Companies with turnover over Rs.200 crore excluded as comparables for assessee under Rs.200 crore; s.37/s.35 R&D expense remand &DExpenditure

ITAT held that companies with turnover exceeding Rs.200 crore cannot be used as comparables for an assessee with turnover below Rs.200 crore and excluded several listed comparables; entities providing materially different functions from the assessee were also excluded. On R&D/website development expenditures treated as disallowance under s.37, the tribunal found conflicting descriptions of the expenses and that their nature (capital vs. revenue) and possible treatment under s.35 could not be determined on record; it set aside the AO's order and remanded the issue for fresh examination after giving the assessee an opportunity to be heard.

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Issues Involved:
1. Legality of the CIT(A)'s order.
2. Errors in the reference to the TPO for determining arm's length price.
3. Errors in the computation of arm's length price and selection/rejection of comparables.
4. Fresh transfer pricing analysis and adoption of inappropriate filters by the TPO.
5. Lack of proper adjustments for differences between the appellant and comparables.
6. Disallowance of research and development expenses under Section 37.
7. Levying of interest under Sections 234B, 234C, and 234D.

Detailed Analysis:

1. Legality of the CIT(A)'s Order:
The appellant contended that the order passed by the CIT(A) was prejudicial and bad in law. However, this ground was not argued separately, and thus, it was left open for consideration in appropriate situations.

2. Errors in the Reference to the TPO:
The appellant argued that the CIT(A) erred in confirming the action of the AO and TPO in making a reference to the TPO without demonstrating the necessity and expediency. The appellant also contended that there was no amendment to the definition of "income" under Chapter X, and the addition made under Chapter X was bad in law. Furthermore, the order was passed without demonstrating any motive of tax evasion by the appellant.

3. Errors in Computation of Arm's Length Price and Selection/Rejection of Comparables:
The CIT(A) confirmed the TPO's action in computing the arm's length price based on data for the financial year 2008-09, which was not available when the appellant undertook transfer pricing documentation. The TPO rejected comparables selected by the appellant and ignored additional comparables proposed without giving cogent reasons. The appellant sought exclusion of certain comparables on the turnover filter and functional dissimilarities. The Tribunal directed the exclusion of comparables like Tata Elxsi, Sasken Communication, Mindtree Ltd, Larson & Toubro Infotech, Infosys Technologies Ltd, Zylog Systems Ltd, and Bodhtree Consulting Ltd based on turnover filter and functional dissimilarities, following the precedent set in the appellant's own case and other related cases.

4. Fresh Transfer Pricing Analysis and Adoption of Inappropriate Filters by the TPO:
The TPO conducted a fresh transfer pricing analysis despite no defects in the appellant's analysis and adopted inappropriate filters in selecting comparables. The Tribunal found that the TPO applied a lower turnover filter but failed to set an upper limit, resulting in the inclusion of companies with significantly higher turnovers. The Tribunal directed the exclusion of companies with turnovers exceeding Rs. 200 crores, adhering to the principle that size matters in business comparability.

5. Lack of Proper Adjustments for Differences Between the Appellant and Comparables:
The appellant argued that the TPO did not make proper adjustments for enterprise-level and transactional-level differences and failed to recognize that the appellant was insulated from risks. This ground was not separately adjudicated as it was not argued.

6. Disallowance of Research and Development Expenses Under Section 37:
The CIT(A) confirmed the AO's action in disallowing Rs. 3,91,21,647/- as research and development expenses, stating they conferred an enduring benefit and were not revenue in nature. The Tribunal noted that this issue was covered by its order in the appellant's own case for the assessment year 2007-08, where it was remanded to the AO for fresh consideration. The Tribunal remanded the issue for the current year as well, directing the AO to consider it afresh after affording an opportunity of being heard to the appellant.

7. Levying of Interest Under Sections 234B, 234C, and 234D:
The appellant contested the levy of interest under Sections 234B, 234C, and 234D, arguing that it was not liable to pay such interest and that the interest charged was excessive. This ground was not separately adjudicated as it was not argued.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of certain comparables based on the turnover filter and functional dissimilarities and remanded the issue of research and development expenses to the AO for fresh consideration. Other grounds were left open for consideration in appropriate situations.

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