2024 (2) TMI 826 - AT - Income Tax

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

DNV Business Assurance India Private Limited Versus Assistant Commissioner of Income Tax, Circle 14 (1) (2), Mumbai

ITAT Mumbai ruled in favor of the appellant regarding transfer pricing comparable selection. The TPO improperly applied additional turnover filters ... TP Adjustment - comparable selection - cherry picking the comparables - Appellant had applied lower turnover filter of INR 1 Crore - as argued TPO did not accept the economic analysis conducted by the Appellant and applied certain additional filters - additional turnover filter of 1/10th to 10 times of Turnover was introduced by the TPO to rejected the two comparables selected by the Appellant namely (a) APITCO Ltd, and (b) IDMA laboratories HELD THAT:- It emerges that the Appellant had applied lower turnover filter of INR 1 Crore. The TPO did not reject the aforesaid lower turnover filter and introduced additional upper/lower turnover filters. Thus, the TPO applied second lower turnover filter of 1/10th of Turnover on application of which two companies selected by the Appellant were excluded from the list of 8 comparables selected by the Appellant. The upper filter selected by the TPO had no application in the facts of the present case and therefore, the decisions cited by the Ld. Departmental Representative have no application in the facts of the present case. We concur the observations made by the Tribunal that turnover filter cannot be applied as a tool for cherry picking the comparables at the later stage after completion of the search process with the object of excluding comparables which was otherwise found to be functionally comparables after the Functions Assets Risks (FAR) Analysis. We are of the view that the application of the second lower turnover filter by the TPO without rejecting the first turnover filter adopted by the Appellant resulted exclusion of two companies which were otherwise functionally comparable and thus, resulted in cherry picking. It is not the case of the Revenue that the comparables excluded were not functionally comparable with the Appellant. The lower turnover of filter adopted by the Appellant and the explanation provided by the Appellant for adopting the same was not rejected by the TPO. CIT(A) upheld the adoption of additional turnover filter on the incorrect premise that in the Transfer Pricing Study Report the Appellant did not apply any filters while selecting the comparables. Accordingly, we find merit in the contentions advanced on behalf of the Appellant and direct the TPO/Assessing Officer to re-compute the ALP and transfer pricing adjustment, if any, after including (a) APITCO Limited and (b) IDMA Laboratories Limited in the final set of comparables. 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 OrderThe 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 AdjustmentsThe 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 234DThe 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 ProceedingsThe 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.