ITAT directs fresh comparable search with ten times turnover filter, excludes three entities under Rule 10TA(g)

The ITAT Hyderabad ruled on transfer pricing comparable selection criteria, directing the AO/TPO to apply a turnover filter of ten times on both sides of the assessee's turnover for fresh comparable search, following Karnataka HC precedent. The tribunal excluded three entities (Vitae International Accounting Services, Domex E Data, and MPS Ltd.) from comparables as their functions fell under Rule 10TA(g) clauses (iv)-(vii), making them non-comparable to the assessee. However, Motiff India Infotech was retained as a comparable despite high advertising expenses, as the DRP found no evidence that such expenses impacted revenues. The appeal was allowed for statistical purposes with directions for fresh ALP determination.

---

---

Issues:
Transfer Pricing Adjustment based on comparables selection

Detailed Analysis:

Issue: Transfer Pricing Adjustment based on comparables selection

The judgment involves an appeal by the assessee against the final assessment order for the assessment year 2018-19, concerning the determination of Arm's Length Price (ALP) for international transactions with its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) suggested an upward adjustment of Rs. 9,86,66,724 based on the selection of comparables. The assessee challenged the inclusion of certain entities like Tech Mahindra Business Services Ltd., Infosys BPM Ltd., and E-Clerx Services Ltd., on the grounds of turnover differences. The contention was that turnover is a relevant factor for comparability, supported by legal precedents. The Tribunal held that turnover is a relevant criteria for choosing comparables in Transfer Pricing cases, following the decision of the Hon'ble Karnataka High Court and directed the Assessing Officer to adopt a turnover filter range of ten times on both ends for a fresh search.

The judgment further addressed the inclusion of Vitae International Accounting Services Pvt. Ltd., Domex E - Data Pvt. Ltd., and MPS Ltd., as comparables. While these entities broadly fall under ITeS, there were critical variations in their functionality beyond the ITeS category. Citing legal precedents, the Tribunal concluded that these entities did not qualify as comparables due to their specific service offerings and directed their exclusion from the list.

Regarding Motiff India Infotech Pvt. Ltd., the only reason presented for exclusion was its significant advertising and promotional expenses. The TPO and DRP found these expenses routine for an independent entity and not impacting revenues significantly. As there was no dispute on the functional profile, the Tribunal directed a fresh study to determine the ALP of the international transaction without excluding this entity.

In conclusion, the appeal of the assessee was treated as allowed for statistical purposes, and the Tribunal provided detailed reasoning for the adjustments made in the Transfer Pricing analysis, emphasizing the relevance of turnover and functional comparability in selecting appropriate comparables for determining the Arm's Length Price in international transactions.

Order pronounced in the open court on the 28th day of June, 2024.

---