ITAT directs TPO to exclude Companies with Turnover exceeding or below 10 times for Transfer Pricing Comparable Analysis [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal orders the Transfer pricing officer ( TPO ) to apply the turnover filter to exclude companies with a Turnover of more than 10 times or less than 1/10th of the turnover of the assessee’s company for Transfer Pricing Comparable Analysis.

The Assessee, Benu Networks Packet involved in the computer software and development business. The Assessee filed its income tax return ( ITR ) for the assessment year of 2016-17 declaring the final income of Rs. 1,56,45,860. Assessee filing was selected for scrutiny under CASS and notices were sent to the assessee accordingly.

The assessee had an international transaction with its Associated Enterprises ( AEs ), leading to TPO intervention. TPO made Transfer Pricing ( TP ) adjustments under section 92CA on international transactions for A.Y 2015-16 totaling Rs.1,22,00,037 (software development services: Rs. 1,04,23,539; interest on delayed receivables: Rs. 17,76,498).

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The income tax AO sent a draft assessment order to the assessee. Aggrieved by this, the assessee objected before the Dispute Resolution Panel ( DRP ). After DRP direction the AO made TP adjustments and finalized the assessment totaling Rs.2,78,45,897. The assessee appealed this order before the ITAT, Hyderabad.

The Assessee's counsel submitted that the TPO and DRP erred on facts and law by comparing the assessee’s company with the companies having high turnover and these companies failing to meet the legally accepted criteria of turnover being greater than Rs. 200 crores in various judicial precedents.

The assessee’s counsel relied on various judicial precedents supporting the exclusion of such companies, especially in the Bombay High Court case of CIT vs Pentair Water India Pvt Ltd (Tax Appeal No. 18 of 2015) where the bench rejected the company turnover exceeding Rs. 200 crores and held that turnover is a relevant criterion for choosing comparable companies for determination of ALP.

The Assessee’s counsel relied on the Karnataka High Court case of the Obopay Mobile Technology India Private Ltd., (supra) where it was held that the turnover is a relevant criterion for choosing companies as comparables in determining the ALP in Transfer Pricing cases and the range of turnover filter at ten times on both the ends.

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The department, represented by Vijaya Lakshmi argued that the huge turnover leads to positive internal economies of scale thereby reducing cost and increasing the company's profitability so these companies should be rejected. AO counsel continues with their arguments that the companies selected by TPO have higher turnover than the assessee company is not a relevant filter since it does not impact the cost plus margin method.

The two-member bench of Laliet Kumar (Judicial Member) and G. Manjunatha (Accountant Member) observed both sides’ arguments. It was noted that it always followed the filter ten times x and 1/10th of the assessee’s turnover on both sides. The Income tax appellate tribunal directed the AO/TPO to apply the ten times filter (more than 10 times and less than 1/10th turnover) to exclude the companies from the list of comparables.

To Read the full text of the Order CLICK HERE

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