2025 (5) TMI 2197 - AT - Income Tax

10x turnover tolerance upheld as valid transfer pricing comparability filter; uniform application ordered, specific comparables remanded

ITAT HYDERABAD upheld the 10x turnover tolerance (both up and down) as a valid comparability filter and excluded 12 comparables that breached it. The ... TP Adjustment - Comparable selection - whether the 12 comparables should be excluded only on the basis of their significant difference in turnover or not? - HELD THAT:- It is well settled by various decision of co-ordinate benches of ITAT, including assessee's own case for the A.Y 2018-19 that the turnover filter of 10 times (both upward and downward) is a valid criteria for determining the comparability. Tribunal has categorically held that, companies with proportionate difference in turnover should be excluded and the application of tolerance range of turnover of ten times on both sides of assessee's turnover was proper. There is no dispute about the fact that the turnover of the 12 comparables clearly breaches the threshold set by this Tribunal in assessee's own case for the A.Y 2018-19 i.e. the turnover filter of 10 times (both upward and downward). Therefore, in our considered opinion, these 12 comparables cannot be considered as good comparable companies. Further, we observe that, TPO did not apply the turnover filter of 10 times (both upward and downward) to other comparables as well. Therefore, in the interest of justice, we deem it appropriate to direct the Ld. TPO, to apply the turnover filter uniformly to all the comparables left after exclusion by this order. Exclude Tata Elxis from the list of final comparables. Further, no evidences with regards to the change of functionality of Tat Elxis in the year under consideration as compared to A.Y. 2017-18 have been brought to our notice by the Revenue. Therefore, respectfully following the order of this Tribunal, we also hold that Tata Elxis is not comparable as far as the assessee is concerned. Integra, Vitae and MPS are not comparable to the assessee. Interactive is engaged in Support services in the category of executive/retained search service. In our view, the services are in the nature of ITES and therefore are not subject to different risks and returns. We are of the considered view that Interactive is functionally comparable to the assessee and deserves to be retained in the final list of comparables. TPO has rejected Thomson on the ground that Thomson was not forming part of the search matrix of the TPO and inclusion of Thomson would lead to cherry picking. However, the Ld. DRP rejected the inclusion of Thomson on the ground that Thomson fails RPT filter as per the order of the TPO and the assessee did not provide bifurcation of related party figures of cost and revenue. Accordingly, in our view, there is an apparent mistake on the part of the Ld. DRP. There is apparent mistake on the part of the Ld. DRP and the rectification application of the assessee is pending before the Ld. DRP, we direct the Ld. DRP to pass appropriate order. Global Healthcare has revenue from 'sale of services' - The amount mentioned against the revenue from 'sale of services' as Rs. Nil in P&L statement seems to be an inadvertent mistake in the P&L statement of Global Healthcare. Therefore, we set aside the issue to the file of the Ld. AO/TPO to verify the correctness of revenue from sale of services and decide the inclusion of Global Healthcare as per law. ISSUES PRESENTED AND CONSIDERED 1. Whether specified comparable entities should be excluded from the comparable set for benchmarking software development services (SDS) and related IT services on the basis of turnover differences (application of a ten-times turnover filter). 2. Whether a specified large diversified company engaged in embedded design and other services (Tata Elxsi) is functionally comparable and therefore includible in the SDS comparables. 3. Whether specified entities should be excluded from the IT-enabled services (ITES) comparable set on grounds of turnover disparity and/or functional dissimilarity. 4. Whether specified entities (I Services, Thomson Reuters International Services, Global Healthcare) ought to be included in the comparable set where the record shows apparent mistakes or issues pending rectification before the Dispute Resolution Panel (DRP). 5. Whether the issue of management fees requires remand for fresh adjudication. 6. Whether the issue of tax consultancy fees requires remand for verification and fresh adjudication. 7. Whether credit for advance tax and tax deducted at source (TDS) should be directed to be verified and granted if legitimately due. 8. Which grounds raised in the appeal were not pressed and therefore not adjudicated on merits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Turnover filter (ten-times) for exclusion of comparables in SDS/ITES benchmarking Legal framework: Transfer pricing comparability requires selection of appropriate comparable uncontrolled entities applying quantitative and qualitative filters; Tribunal practice recognizes turnover/scale as a relevant filter to ensure homogeneity of scale, cost structure and margins. Precedent treatment: The Tribunal relied on its own earlier decisions (including the assessee's prior AY decision) and co-ordinate bench authorities which have validated application of a tolerance range of ten times (both upward and downward) of assessee's turnover as a permissible and proper turnover filter for excluding comparables. Interpretation and reasoning: The Tribunal observed that entities with significantly different turnover face distinct economic/market conditions that materially affect margins and cost structure. The revenue-side heterogeneity therefore undermines comparability despite similarity in core activities. The Department's contention that human-resource intensive nature mitigates turnover impact was rejected as lacking merit in TP principles. Ratio vs. Obiter: Ratio - the direction to apply a ten-times turnover filter uniformly to determine and exclude non-comparable entities is a dispositive ruling applicable to the assessment year in question and for statistical purposes; discussion of turnover's effect on margins is authoritative for comparability analysis. Conclusions: The Tribunal excluded twelve specified SDS comparables and three specified ITES comparables whose turnovers fell outside the ten-times threshold, directed uniform application of the turnover filter by the TPO, and treated the exclusions as partly allowing the relevant grounds for statistical purposes. Issue 2 - Exclusion of a diversified/embedded-design company (Tata Elxsi) from SDS comparables Legal framework: Functional comparability and segmental analysis determine whether a large diversified enterprise can be a meaningful comparable; prior consistent findings on functional dissimilarity and lack of segmental disclosure are relevant. Precedent treatment: The Tribunal relied on earlier consistent tribunal orders in the assessee's own case for prior assessment years where the same entity was excluded for functional dissimilarity, non-availability of segmental information or super-normal profits. Interpretation and reasoning: No material change in the factual matrix or functionality of the entity was demonstrated by the Revenue for the year under consideration; absent contrary evidence, the Tribunal followed the consistent prior treatment and excluded the entity from comparables. Ratio vs. Obiter: Ratio - exclusion directed; the reliance on consistency across years is a binding approach in this context (statutory comparability assessment for the year). Conclusions: The Tribunal directed exclusion of the specified diversified company from the final comparables list on functional dissimilarity, following prior Tribunal findings. Issue 3 - Functional dissimilarity exclusions in ITES segment (Integra, Vitae, MPS, Interactive) Legal framework: Functional analysis (FAR - functions, assets, risks) is core to comparability; entities performing accounting, healthcare, content development or offshore recruitment may be functionally dissimilar to the assessee's ITES activities. Precedent treatment: The Tribunal applied precedent including a coordinate bench decision that excluded certain entities engaged primarily in accounting/health/e-publishing and content services from ITES comparables; a prior decision held some staffing/recruitment firms to be dissimilar where activities, risk and margin profiles differ. Interpretation and reasoning: Documentary evidence (annual report extracts) demonstrated that Integra, Vitae and MPS derive revenue from accounting/health/e-publishing/content, supporting exclusion. Interactive, engaged in offshore recruitment/staffing, was examined and found to provide support services in the nature of ITES and thus retained as functionally comparable after reviewing authorities' reasoning and precedents. Ratio vs. Obiter: Mixed - ratio for exclusion of Integra, Vitae and MPS (directed excluded); ratio for retention of Interactive (directed included); reasoning on functional comparability is authoritative for adjudication. Conclusions: Integra, Vitae and MPS were excluded from the ITES comparable set; Interactive was retained as a comparable. Issue 4 - Inclusion requests where DRP/TPO records show apparent mistakes or pending rectification (I Services, Thomson, Global Healthcare) Legal framework: Inclusion of comparables must follow proper application of filters and accurate factual matrix; where an apparent mistake or pending rectification at DRP affects comparability decisions, a remand or direction to the DRP/TPO for fresh adjudication is appropriate. Precedent treatment: Tribunal practice permits remand to the assessing/TPO/DRP where record reflects clerical or apparent errors or where rectification applications are pending, so that the administrative authority can re-consider with correct data. Interpretation and reasoning: The Tribunal found apparent mistakes in DRP/TPO records (e.g., mis-assignment of FAR, typographical/format errors in financial statements, failure to dispose pending rectification). Given those errors and the pending rectification applications, the Tribunal directed the DRP/TPO to decide afresh after verifying records and disposing rectification applications. Ratio vs. Obiter: Ratio - directions to remit the matters to the DRP/TPO for fresh consideration after verification/rectification; the approach is dispositive for those inclusion issues. Conclusions: The Tribunal remitted the inclusion issues of the identified companies to the DRP/TPO for verification and fresh adjudication due to apparent mistakes and pending rectification. Issue 5 - Management fees: need for remand for re-examination Legal framework: Determination of ALP for intra-group management/consultancy fees involves assessment of benefit test, cost-to-cost arrangements, and relevant judicial precedents limiting TPO's application of a benefit test; parties may be permitted to produce additional evidence. Precedent treatment: The Tribunal noted prior orders (including its own) directing re-examination where prima facie cost-to-cost arrangements exist and where benefit test application by departmental authorities is inappropriate without thorough analysis. Interpretation and reasoning: Given prior Tribunal guidance and the existence of submissions and documents supportive of an arm's-length cost recovery (including intra-group service documentation), the Tribunal directed remand to the AO/TPO for fresh adjudication, permitting additional evidence. Ratio vs. Obiter: Ratio - remand directed for fresh examination; the principle that benefit test should not be lightly applied by TPOs in such contexts is affirmed as guiding law. Conclusions: Management fee issue restored to AO/TPO for re-examination in light of earlier tribunal findings and enabling the assessee to produce additional evidence. Issue 6 - Tax consultancy fees: verification and remand Legal framework: ALP for reimbursed consultancy fees requires verification of supporting evidence and factual matrix before making an adjustment. Precedent treatment: Tribunal practice directs remand where evidentiary verification is necessary and the authorities have not examined the underlying documents sufficiently. Interpretation and reasoning: As evidentiary verification was necessary and the DRP had not adjudicated the issue, the Tribunal remitted the matter to the AO/TPO to verify documents and re-adjudicate. Ratio vs. Obiter: Ratio - remand for verification and re-adjudication; not a decision on merits of ALP. Conclusions: Tax consultancy fee issue remitted to AO/TPO for verification of evidence and fresh decision as per law. Issue 7 - Advance tax and TDS credit Legal framework: Legitimate credits for advance tax and TDS must be granted where supported by law and record; AO must verify entitlement. Precedent treatment: Tribunal directed grant of such credits where entitlement established or remand for verification to give statutory relief. Interpretation and reasoning: The Tribunal held that if credits are legitimately due under law, they should not be denied; therefore it remanded the issue to AO/TPO to verify entitlement and grant credit as per law. Ratio vs. Obiter: Ratio - direction to verify and grant credits where due. Conclusions: Issues on advance tax and TDS credits remitted to AO/TPO with directions to verify entitlement and grant credits in accordance with law. Issue 8 - Grounds not pressed Analysis and conclusion: Several grounds (including grounds 1,2,5-8,11-18,23-25) were not pressed by the appellant and were therefore dismissed as not pressed; they were not separately adjudicated on merits by the Tribunal.