2025 (9) TMI 1188 - AT - Income Tax

Tax authority upheld one comparable's inclusion; two exclusions sent back for fresh review; taxpayer's appeal allowed for statistics

ITAT upheld the AO/TPO's inclusion of one comparable (a wholesale medicines trader) in the final set, finding the taxpayer failed to rebut its financials ... TP Adjustment - comparable selection - HELD THAT:- Fulford (India) Ltd. (‘Fulford India’) - More than 99% of revenue of Fulford India in the relevant year is from wholesale trading of medicines only. Fulford India passes all the filters. The case law relied upon by the Ld. Counsel, being factually different, is not relevant here. The Ld. Counsel did not demonstrate any factual inaccuracy in the financials of Profit & Loss account of Fulford India. Further, it is worth mentioning here that the Ld. Counsel has not brought any material on the record to contradict the finding of the AO/TPO. In view of the above, we hold that the AO is justified in including Fulford India in the list of final comparables for Distribution segment. We therefore, hold that Fulford India has been validly included in the list of final comparables by the AO/TPO. Carestream Health India Pvt. Ltd. and Nureca Limited - AR submitted that these two comparables had failed RPT filters - We set aside the finding of the AO with respect to these two comparables and remit the issue of failure of RPT Filters of these comparables back to the file of the AO/TPO for deciding their inclusion or exclusion on the basis of RPT Filters and pass order accordingly in accordance with law after providing adequate opportunity of being heard to the appellant assessee. Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer/AO properly rejected the arm's length price determination by altering comparable filters and including certain comparables in the final comparable set for the distribution segment. 2. Whether the inclusion of a particular comparable that was primarily engaged in trading in pharmaceuticals is justified despite asserted functional and product dissimilarities. 3. Whether two specified comparables should be excluded from the final comparable set on account of failing Related Party Transaction (RPT) filters and/or being functionally dissimilar. 4. Whether the matters relating to RPT filter failure and functional comparability, raised before the Tribunal for the first time, should be remitted to the AO/TPO for fresh examination. 5. (Raised but not adjudicated substantively) Whether initiation of penalty proceedings under sections 270A and 271AA was justified. ISSUE-WISE DETAILED ANALYSIS Issue 1: Legitimacy of AO/TPO's alteration of comparability filters and inclusion of additional comparables Legal framework: Transfer pricing methodology is governed by the arm's length principle as embodied in the Act and Rules (including Rule 10B and Rule 10D procedures), with the Transactional Net Margin Method (TNMM) relying on selection of an appropriate comparable set subject to statutory filters. Precedent treatment: The Tribunal treated comparator selection as fact-sensitive and recognized that no comparable is 100% identical; comparables must pass statutory and functional filters. Prior factual determinations of AO/TPO are accorded weight where supported by material. Interpretation and reasoning: The Court observed that the AO/TPO's modifications to the comparable set are permissible where warranted by record material and where comparables pass the prescribed filters. However, any inclusion/exclusion must be tested against statutory filters and functional similarity. The Tribunal noted that issues not previously raised before the AO/TPO/DRP may not have been examined below; where an issue has not been canvassed earlier, it may require remand for adjudication at fact stage. Ratio vs. Obiter: Ratio - AO/TPO may include comparables provided they satisfy statutory filters and functional comparability; factual determinations on comparability must be supported by record material. Obiter - general observation that no two comparables will be 100% identical. Conclusions: The AO/TPO's power to alter the comparable set was upheld in principle but subject to the requirement that factual filters and functional similarity be properly applied and recorded. Where facts regarding filters were not previously canvassed, remand is appropriate. Issue 2: Inclusion of a comparable primarily engaged in pharmaceutical trading despite asserted functional/product differences Legal framework: Comparative analysis for distribution segment under TNMM focuses on transactional/functional similarity rather than identity of products; statutory filters and functional profile govern selection. Precedent treatment: The Tribunal reaffirmed that functional dissimilarities must be material and demonstrable; where a comparable's financials and segmental revenue indicate dominance of trading activity similar to the tested party, inclusion may be justified despite differences in product taxonomy. Interpretation and reasoning: The Tribunal examined available record (including director's report/financials) and held that the comparable was predominantly a wholesale trader in the relevant year, passing the applied filters. The party challenging inclusion failed to demonstrate factual inaccuracy in the comparable's financials or to bring contradicting material. The Court emphasized that the mere difference in product category (e.g., pharmaceuticals v. scientific instruments) is not decisive if functional activity (distribution/trading) and filters are satisfied. Ratio vs. Obiter: Ratio - Product dissimilarity alone does not invalidate a comparable where functional profile and statutory filters indicate similarity; material record contradicting AO/TPO findings is required to exclude such comparable. Obiter - none beyond factual application. Conclusions: Inclusion of the pharmaceutical-trading comparable was upheld on available material; absence of contradicting evidence and satisfaction of filters justify its retention in the comparable set. Issue 3: Alleged failure of RPT filters and functional dissimilarity of two comparables (remit vs. exclusion) Legal framework: Comparables must pass RPT-related quantitative filters (e.g., RPT/Sales thresholds) and be functionally comparable; Authorities must verify RPT exposure from available filings and financial statements before inclusion. Precedent treatment: Where an issue (e.g., RPT filter failure) is raised for the first time before the Tribunal and was not examined by AO/TPO/DRP, the correct course is remand for fact-finding rather than appellate substitution of findings. Interpretation and reasoning: The Tribunal found that the challenge on RPT filters for the two comparables had not been raised below and therefore had not been examined by the AO/TPO or DRP. The Tribunal did not decide on the merits of RPT failure or functional dissimilarity but held that these matters require fresh verification by AO/TPO with opportunity to the taxpayer to be heard. The Tribunal directed reassessment of inclusion/exclusion based on RPT filter analysis and functional similarity, and required the taxpayer to cooperate in remitted proceedings. Ratio vs. Obiter: Ratio - Where an appellate forum is confronted with factual issues not previously examined by fact-finding authorities, the appellate forum should remit to the AO/TPO for fresh consideration and adjudication in accordance with law after affording opportunity to be heard. Obiter - specifics of how RPT filter thresholds apply to those entities were not decided. Conclusions: The findings with respect to these two comparables were set aside and remitted to the AO/TPO for fresh determination on RPT filters and functional comparability, with directions to afford the assessee adequate opportunity to be heard. Issue 4: Appropriateness of remand where issues are first raised before the Tribunal Legal framework: Principles of natural justice and fact-finding require that authorities of first instance address issues of fact. Appellate intervention is circumscribed where primary fact-finding has not occurred. Precedent treatment: Tribunal applied established principle that new factual contentions raised initially at appellate stage should ordinarily be remitted for consideration by AO/TPO/DRP rather than decided for the first time on appeal. Interpretation and reasoning: The Tribunal determined remand was necessary because the AO/TPO/DRP had not examined the RPT/filter issue; remand enables fresh fact-finding, application of statutory filters, and affording of hearing to the assessee. The Tribunal directed specific examinations (RPT filters and functional similarities) and cooperation by the assessee. Ratio vs. Obiter: Ratio - Remand is appropriate where factual matters have not been previously examined by the authorities below; appellate court should not normally decide such matters in the first instance. Obiter - emphasis on cooperation by the taxpayer in remanded proceedings. Conclusions: The Tribunal remitted the relevant comparability issues to AO/TPO for fresh determination consistent with principles of law and natural justice. Issue 5: Penalty proceedings under sections 270A and 271AA (not adjudicated) Legal framework: Penalty provisions require separate adjudication based on findings of concealment/false statements or failure to maintain/produce documents as mandated; ordinarily require primary fact-finding. Precedent treatment: The Tribunal did not reach the substantive penalty issues in the present order. Interpretation and reasoning: The appeal and directions focus on transfer pricing comparability issues and remand; the question of initiation of penalty proceedings was included in grounds but not decided. No adjudicative reasoning on penalties appears in the order. Ratio vs. Obiter: Obiter - absence of decision on penalties; no precedent-altering observations made. Conclusions: Penalty-related grounds were noted but not adjudicated; no conclusion on penalties rendered in this order. Disposition The Tribunal allowed the appeal for statistical purposes, upheld inclusion of the pharmaceutical-trading comparable on the available record, set aside findings in respect of two other comparables and remitted those issues to the AO/TPO for fresh consideration of RPT filters and functional comparability after affording opportunity to be heard; the Tribunal did not decide penalty-related grounds.