2025 (10) TMI 580 - AT - Income Tax

Comparable deleted where assessee mainly traded and failed 75% trading-turnover filter; AO/TPO must rework PLI using 2.92% margin

B & R Industrial Automation Pvt. Ltd. Versus Additional/Joint/ Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National Faceless Assessment Centre, New Delhi/The Deputy Commissioner of Income Tax, Circle-1 (1), Pune.

ITAT PUNE (AT) held that a selected comparable was not comparable to the assessee because company records showed pure manufacturing while the assessee ... TP Adjustment - comparable selection - contention of the Assessee that Maxim SMT Technologies Private Limited is not comparable with assessee - HELD THAT:- Maxim SMT Technologies Private Limited has admitted before ROC that it is into manufacturing only. As per Assessing Officer, Assessee is into manufacturing and trading. The filter applied by TPO of trading turnover was 75% and Maxim SMT Technologies Private Limited does not qualify the said filter. In these facts and circumstances of the case, we are of the considered opinion that Maxim SMT Technologies Private Limited is not comparable to the Assessee. Accordingly, we direct the Assessing Officer/TPO to delete Maxim SMT Technologies Private Limited from the list of selected comparables. Accordingly, Ground No.2 raised by the Assessee is allowed. Assessee and ld.DR for the Revenue has accepted the fact that the margin of Debak Enterprises Private Limited is 2.92%. In these facts and circumstances of the case, ld.AO/TPO is directed to rework the Average by considering the Debak Enterprises Private Limited’s margin at 2.92%. ISSUES PRESENTED AND CONSIDERED 1. Whether Maxim SMT Technologies Pvt. Ltd. was a valid comparable for determination of Arm's Length Price where it failed the TPO's trading-turnover filter (75%) and DRP directed reduction of that filter to 50% for re-evaluation. 2. Whether the margin of Debak Enterprise Pvt. Ltd. as used in the TPO's comparable set is correctly computed and, if not, the consequence for the weighted average Profit Level Indicator (PLI) applied to the assessee. 3. Whether directions by the Dispute Resolution Panel (DRP) to reduce a specific filter (trading turnover threshold) for the purpose of retaining a particular comparable, without replacing or otherwise applying the filter uniformly, comport with the statutory scheme for transfer-pricing comparability analysis. 4. Miscellaneous/ancillary: Treatment of other grounds raised by the assessee (transfer pricing adjustments, operating/non-operating classification, risk adjustments, omission of TPO's order giving effect to DRP) which the authorised representative did not press and which the Tribunal treated as unadjudicated. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of Maxim SMT Technologies Pvt. Ltd. as a comparable where it failed TPO's 75% trading-turnover filter and DRP directed reduction to 50% Legal framework: Determination of Arm's Length Price under section 92CA of the Act requires selection of comparables based on functional and transactional comparability and application of appropriate filters (e.g., trading turnover threshold) in the Transfer Pricing Officer's comparability analysis. DRP may give directions under section 144C but must act within the statutory framework and principles of comparability. Precedent treatment: No specific judicial precedents were cited or relied upon in the record. The Tribunal applied statutory and methodological principles intrinsic to transfer pricing comparability (filters, functional similarity, and reliance on statutory records such as ROC filings). Interpretation and reasoning: The TPO originally applied a trading-turnover filter of 75% (trading turnover as percentage of total sales) when selecting comparables for a taxpayer engaged principally in trading activity. The assessee demonstrated that Maxim SMT failed the 75% filter for three years; DRP recorded that fact but directed the TPO to reduce the trading-turnover threshold to 50% and re-evaluate the comparable. The Tribunal found that (a) the TPO applied the 75% filter as part of a uniform selection methodology; (b) DRP's acceptance that Maxim SMT failed the 75% threshold implied that the comparable ought to be excluded; (c) DRP's direction to reduce the threshold to 50% solely to accommodate the particular comparable was procedurally and substantively impermissible because a reduction of the filter would enlarge the universe of comparables and change the selection framework, which cannot be done selectively for one company; and (d) ROC/annual return evidence indicated that Maxim SMT's operations were manufacturing, not trading, supporting functional non-comparability with a trading enterprise importing programmable logic controllers. Ratio vs. Obiter: Ratio - The Tribunal held as a binding determination that a comparable that fails a uniformly applied trading-turnover filter must be excluded and that DRP cannot direct a selective dilution of that filter to retain a particular comparable. Obiter - Observations on the broader propriety of DRP altering filters generally (beyond these facts) are incidental but consistent with the ratio. Conclusion: Maxim SMT Technologies Pvt. Ltd. is not a comparable; it is to be deleted from the TPO/AO's comparable set. The Tribunal allowed the relevant ground of appeal accordingly. Issue 2 - Correctness of Debak Enterprise Pvt. Ltd.'s margin and effect on the average PLI Legal framework: In TNMM, the PLI of comparables (here Operating Profit/Operating Revenue) must be correctly computed from the companies' audited/ROC-filed financials; errors in individual comparables' PLIs affect the arm's-length range/average and consequent adjustment under section 92CA. Precedent treatment: None cited; the Tribunal accepted party-filed computations when agreed between parties or on record demonstration of error. Interpretation and reasoning: The assessee's authorised representative produced working showing Debak's margin as 2.92%, whereas the TPO had used 15.80%. The departmental representative accepted the corrected margin of 2.92%. Given mutual acceptance and record evidence, the Tribunal directed the AO/TPO to recompute the weighted average PLI by using Debak's margin at 2.92%. Ratio vs. Obiter: Ratio - A comparable's PLI must be corrected to reflect the correct margin where demonstrable arithmetic/record errors exist; the AO/TPO is directed to rework the average PLI accordingly. Obiter - None significant beyond the corrective principle. Conclusion: Debak Enterprise Pvt. Ltd.'s margin is 2.92% for the purpose of averaging; the AO/TPO must recalculate the average PLI incorporating this corrected figure. Issue 3 - Legality of DRP's selective modification of comparability filters Legal framework: DRP's role under the dispute resolution scheme is to examine objections and issue directions consistent with transfer-pricing law; DRP's directions must respect the methodological integrity of the comparability exercise and cannot selectively alter criteria to favor inclusion of a challenged comparable without considering the wider consequences. Precedent treatment: No authorities cited. The Tribunal relied on statutory principles of comparability and consistency. Interpretation and reasoning: The DRP accepted that the comparable failed the 75% trading filter but nonetheless directed reduction to 50% for re-evaluation. The Tribunal reasoned that a reduction of the trading turnover threshold is not a cosmetic, company-specific adjustment; it affects the universe of comparables and must be applied as a change in methodology with consequential reassessment of all candidates. Selective reduction to retain a particular company circumvents the objectivity of filters and is not permissible in the facts of this case. Accordingly, DRP should have excluded the comparable once it conceded failure of the original filter, rather than mandate a selective relaxation of criteria. Ratio vs. Obiter: Ratio - DRP cannot direct a selective relaxation of a uniformly applied comparability filter to retain a particular comparable that otherwise fails the filter; where DRP accepts that a comparable fails a filter, DRP must exclude it unless a holistic and uniformly applied methodological change is justified and recorded. Obiter - General commentary that DRP can direct methodological changes only if done transparently and applied uniformly. Conclusion: DRP's direction to reduce the trading turnover filter solely to accommodate Maxim SMT was not proper; the comparable must be excluded as per the original filter applied by the TPO. Issue 4 - Other grounds raised but not argued (operating/non-operating classification, CSR treatment, risk adjustments, failure to give effect to TPO order, etc.) Legal framework: All transfer-pricing/contention grounds raised before assessing authorities are subject to adjudication; however, an appellant may refrain from pressing certain grounds before the Tribunal, which may result in those grounds remaining unadjudicated. Precedent treatment: Not applicable in the record; parties agreed that only selected grounds would be argued. Interpretation and reasoning: The authorised representative expressly limited argument to ground relating to Maxim SMT and the computation error for Debak. Consequently, the Tribunal did not adjudicate other grounds and dismissed them as unadjudicated. Ratio vs. Obiter: Ratio - Where a party elects not to press certain grounds, the Tribunal may decline to adjudicate them and treat them as unadjudicated. Obiter - None. Conclusion: All other grounds not argued were dismissed as unadjudicated; the appeal was allowed in part on the two specific issues addressed. Disposition The Tribunal directed deletion of Maxim SMT Technologies Pvt. Ltd. from the comparable set and directed the AO/TPO to recompute the average PLI using Debak Enterprise Pvt. Ltd.'s margin at 2.92%; all other grounds were left unadjudicated and dismissed accordingly. The appeal was partly allowed.