Transfer Pricing Appeal: Exclusion of High-Turnover Companies Upheld

The Tribunal partially allowed the appeal by directing the exclusion of high-turnover companies from the comparables list and upholding the disallowances related to professional fees and forex loss. The correctness of the determination of Arm's Length Price (ALP) for Information and Technology Enabled Services (ITES) was contested, with adjustments proposed by the Transfer Pricing Officer (TPO) and upheld by the CIT(A). The application of the turnover filter in selecting comparable companies was disputed, with the Tribunal ruling in favor of excluding high-turnover companies. The disallowance of provision for professional fees and forex loss as prior period expenditure was upheld by the Tribunal.

---

---

Issues Involved:
1. Correctness of the determination of Arm's Length Price (ALP) in respect of an international transaction of rendering Information and Technology Enabled Services (ITES).
2. Application of the turnover filter in selecting comparable companies.
3. Disallowance of provision for professional fees due to non-deduction of taxes at source.
4. Disallowance of forex loss as prior period expenditure.

Issue-wise Detailed Analysis:

1. Correctness of the determination of Arm's Length Price (ALP):
The primary issue was the correctness of the ALP determination for the ITES provided by the assessee to its Associated Enterprise (AE). Both parties agreed on using the Transactional Net Margin Method (TNMM) and the Profit Level Indicator (PLI) of Operating Profit on Operating Cost. The assessee's PLI was 20.53%. The Transfer Pricing Officer (TPO) rejected the assessee's comparables and chose 10 others, resulting in an Arithmetic Mean of 28.11%. After adjustments, the TPO proposed an addition of Rs. 2,48,24,560 to the total income. The CIT(A) upheld the TPO's choice of comparables but disagreed with the negative working capital adjustment, reducing the Arithmetic Mean to 28.11%.

2. Application of the turnover filter in selecting comparable companies:
The assessee contended that the TPO should have applied an upper turnover limit while selecting comparables. The TPO and CIT(A) rejected this, citing previous ITAT decisions. However, the Tribunal referenced the case of DCIT Vs. M/s. Northern Operating Services, which emphasized the relevance of turnover in comparability. The Tribunal concluded that companies with turnovers above Rs. 200 Crores should not be compared with the assessee's turnover of Rs. 27.61 Crores. Consequently, Infosys BPO Limited and TCS E-Serve Limited were excluded from the comparables, and the TPO was directed to recompute the Arithmetic Mean profit.

3. Disallowance of provision for professional fees due to non-deduction of taxes at source:
The assessee's provision for professional fees amounting to Rs. 8,11,455 was disallowed by the Assessing Officer (AO) for non-deduction of TDS. The CIT(A) upheld this decision, referencing the Bangalore Bench of ITAT's ruling in M/s. Bosch Limited Vs. ITO, which mandated TDS even on provisions. The Tribunal found no material evidence to show that the liability was not contingent and upheld the CIT(A)'s order, dismissing the assessee's ground.

4. Disallowance of forex loss as prior period expenditure:
The forex loss of Rs. 43,40,156, related to AY 2011-12, was claimed in AY 2012-13 due to a change in accounting policy by new auditors. The AO disallowed this as it was a prior period loss, and the CIT(A) upheld this decision. The Tribunal agreed, stating that under the Mercantile System of Accounting, only losses accruing in the relevant period could be deducted. The assessee's ground was dismissed.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of certain high-turnover companies from the comparables list and upheld the disallowances related to professional fees and forex loss.

---