The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) ruled on September 9 that functionally comparable entities cannot be excluded from transfer pricing analysis solely by applying a rigid turnover threshold.
A Division Bench of Judicial Member Satbeer Singh Godara and Accountant Member Manish Agarwal partly allowed GE India Industrial Pvt. Ltd.’s appeals for assessment years 2007-08 and 2008-09.
The appeals challenged transfer pricing adjustments and several corporate tax disallowances imposed by the Assessing Officer (AO). The Tribunal noted that:
“We are of the considered view that the learned lower authorities, more particularly, the DRP, has been more guided by a general opinion than by the aforesaid statutory provisions envisaging suitable adjustments in the Rules. We thus reject the Revenue’s vehement contentions supporting the impugned turnover filter of 50% or less to exclude lower-end entities as compared to the assessee and direct the Transfer Pricing Officer ‘TPO’ to finalise his afresh arm’s length price ‘ALP’ computation as per law preferably within three effective opportunities of hearing.”
The Transfer Pricing Officer (TPO) in the lead appeal for AY 2007-08 had applied a turnover filter mandating comparable companies to have turnover within 50% of GE India’s turnover.
GE India contested the strategy, claiming that companies otherwise fulfilling the operational comparability provisions could not be excluded only because of differences in turnover.
The Tribunal highlighted that, according to Rule 10B, comparability must be evaluated based on the functions performed, assets used, and risks taken.
It also noted that differences that materially affect price, cost, or profit should be addressed through reasonably accurate adjustments.
As a result, the Tribunal rejected the 50% turnover filter and instructed the TPO to conduct a new computation of the Arm’s Length Price (ALP).
Additionally, the Tribunal accepted GE India’s argument that any transfer pricing adjustments should be limited to international transactions conducted with its associated enterprises (AEs) and should not be applied to entire business segments that include transactions with unrelated parties. Accordingly, it directed the TPO to recompute the ALP based on this principle.
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The Bench, regarding the corporate tax issues for AY 2007-08, directed the exclusion of amortisation of goodwill, bad debts and legal expenses from the ALP computation.
It removed the disallowance of warranty and replacement expenses, permitted the claim for business rights as revenue expenditure, and accepted the claim of GE India for depreciation on software. Several other cases were remanded to the Assessing Officer or TPO for factual verification.
Concerning AY2008-09, the Tribunal asked that transfer pricing adjustments for the Power Controls, Water Process Technology, and Manufacturing segments be restricted to international transactions with AEs. It restored GE India’s claim for a working capital adjustment before the Transfer Pricing Officer (TPO) for a fresh examination.
Subsequently, the ITAT partly permitted both appeals and asked for fresh consequential calculations on the transfer pricing issues while furnishing relief on different corporate tax disallowances.
| Case Title | M/s. GE India Industrial Pvt. Ltd. vs. DCIT |
| Appeal No. | ITA Nos.3695/Del/2015 & 2781/Ahd/2012 |
| Assessee by | Sh. Sachit Jolly, Ms Sherry Goyal, and Ms Viyushti Rawat |
| Department by | Sh. Mahesh Kumar |
| Delhi ITAT | Read Order |
