TPO's benchmarking flawed for using only Rs 1 crore lower turnover filter without upper limit; matter remanded for fresh exercise

ITAT COCHIN AT held that the TPO erred in benchmarking by applying only a lower turnover filter of Rs. 1 crore without an appropriate upper turnover limit; the benchmarking exercise is therefore flawed. The matter is remanded to the AO/TPO to undertake a fresh benchmarking exercise using an upper turnover filter. All other contentions of the assessee are left open for reconsideration by the AO/TPO. The appeal by the assessee is partly allowed for statistical purposes.

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Issues: (i) Whether the benchmarking exercise and selection of comparable companies by the Transfer Pricing Officer (TPO) for determining Arm's Length Price (ALP) is valid in view of omission to apply an appropriate upper turnover limit when a lower turnover filter was applied, and whether the matter requires remand for fresh benchmarking.

Analysis: The appeal challenges the TPO's comparability and benchmarking filters, specifically the adoption of a lower turnover threshold without any corresponding upper turnover limit. The reasoning examines the TPO's filtering criteria for selecting comparables and recognises that omission of an upper turnover limit can materially affect the composition of the comparable set and the resulting margin benchmarking. The decision does not determine other contested issues on merits but holds that the benchmarking exercise as carried out is flawed for the limited reason identified and that a fresh exercise by the assessing authorities is necessary. All other contentions are left open for reconsideration by the assessing authorities.

Conclusion: The benchmarking exercise of the TPO is flawed due to failure to apply an appropriate upper turnover limit and the matter is remitted to the Assessing Officer/TPO for fresh benchmarking; the appeal is partly allowed for statistical purposes in favour of the assessee.

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