Transfer pricing analysis must exclude comparable companies with turnover exceeding Rs. 200 crores, TPO directed fresh assessment

ITAT Bangalore held that comparable companies with turnover exceeding Rs. 200 crores must be excluded from transfer pricing analysis, following established precedent. The Tribunal directed TPO to exclude such companies and reconsider inclusion of specific entities including Akshay Software, I2T2 India Limited, and Evoke Technologies Ltd. for fresh comparability assessment. Regarding addition for assets received free of cost, the Tribunal found DRP failed to verify assessee's claim that customs wrongly recorded replacement assets as free assets. Matter remanded to AO for verification of supporting documents and fresh determination in accordance with law.

---

---

Issues Involved:
1. Application of turnover filter in selecting comparables.
2. Rejection of additional comparable companies requested by the appellant.
3. Corporate tax adjustment for assets received free of cost/on loan basis.

Detailed Analysis:

1. Application of Turnover Filter:
The appellant argued that the Transfer Pricing Officer (TPO) erred by not excluding comparables with a turnover exceeding INR 200 crores. The Tribunal noted that the TPO applied a lower turnover filter but failed to apply an upper turnover filter. The Tribunal referenced previous cases, such as BORQS Software Solutions Pvt. Ltd., where companies with turnovers exceeding INR 200 crores were excluded. The Tribunal concluded that companies listed by the appellant with turnovers above INR 200 crores should be excluded from the list of comparables. The TPO was directed to exclude these companies while recomputing the Arm's Length Price (ALP).

2. Rejection of Additional Comparable Companies:
The appellant contested the exclusion of certain companies during the Transfer Pricing (TP) assessment. Specifically, the appellant pressed for the inclusion of Akshay Software Technologies Ltd., Evoke Technologies Ltd., and I2T2 India Ltd.

- Akshay Software Technologies Ltd.: The TPO rejected this company due to significant foreign branch expenditure and its engagement in professional services, which was upheld by the Dispute Resolution Panel (DRP). The Tribunal, referencing the case of M/s. Cypress Semiconductor Technology India P. Ltd., remanded the issue back to the TPO for fresh examination.

- I2T2 India Ltd.: The TPO excluded this company due to the lack of Related Party Transactions (RPT) information in its annual report. The Tribunal, citing M/s. Cypress Semiconductor Technology, directed the TPO to include I2T2 India Ltd. as a comparable, noting that the absence of RPT information should not penalize the appellant.

- Evoke Technologies Ltd.: The TPO rejected this company due to un-audited financials from its foreign branch. The Tribunal, following the case of Mindteck India Ltd., remanded the issue back to the TPO for fresh consideration.

3. Corporate Tax Adjustment for Assets Received Free of Cost/On Loan Basis:
The Assessing Officer (AO) added INR 71,55,525 to the appellant's income under Section 28(iv) of the Income-tax Act, considering the receipt of tangible assets free of cost/on loan basis as a taxable benefit. The DRP upheld this addition, stating that the appellant failed to provide documentation to substantiate the terms of the loan arrangement or evidence of returning the assets.

The Tribunal referenced its decision in the appellant's own case for AY 2014-15, where relief was granted to the extent that the appellant could prove the re-export of assets. The Tribunal remanded the issue back to the AO to verify the invoices and relevant documents substantiating the appellant's claim. The AO was directed to decide the issue in accordance with the law, considering the Tribunal's previous decision. The appellant was instructed to produce all relevant documents and cooperate with the proceedings.

Conclusion:
The appeal was partly allowed, with specific directions to the TPO and AO for fresh consideration and verification of the appellant's claims. The Tribunal emphasized adherence to previous decisions and the necessity of accurate documentation in substantiating claims.

---