2021 (3) TMI 1316 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - It is pertinent to note that the comparables which were argued by the assessee to be excluded as a functionally dissimilar cannot be simplicitory included - as seen from annual report and the documents provided by the assessee before us that the functional profile was not properly verified by TPO / AO. Thus it will be appropriate to direct the TPO to exclude these three comparables i.e. M/s Aptico Ltd.; Axis Integrated System Ltd. and Killik Agencies and Marketing Ltd. As regards the inclusion prima facie after seeing the documentation of all the three companies it can be seen that the functional profile of each of the company were not exactly similar to the assessee company and besides that there are filters which was taken into account by the TPO during the reference proceedings has not been properly sufficient and comparable to the assessee company. Though the assessee pointed out that these companies have to be included it needs proper verification as the data before us cannot convey as to how these comparables has to be accepted. Therefore it will be appropriate to remand back the inclusions to the file of the TPO / Assessing Officer for through verification of these comparable companies and if found comparable the same should be taken into account. Working capital Adjustment - As issue from the perusal of the order of the TPO / Assessing Officer it can be seen that the computation of the working capital adjustment was not properly done and the same has to be done in accordance with the ALP margins. Therefore we direct the TPO / Assessing Officer to re-compute the working capital adjustment as per the ALP margins.

Summary

Issues:
1. Transfer pricing adjustments made by TPO and subsequent assessment order
2. Exclusion and inclusion of comparables in the transfer pricing analysis
3. Working capital adjustment calculation

Transfer Pricing Adjustments:
The assessee, engaged in two-wheeler and power producer research and development, filed its income return declaring &8377;1,19,16,780. The TPO made an adjustment of &8377;10,28,08,892, leading to a revised income of &8377;4,10,07,860. The DRP directed the TPO to re-verify certain issues, resulting in an ALP adjustment of &8377;4,74,55,478 by the Assessing Officer. The assessee appealed against this assessment order.

Exclusion and Inclusion of Comparables:
The main issue in the appeal was the exclusion and inclusion of comparables in the transfer pricing analysis. The assessee contested the exclusion of companies like M/s Aptico Ltd., Axis Integrated System Ltd., and Killik Agencies and Marketing Ltd., arguing they were functionally dissimilar. The assessee relied on various legal precedents to support its argument. On the other hand, the TPO defended the inclusion of these comparables, stating they were functionally similar and within acceptable margins. Regarding the inclusion of comparables like Hi-Tech Laboratories Ltd., ITDC Ltd., and Cyber Media Research Ltd., the assessee argued for their inclusion based on past acceptance and comparable margins, while the TPO rejected them as functionally dissimilar. The Tribunal found that proper verification of the functional profiles was lacking and directed the TPO to exclude certain comparables and re-verify the inclusion of others.

Working Capital Adjustment:
The Tribunal noted that the working capital adjustment calculation was not properly done by the TPO/Assessing Officer and directed a re-computation in accordance with ALP margins. The assessee was to be given an opportunity for a hearing following the principles of natural justice. The appeal was partly allowed for statistical purposes.

In conclusion, the Tribunal partially allowed the assessee's appeal, directing the exclusion of certain comparables, re-verification of inclusion of others, and a re-computation of the working capital adjustment. The decision aimed at ensuring a fair and accurate transfer pricing analysis in line with legal requirements and principles.