2025 (9) TMI 1193 - AT - Income Tax

TPO's use of IT-enabled services comparable upheld; appeal allowed for statistical purposes and matter remitted to AO

ITAT held that the TPO correctly included a comparable engaged in IT-enabled services based on functional comparability and available segmental ... TP Adjustment - comparable selection - CIT(A) rejected appellant’s comparable company Microland Limited by alleging that the company was having turnover less than 1 Cr - HELD THAT:- TPO has rightly accepted Microland Limited based on functional comparability as Company is engaged in IT enabled services which are similar to the services provided by assessee for which segmental information is also available. In above scenario, Microland Limited is to be included in the final set of comparable companies. CIT(A) in considering TCS e-Serve International Limited and TCS e-Serve Limited as comparable to the Appellant for benchmarking the international transaction of provision of IT enabled services TPO by giving benefit of working capital adjustment to the assessee - Pursuant to the order of Ld. CIT(A), the assessee has filed copy of letter dated 19.05.2017 before AO seeking appeal effect order dated 18.11.2016. The same is required to be decided by Ld. AO. Impugned orders are set aside and the matter is restored to the file of AO for fresh decision - Appeal of the assessee is allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer's selection and rejection of comparable companies for benchmarking the international transaction of provision of IT-enabled services was correct, specifically the exclusion of Microland Limited and the inclusion of TCS e-Serve International Limited and TCS e-Serve Limited. 2. Whether the reference of the case to the Transfer Pricing Officer (TPO) and procedural opportunities (including opportunity of hearing) in the reference process were infirm. 3. Whether the Tribunal should direct inclusion of a particular comparable (Microland Limited) in the final comparable set and whether the benchmarking/working-capital adjustments applied by the TPO/CIT(A) require reconsideration by the Assessing Officer (AO). 4. Miscellaneous grounds (computation of operating margin, use of three-year weighted averages, risk adjustments, tax credit, and initiation of penalty proceedings) - whether these grounds were pressed and decided. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exclusion of Microland Limited as a comparable Legal framework: Transfer-pricing provisions under Section 92C read with Rule 10B/10C/10D (benchmarking and selection of comparable uncontrolled companies) require functional comparability and appropriate filters in selecting comparables for determining arm's-length price/margin. Precedent treatment: Decisions of coordinate benches were cited concerning the proper application of comparability filters and the non-necessity of mechanical or overly technical exclusions where functional similarity exists. Interpretation and reasoning: The Tribunal examined the record and observed that the alleged reason for exclusion - turnover being less than Rs.1 crore - was factually erroneous because the audited financials showed turnover of Rs. 1,341,567,000 (figures in thousands). The TPO had accepted Microland based on functional comparability (engagement in IT-enabled services and availability of segmental information). Given functional similarity and the factual misreading of turnover, inclusion of Microland in the final comparable set was warranted. Ratio vs. Obiter: Ratio - the finding that a comparable cannot be excluded on a patently incorrect factual premise and that functional comparability warrants inclusion is a binding finding for the decision. Conclusion: Microland Limited is to be included in the final set of comparable companies for bench-marking purposes. Issue 2 - Inclusion of TCS e-Serve entities as comparables and working-capital/other adjustments Legal framework: Selection of comparables and application of adjustments (including working-capital adjustments) fall within the TPO/AO's domain subject to correctness, reasonableness and opportunity to the assessee; the appellate authority may remit for fresh consideration where legal or factual issues require further examination. Precedent treatment: The parties relied on various Tribunal decisions addressing comparability filters, functional differences, and the broad (non-technical) application of Rule 10B to accept reasonably comparable companies notwithstanding some differences in FAR and expense profiles. Interpretation and reasoning: The Tribunal noted that the CIT(A) had considered TCS e-Serve International Limited and TCS e-Serve Limited as comparables and had directed the TPO to give benefit of working-capital adjustment in favour of the assessee. The assessee subsequently sought to give effect to that appellate direction before the AO. The Tribunal found that the matter required fresh consideration by the AO (with opportunity to the assessee) to implement the CIT(A)'s directions and to re-evaluate margins and working-capital adjustments in accordance with law. Ratio vs. Obiter: Ratio - remitting the matter to the AO for fresh decision after affording fair opportunity is a operative direction forming part of the judgment. The observation that the comparability questions require re-examination and implementation of working-capital adjustment is binding for disposition of the appeal. Conclusion: The orders upholding inclusion of the TCS e-Serve entities and directing working-capital adjustments are set aside for fresh decision by the AO after affording the assessee a fair hearing; grounds relating to these comparables are allowed for statistical purposes and the matter is restored to the AO. Issue 3 - Validity of reference to the TPO and procedural fairness (opportunity of hearing) Legal framework: Provisions relating to reference to the TPO (e.g., Section 92CA and related rules/procedures) require that reference be made after appropriate evaluation and that procedural fairness (opportunity to be heard) be provided. Precedent treatment: Parties referenced decisions stressing the need for case-specific evaluation before making a TPO reference and for adequate opportunity to the taxpayer. Interpretation and reasoning: The record indicates that the TPO had functionally evaluated comparability and accepted certain comparables (e.g., Microland). However, the Tribunal's operative directions relate primarily to inclusion of Microland and remand for re-examination of TCS e-Serve comparables and working-capital adjustments. The Tribunal ordered restoration to the AO to decide appeal-effect issues and to afford a fair opportunity to the assessee, implicitly endorsing the need for procedural fairness on remand. Ratio vs. Obiter: Ratio - the requirement that the AO decide the appeal-effect matters afresh and afford the assessee a hearing is an operative direction. Any broader criticism of the mere fact of reference to the TPO was not finally adjudicated as grounds 3 and 4 were left open/not pressed. Conclusion: Procedural fairness is required on remand; the AO must reconsider in accordance with law and afford the assessee opportunity to be heard in relation to matters remitted. Issue 4 - Other transfer-pricing and assessment grounds (bench-marking methodology, three-year averaging, rejection/inclusion of other comparables, operating margin adjustments, risk adjustments, tax credit, and penalty initiation) Legal framework: Transfer-pricing documentation rules (Rule 10D) and statutory tests under Section 92C(3)/(4), Rule 10C(2)(e) (risk adjustments), and general assessment and penalty provisions (including Section 271(1)(c)) frame these issues. Precedent treatment: Numerous decisions were cited on the correct application of comparability filters, interpretation of functional differences and the permissibility of certain adjustments; however, the Tribunal did not undertake fresh detailed adjudication on these points in this order. Interpretation and reasoning: The record shows that several grounds (grounds 1-8 and 11-16) were not pressed before the Tribunal and therefore were left open. The Tribunal did not pronounce substantive findings on these unpressed grounds, aside from those expressly remitted/decided (Microland inclusion and remand on TCS e-Serve comparables/working-capital adjustment). Ratio vs. Obiter: Obiter/inconclusive - no binding adjudication on these grounds because they were not pressed; they remain open for future adjudication. Conclusion: Grounds 1-8 and 11-16 were not pressed and are left open; no substantive decision was rendered on those issues in this order. DISPOSITION The appeal is allowed for statistical purposes to the extent that (a) Microland Limited is to be included in the final comparable set, and (b) the matters concerning inclusion/exclusion and margin computation in respect of the TCS e-Serve entities and working-capital adjustments are set aside and restored to the file of the Assessing Officer for fresh decision after affording the assessee a fair opportunity of hearing. Other grounds not pressed remain open.