Transfer pricing adjustments remitted to AO/TPO for fresh examination including comparable selection and risk adjustment determinations

ITAT Bangalore remitted comparable selection issue to AO/TPO to examine whether company had operating profit in one of three preceding years. Working capital adjustment was allowed following OECD guidelines to maintain comparables for transfer pricing analysis. Risk adjustment issue was remitted to TPO/AO for factual determination with proper opportunity for assessee to substantiate claims. Recovery of pass-through costs was treated as operating income requiring mark-up, rejecting assessee's addendum as tax evasion device lacking genuineness. Interest on outstanding receivables adjustment was remitted to AO/TPO for determination following Bombay HC precedent limiting notional interest to LIBOR+2%.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Inclusion and Exclusion of Comparable Companies
3. Directions of the Panel
4. Working Capital Adjustment
5. Risk Adjustment
6. Treatment of Pass-Through Costs
7. Interest on Outstanding Receivables

Summary:

1. Transfer Pricing Adjustment:
The appellant contested the transfer pricing adjustment of INR 1,95,53,651 made by the TPO/AO/Panel. The grounds included rejection of the transfer pricing documentation and certain filters applied during the comparability analysis. These grounds were deemed general and did not require adjudication.

2. Inclusion and Exclusion of Comparable Companies:
The appellant raised issues regarding the inclusion of certain companies in the final set which were not comparable to their functions, asset base, and risk profile, and the exclusion of others that were comparable. These grounds were dismissed as academic.

3. Directions of the Panel:
The appellant argued that the AO did not follow the directions issued by the Panel regarding the acceptance of Micro Therapeutic Research Labs Limited as a comparable company. The Tribunal remitted this issue to the AO/TPO to examine the operating profit in the immediate preceding years and consider it as a comparable if there is operating profit in any one of the last three years.

4. Working Capital Adjustment:
The Tribunal addressed the issue of non-granting of working capital adjustment. The DRP had rejected the claim due to the lack of demonstration of material differences affecting price, cost, or profits. The Tribunal, referencing its own previous decision, held that working capital adjustment should be given and decided the issue in favor of the appellant.

5. Risk Adjustment:
The appellant contested the non-granting of risk adjustment. The DRP had rejected this claim, arguing that the appellant bore significant risks, including single customer risk and credit risk. The Tribunal remitted this issue back to the AO/TPO for reconsideration, directing them to evaluate the material impact of risk adjustments on profitability.

6. Treatment of Pass-Through Costs:
The appellant contested the treatment of recovery of pass-through costs as operating in nature. The Tribunal, referencing its own previous decision, held that the appellant's intra-group services rendered to the parent company could not be considered as reimbursement of expenses or pass-through costs. The Tribunal sustained the AO's adjustment on this count.

7. Interest on Outstanding Receivables:
The appellant contested the adjustment towards interest on outstanding receivables. The Tribunal, referencing its own previous decision, remitted the issue to the AO/TPO to benchmark the interest rate considering the period of credit enjoyed by comparables and applicable LIBOR rate. The Tribunal also noted that the interest should be restricted to LIBOR+2% as per the Bombay High Court's decision in a similar case.

Conclusion:
The appeal was partly allowed for statistical purposes, with issues remitted to AO/TPO for reconsideration following the Tribunal's directions.

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