the ALP for both the assessee and comparable companies. Consequently, the appeal of the assessee was allowed, and the order was pronounced on 25th October 2019.

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