ITAT excludes Dembla Valves as transfer pricing comparable, remands verification of functional similarity under TNMM method

The ITAT Bangalore remanded several transfer pricing comparables back to AO/TPO for verification of functional similarity under TNMM method. The tribunal excluded certain comparables like Dembla Valves Ltd for manufacturing different products and directed verification of RPT filters for three companies at 15% threshold. Remi Sales Engineering Ltd was included as comparable since revenue accepted it in preceding year without cogent reasons for exclusion. Working capital adjustment was allowed following coordinate bench precedent, noting revenue has powers under section 133(6) to obtain comparable company details. Global sales and marketing expenses were treated as operating costs to be allocated based on turnover ratio. TDS issue on expat salary reimbursement was remanded for verification. DDT refund claim was allowed following Special Bench decision in Total Oil India case.

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Issues Involved:
1. Inclusion/Exclusion of Comparables in Manufacturing Segment
2. Inclusion/Exclusion of Comparables in Trading Segment
3. Working Capital Adjustment
4. Global Sales and Marketing Activity Expenses
5. Expat Salary Reimbursement Disallowance

Summary of Judgment:

1. Inclusion/Exclusion of Comparables in Manufacturing Segment:
- Ground No. 6(c): The Tribunal remanded the comparables (Amtech Electronics (India) Ltd., Continental Controls Ltd., Supernova Engineers Ltd.) back to the Ld.AO/TPO for necessary verification of the FAR (Functions, Assets, and Risks) of these comparables with that of the assessee. If broad similarities are ascertained under TNMM and pass through the filters applied by the Ld.TPO, they may be considered for inclusion.
- Ground No. 6(d) r.w. Ground Nos. 8-10: The Tribunal directed the Ld.AO/TPO to exclude Annanya Interface & Controls Pvt. Ltd. and Dembla Valves Ltd. from the final list due to functional dissimilarities. For Abak Elcerofab Engg Pvt. Ltd., the Tribunal remanded it back for necessary verification. Limitorque India Ltd., Flowserve India Controls Pvt. Ltd., and Koso India Pvt. Ltd. were remanded back to verify the RPT filter at a threshold limit of 15%.

2. Inclusion/Exclusion of Comparables in Trading Segment:
- Ground No. 12: The Tribunal directed the inclusion of Remi Sales & Engineering Ltd. as it was accepted in previous assessment years without any cogent reason for exclusion. Innovative Automation Pvt. Ltd. was retained as it was functionally similar with the assessee under the trading segment.
- Ground No. 13: The Tribunal directed the Ld.AO/TPO to follow the DRP's directions and recompute the margin of Innovative Automation Pvt. Ltd. in accordance with the law.

3. Working Capital Adjustment:
- Ground No. 16: The Tribunal directed the Ld.AO/TPO to compute and allow working capital adjustment as per actuals, following the decision in Huawei Technologies India (P.) Ltd., and OECD guidelines.

4. Global Sales and Marketing Activity Expenses:
- Ground Nos. 17-19: Following the Hon'ble High Court's decision in the assessee's own case for A.Y. 2010-11, the Tribunal held that the expenditure incurred by the assessee towards global sales and marketing activity should be treated as operating cost and allocated in the ratio of the turnover of the other international transactions for determining the ALP under TNMM analysis.

5. Expat Salary Reimbursement Disallowance:
- Ground Nos. 20-28: The Tribunal remanded the issue back to the Ld.AO for necessary verification in accordance with the observations made, following the decision of the Hon'ble Karnataka High Court in Flipkart Internet Pvt. Ltd. and other relevant decisions.

Other Grounds:
- Ground Nos. 1-5, 6(a)-(b), 7, 11, 14-15, 29-31: These grounds were either general in nature or consequential and did not require adjudication.

Order Pronounced in the open court on 17th May, 2023.

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