Faceless assessment and transfer pricing comparability: ITAT upheld jurisdiction, remitted ESOP cost verification, and allowed working capital adjustment.
The Tribunal held that a jurisdictional challenge to a faceless assessment under section 144B was not sustainable. On transfer pricing, it ruled that ESOP cost could enter operating cost only if the assessee actually incurred the expenditure, and remitted the issue for verification of the scheme and financials. It applied turnover and functional comparability filters to exclude materially dissimilar companies, while remanding some comparables for fresh examination. Working capital adjustment was allowed to neutralise differences between the assessee and retained comparables; risk adjustment was left open subject to evidence, and interest under section 234B was treated as consequential.
Issues: (i) Whether the assessment order passed by the jurisdictional Assessing Officer was invalid in view of the faceless assessment regime under section 144B; (ii) whether the ESOP cost could be treated as part of the operating cost for transfer pricing purposes; (iii) whether certain comparables were to be included or excluded, including application of the turnover filter and functional comparability; and (iv) whether working capital adjustment and risk adjustment were to be granted, with interest under section 234B being consequential.
Issue (i): Whether the assessment order passed by the jurisdictional Assessing Officer was invalid in view of the faceless assessment regime under section 144B.
Analysis: The objection to the assessment order on the ground of jurisdiction under the faceless assessment provisions was not accepted. The Tribunal found no merit in the challenge based on the change in assessment hierarchy and rejected the assessee's plea on this legal issue.
Conclusion: Decided against the assessee.
Issue (ii): Whether the ESOP cost could be treated as part of the operating cost for transfer pricing purposes.
Analysis: The Tribunal noted that the Assessing Officer and TPO had not properly examined the ESOP agreement and the actual incidence of expenditure. It held that unless the expenditure was incurred by the assessee, it could not automatically form part of the margin computation. The matter required verification of the ESOP scheme and the underlying financials.
Conclusion: Remitted for verification and allowed for statistical purposes in favour of the assessee.
Issue (iii): Whether certain comparables were to be included or excluded, including application of the turnover filter and functional comparability.
Analysis: The Tribunal applied the turnover filter and held that companies having turnover far above the tested party's permissible range were not comparable. It excluded high-turnover companies and also rejected companies found functionally dissimilar or lacking segmental data. As to some comparables not originally examined, and others where adequate material was not available, the Tribunal remanded the matter to the Assessing Officer/TPO for fresh examination after granting opportunity to the assessee.
Conclusion: Partly in favour of the assessee, with several comparables excluded and some issues remanded.
Issue (iv): Whether working capital adjustment and risk adjustment were to be granted, with interest under section 234B being consequential.
Analysis: The Tribunal held that working capital adjustment was warranted to iron out differences between the assessee and the retained comparables. Risk adjustment was left to be examined on the basis of evidence to be furnished by the assessee. The levy of interest under section 234B was treated as consequential.
Conclusion: Working capital adjustment allowed, risk adjustment kept open subject to proof, and interest treated as consequential.
Final Conclusion: The appeal succeeded only in part. The jurisdictional challenge failed, the ESOP issue and several comparable-selection issues were sent back or decided in the assessee's favour, and working capital adjustment was directed to be granted. The transfer pricing exercise was therefore modified and remanded to that extent.
Ratio Decidendi: In transfer pricing, only expenditure actually incurred by the assessee can enter operating cost computation, and comparability must be tested by functional similarity and appropriate turnover-based exclusion of materially dissimilar companies, with adjustments such as working capital granted to neutralise material differences.