ITAT allows appeal on transfer pricing adjustments requiring TPO to re-examine rejected comparable companies with consistent turnover filters

The ITAT Hyderabad allowed the assessee's appeal for statistical purposes regarding TP adjustments. The tribunal remanded the case to the TPO to re-examine rejected comparable companies that appeared in the search matrix, directing inclusion if functionally comparable. The court found the TPO's application of only minimum turnover filter (Rs. 1 crore) without maximum filter improper, requiring consistent parameters of 10 times turnover on both sides. The issue of treating deferred receivables as international transactions was remanded to AO/TPO to apply 6% savings bank rate after allowing 60-day credit period.

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Issues Involved:

1. Rejection of comparable companies by the Transfer Pricing Officer (TPO).
2. Inclusion of certain companies by the TPO in the set of comparables.
3. Application of related party filter by the TPO.
4. Treatment of deferred receivables as international transactions.
5. Consideration of foreign exchange currency fluctuation gain/loss as operating in nature.

Detailed Analysis:

Issue 1: Rejection of Comparable Companies

The assessee challenged the TPO's rejection of eight comparable companies in its Transfer Pricing (TP) study analysis. The assessee argued that these companies were functionally comparable and met all filters applied by the TPO. However, the TPO rejected these comparables and selected a new set of 21 companies, resulting in a proposed transfer pricing adjustment. The Tribunal noted that in the assessee's own case for the previous assessment year, a similar issue was remanded to the TPO for reconsideration. Therefore, to maintain consistency, the Tribunal remanded the issue of rejection of six comparables (excluding Sasken Technologies and E-Zest Solutions) back to the Assessing Officer for fresh examination and determination of the Arm's Length Price (ALP).

Issue 2: Inclusion of Certain Companies by the TPO

The assessee contested the inclusion of 16 companies by the TPO, arguing that these companies had significantly higher turnover, related party transactions (RPT), and onsite revenues, making them incomparable. The Tribunal observed that the TPO applied only a minimum turnover filter of Rs. 1 crore without considering a maximum turnover filter. The Tribunal referenced its previous decision, which applied a consistent turnover filter of 10 times on both the higher and lower sides. Consequently, the Tribunal remanded the issue back to the TPO to apply the turnover filter consistently and determine the ALP accordingly.

Issue 3: Application of Related Party Filter

The TPO applied a related party filter of 25%, while the assessee applied a filter of 15%. During the hearing, the assessee chose not to press this ground, and the Tribunal dismissed it as not pressed.

Issue 4: Treatment of Deferred Receivables as International Transactions

The TPO treated deferred receivables from Associated Enterprises as international transactions and proposed notional interest adjustments. The assessee referenced a previous Tribunal decision, which applied a 6% interest rate with a 60-day credit period. The Tribunal, maintaining consistency, remanded the issue to the Assessing Officer/TPO to apply the savings bank rate of 6% on deferred receivables after allowing a 60-day credit period.

Issue 5: Consideration of Foreign Exchange Currency Fluctuation Gain/Loss

The assessee initially contested the TPO's consideration of foreign exchange currency fluctuation gain/loss as operating in nature. However, during the hearing, the assessee chose not to press this ground, and the Tribunal dismissed it as not pressed.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with several issues remanded back to the Assessing Officer/TPO for reconsideration and determination in light of the Tribunal's directions. The order was pronounced in the Open Court on 25th November 2024.

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