High-turnover entities over Rs.200 crore excluded as comparables for low-turnover assessee; working-capital adjustment allowed, ALP limited to AE transactions

ITAT, Bangalore partly allowed the appeal. It held that entities with turnover exceeding Rs.200 crore should be excluded as comparables when the assessee's turnover is low, directed the TPO to apply the turnover filter and to allow the claimed working-capital adjustment, and remitted the transfer-pricing issue to the TPO for de novo consideration with an opportunity of hearing. The Tribunal also held that transactions with local vendors not influenced by the AE are not deemed international transactions and directed the TPO to consider only AE transactions for ALP determination.

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Issues Involved:
1. General opposition to the impugned order.
2. Inclusion of non-AE transactions for the purpose of ALP.
3. Inclusion and exclusion of comparables based on turnover filter, functional similarity/dissimilarity, and persistent loss filter.
4. Working capital adjustment.
5. Consideration of incorrect margin of comparables.

Detailed Analysis:

General Opposition to the Impugned Order:
- Issue: The appellant argued that the impugned order is opposed to law and facts, prejudicial to their interest.
- Judgment: This ground was deemed general and did not warrant specific adjudication.

Inclusion of Non-AE Transactions for the Purpose of ALP:
- Issue: The appellant contended that the inclusion of transactions with non-associated enterprises (AEs) for ALP adjustments is invalid and bad in law.
- Judgment: The Tribunal held that transactions with local vendors, where terms are not influenced by Comer SpA, cannot be treated as deemed international transactions. The TPO's finding was unsupported by evidence, and the report of the auditor cannot be the sole basis for adjustments. Only transactions with AEs should be considered for ALP determination.

Inclusion and Exclusion of Comparables:
- Issue: The appellant contested the inclusion of certain companies as comparables due to functional dissimilarity, failure to meet turnover criteria, and persistent loss.
- Judgment: The Tribunal cited the decision in the case of Autodesk India Pvt. Ltd. vs. DCIT, emphasizing that high turnover is a valid ground for excluding companies as comparables. Companies with turnover exceeding Rs.200 Crores were excluded. The Tribunal remitted the issue back to the TPO for a de novo consideration, directing the application of the upper turnover filter and re-evaluation of comparables.

Working Capital Adjustment:
- Issue: The appellant argued that the working capital adjustment was not considered in the computation of the ALP.
- Judgment: The Tribunal referred to the case of Huawei Technologies India P. Ltd., which upheld the necessity of working capital adjustments to account for differences in time value of money between the tested party and comparables. The Tribunal directed the TPO to allow the working capital adjustment based on the appellant's submissions.

Consideration of Incorrect Margin of Comparables:
- Issue: The appellant claimed that the Operating Margin of Comparables computed by the AO was erroneous.
- Judgment: This ground became academic due to the Tribunal's decision to remit the issue of TP adjustment back to the TPO for re-evaluation, considering the turnover filter and working capital adjustment.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to re-evaluate the TP adjustment by excluding companies with turnover exceeding Rs.200 Crores, considering working capital adjustments, and limiting ALP adjustments to transactions with AEs. The Tribunal emphasized the need for evidence to support the inclusion of non-AE transactions and upheld the appellant's right to contest deemed international transactions reported in Form 3CEB.

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