Turnover Filter Cannot Be Applied Mechanically To Exclude Transfer Pricing Comparables: ITAT Delhi

The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 9 September held that transfer pricing comparables cannot be excluded merely by applying a rigid turnover filter where the entities are otherwise functionally comparable.

A Division Bench comprising Judicial Member Satbeer Singh Godara and Accountant Member Manish Agarwal partly allowed twin appeals filed by GE India Industrial Pvt. Ltd. for assessment years 2007-08 and 2008-09 against transfer pricing adjustments and various corporate tax disallowances made by the Assessing Officer. The Tribunal observed:

“We are of the considered view that the learned lower authorities, more particularly, the DRP has been more guided by a general opinion than being the aforesaid statutory provisions envisaging in suitable adjustments in the Rules. We thus reject the Revenue's vehement contentions supporting the impugned turnover filter of 50% or less so as to exclude lower-end entity as compared to the assessee and direct the Transfer Pricing Officer 'TPO' to finalize his afresh arm's length price 'ALP' computation as per law preferably within three effective opportunities of hearing.”

In the lead appeal for AY 2007-08, the Transfer Pricing Officer (TPO) had applied a turnover filter requiring comparable companies to have turnover within 50% of GE India's turnover. GE India challenged the approach, contending that companies otherwise satisfying the functional comparability requirements could not be excluded solely because of differences in turnover.

The Tribunal noted that under Rule 10B, comparability has to be examined with reference to functions performed, assets employed and risks assumed. It further noted that differences which materially affect the price, cost or profit should be addressed through reasonably accurate adjustments. On this basis, it rejected the 50% turnover filter and directed the TPO to undertake a fresh Arm's Length Price (ALP) computation.

It also accepted GE India's contention that any transfer pricing adjustment should be confined to international transactions undertaken with its AEs rather than being applied across entire business segments containing transactions with unrelated parties. It accordingly directed the TPO to recompute the ALP on that basis.

On the corporate tax issues for AY 2007-08, the Bench directed exclusion of amortisation of goodwill, bad debts and legal expenses from the ALP computation. It deleted the disallowance of warranty and replacement expenses, allowed the claim concerning business rights as revenue expenditure, and accepted GE India's claim for depreciation on software. Several other issues were restored to the Assessing Officer or TPO for factual verification.

For AY 2008-09, the Tribunal similarly directed that transfer pricing adjustments concerning the Power Controls, Water Process Technology and Manufacturing segments be restricted to international transactions with AEs. It also restored GE India's claim for working capital adjustment to the TPO for fresh verification.

Accordingly, the ITAT partly allowed both appeals and directed fresh consequential computations on the transfer pricing issues while granting relief on various corporate tax disallowances.

Counsel for the Appellant: Sachit Jolly, Sr. Advocate; Sherry Goyal, Advocate; Viyushti Rawat, Advocate

Counsel for the Respondent: Mahesh Kumar, CIT(DR)