TaxTMI 
TaxTMI 
2024 (2) TMI 273
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....r section 143(2) of the Act was issued on 30.07.2017. During the course of assessment proceedings, it was noticed that assessee had entered into international transaction with its Associate Enterprises (AE) amounting to Rs. 131,11,86,107/-. The case was referred by the AO to the TPO to determine the Arm's Length Price (ALP) of international transaction undertaken by assessee with its AEs. The TPO passed an order under section 92CA of the Act on 30.10.2019 proposing Transfer Pricing (TP) adjustment of Rs. 12,21,83,641/- with reference to software development segment of the international transaction entered into by the assessee with its AE during the previous year. Consequent to the TPO's Order, a Draft Assessment Order was passed under section 144C of the Act on 21.12.2019. 3. Aggrieved, assessee filed objections before the Dispute Resolution Panel (DRP) (objections dated 20.01.2020). The DRP, vide its directions dated 2025.03.2021, dismissed the objections raised by the assessee and confirmed the TPO adjustment proposed by the TPO. Pursuant to the DRP's directions, the impugned Final Assessment Order was passed incorporating TP adjustment in the software development segment amou....
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....terial on record. The limited contention of the assessee is only for adjudication of ground No.6 referred supra. The assessee submits that the turnover of the assessee is only Rs. 124 Crores during the relevant previous year, hence, companies having turnover of more than Rs. 200 Crores needs to be excluded from the comparable list while calculating the ALP of the said international transaction. We find that identical issue was considered by the Tribunal in assessee's own case for Assessment Year 2015-16 (supra). The relevant narration of facts, the contentions raised and the findings of the Tribunal for Assessment Year 2015- 16 reads as follows: "14. Ground No.8 relates to application of turnover filter by the TPO. The ld AR submitted that the TPO has applied the lower turnover filter while choosing the fresh comparable companies but failed to apply the upper turnover filter. The ld AR submitted that the turnover of assessee for the year under consideration is Rs. 108 crores and that by applying the upper turnover filter Rs. 200 crores, the following companies need to be excluded. In this regard, the ld. AR presented a table with the turnover details of the comparabl....
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.... sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account asset....
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....ly compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed as (a) to (g) in Grd.No.8.7 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs. 200 Crores and the Assessee's turnover is only Rs. 24,71,71,242/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs. 1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflec....
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.... Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparable companies. This shows that there is a limit for the lower end for identifying the comparable companies. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies whic....
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....ansfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies tu....