2024 (9) TMI 1797 - AT - Income Tax

Order directs exclusion of comparables with turnover over Rs 200 crore; ALP to be recomputed under TNMM

M/s. Marvell India Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle-4 (1) (1), Bangalore

ITAT (Bangalore) partly allowed the appeal, directing the TPO to exclude from the comparable set companies with turnover exceeding Rs. 200 crores and to ... TP Adjustment - comparable selection - turnover filters adopted by the AO - HELD THAT:- As decided in own [2022 (10) TMI 1225 - ITAT BANGALORE] we hold that the companies having more than 200 crores turnover need to be excluded. ISSUES PRESENTED AND CONSIDERED 1. Whether the turnover filter requires an upper limit (Rs. 200 crores) to exclude companies with substantially higher turnover from the comparable set in a TNMM transfer-pricing analysis. 2. Whether other grounds raised in the appeal (relating to comparability search, rejection of TP documentation, working capital and risk adjustments, specific inclusion/exclusion of comparables, computation adjustments, additions not proposed in draft order, interest and penalty) were to be adjudicated when not pressed by the appellant. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Upper turnover filter (whether companies with turnover > Rs. 200 crores must be excluded) Legal framework: - Determination of arm's length price under Chapter X and Rule 10B (including Rule 10B(1)(e) - TNMM) and comparability criteria under Rule 10B(2) and Rule 10B(3) read with Section 92C/92CA (TPO/DRP powers and adjustments). OECD Transfer Pricing Guidelines (comparability adjustments) inform interpretive guidance. Precedent treatment (followed/distinguished/overruled): - The Tribunal followed consistent bench authority that applies an upper turnover cut-off (Rs. 200 crores) for selection of comparables in the Indian context (as adopted in earlier coordinate-bench decisions). The Tribunal recognized conflicting views in other benches and high courts (including a decision that high turnover ipso facto should not exclude a functionally comparable company and another view permitting turnover-based exclusion) and expressly followed the view favourable to the taxpayer rendered by a non-jurisdictional High Court and coordinate bench decisions favoring an upper limit. Interpretation and reasoning: - The Tribunal examined statutory comparability factors (functions, assets, risks, contractual terms and market conditions) and Rule 10B guidance that differences materially affecting margins must be adjusted or companies excluded. It noted that the TPO had applied a lower turnover cut-off (excluding very small entities) but had not symmetrically applied an upper turnover limit, producing an inconsistent universe of comparables. - Drawing on prior Tribunal analysis and industry classification norms (e.g., Dun & Bradstreet ranges), the Tribunal reasoned that size/turnover materially affects bargaining power, cost structures, availability of skilled resources and thereby profitability; hence, where small/low-turnover entities are excluded for unreliability, symmetrically very large turnover entities should also be excluded to preserve like-for-like comparability. - The Tribunal considered contrary authorities (including a decision that treated the turnover observations as obiter) and held that where two non-binding views exist, the one favourable to the taxpayer should be followed by the Tribunal bench. The Tribunal treated certain decisions of other benches as per incuriam where they ignored binding coordinate-bench precedent. Ratio vs. Obiter: - Ratio: The Tribunal's decision that companies with turnover in excess of Rs. 200 crores should be excluded from the comparable set for an assessee with substantially lower turnover constitutes the operative ratio for the matter at hand - i.e., exclusion on the ground of disproportionate turnover (upper turnover filter) is justified and must be applied when the facts match. - Obiter: Observations regarding the weight of various counter authorities and the detailed discussion of OECD Guidelines and Dun & Bradstreet/NASSCOM ranges serve as explanatory guidance but are ancillary to the operative direction to exclude the identified large-turnover comparables. Conclusions: - The Tribunal directed exclusion of comparable companies whose turnover exceeded Rs. 200 crores from the TPO's comparable set and remitted the matter to the TPO to recompute the ALP after excluding those companies. - The Tribunal expressly followed its coordinate-bench precedent applying the Rs. 200 crores upper turnover filter in the facts of this appeal and found the facts and comparable companies identical or substantially similar to those earlier considered, warranting the same outcome. Issue 2 - Other grounds (withdrawal/unpressed grounds; scope of adjudication) Legal framework: - Principle that appellate forums address grounds which are pressed and argued; unpressed/withdrawn grounds need not be adjudicated. Precedent treatment: - The Tribunal noted that the appellant limited its challenge at the hearing to ground no. 6 (turnover filter) and expressly withdrew/treated as withdrawn the remaining grounds. Interpretation and reasoning: - Having been apprised that only ground no. 6 was being pressed, the Tribunal confined its adjudication to that ground. The Tribunal did not examine or decide issues on comparability methodology, rejection of TP documentation, working capital and risk adjustments, specific inclusion/exclusion of individual comparables beyond the turnover issue, computation of operating margins, additions not proposed in draft assessment order, interest under section 234B or penalty under section 270A, since those grounds were not pressed by the appellant at hearing. Ratio vs. Obiter: - Ratio: The operative approach is that appellate determination will address and decide only those grounds actively pressed and argued; unpressed grounds remain unadjudicated and may be open for future contest. This procedural stance is the binding outcome in this appeal. - Obiter: No substantive pronouncements were made on the merits of the withdrawn grounds; any discussion implying potential views on those grounds is non-binding and not decided. Conclusions: - The appeal was partly allowed solely on the turnover filter ground: the Tribunal ordered exclusion of comparables with turnover exceeding Rs. 200 crores and directed recomputation of ALP by the TPO accordingly. - All other grounds raised in the memo of appeal were not adjudicated because they were not pressed by the appellant at the hearing; the Tribunal made no findings on those grounds. Cross-references - The Tribunal's reasoning on Issue 1 relies on Rule 10B/TNMM comparability principles and prior coordinate bench decisions interpreting turnover thresholds (as summarized above); the procedural disposition in Issue 2 reflects the hearing record where only the turnover ground was pressed.