TPO cannot apply additional turnover filters after accepting initial filters to exclude functionally comparable companies

ITAT Mumbai ruled in favor of the appellant regarding transfer pricing comparable selection. The TPO improperly applied additional turnover filters (1/10th to 10 times) after accepting appellant's initial INR 1 crore filter, excluding two functionally comparable companies - APITCO Ltd and IDMA Laboratories. The tribunal held this constituted cherry-picking of comparables, as the excluded companies were functionally comparable after FAR analysis. CIT(A) incorrectly upheld the additional filters. ITAT directed TPO/AO to recompute arm's length price including both excluded comparables in the final set.

---

---

Issues Involved:
1. Validity of the assessment order under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961.
2. Transfer pricing adjustments and the approach of the Transfer Pricing Officer (TPO).
3. Levy of interest under Section 234D of the Act.
4. Initiation of penalty proceedings under Section 274 read with Section 270A of the Act.

Summary:

Issue 1: Validity of the Assessment Order
The Appellant challenged the assessment order dated 24/06/2022, arguing it was not in conformity with the procedures laid out in Section 144B(1)(xxix) and Section 144B(1)(xxx) of the Income Tax Act, 1961. However, this ground was dismissed as not pressed by the Appellant.

Issue 2: Transfer Pricing Adjustments
The Appellant contested the transfer pricing adjustments made by the TPO, who applied additional filters including an upper turnover filter of 10 times and a lower turnover filter of 1/10th of the turnover of the tested party. The TPO excluded APITCO Limited and IDMA Laboratories Limited from the comparables list and rejected an additional comparable (Cigniti Technologies Limited) identified by the Appellant. The Tribunal found that the TPO's application of the second lower turnover filter resulted in cherry-picking, which was not permissible. The Tribunal directed the TPO/Assessing Officer to re-compute the Arm's Length Price (ALP) and transfer pricing adjustment after including APITCO Limited and IDMA Laboratories Limited in the final set of comparables. Consequently, Grounds 3 to 3.3 were allowed, while Grounds 3.4 and 3.5 were dismissed as infructuous.

Issue 3: Levy of Interest under Section 234D
The levy of interest under Section 234D amounting to INR 42,416 was contested by the Appellant. The Tribunal disposed of this ground as being consequential in nature.

Issue 4: Initiation of Penalty Proceedings
The Appellant challenged the initiation of penalty proceedings under Section 274 read with Section 270A of the Act. The Tribunal dismissed this ground as being premature.

Conclusion:
The appeal was partly allowed, with specific directions to the TPO/Assessing Officer regarding the re-computation of the ALP and transfer pricing adjustment. Other grounds were either dismissed or deemed consequential/premature.

Order pronounced on 22.12.2023.

---