The tribunal emphasized functional comparability in transfer pricing, affirming that differing turnover disqualifies comparables and allows for royalty expenses as revenue.

ORDER

PER WASEEM AHMED, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the order passed by the AO, Bengaluru dated 30/01/2023 in DIN No. ITBA/AST/M/143(3)/2022- 23/1049212571(1) for the assessment year 2010-11.

2. The interconnected issue raised by the assessee in ground numbers 1 to 13 is that the ld. DRP and the AO/TPO erred in making the upward adjustment of ₹ 8,09,48,991.00 with respect to the international transactions carried out with the associated enterprise.

3. The necessary facts as arising from the order of the authorities below are that the assessee in the present case is a wholly owned subsidiary of M/s Continental Automotive Holdings Netherlands, BV and engaged in manufacturing of components and systems for vehicles. The assessee in the year under consideration has carried out certain international transactions with its AE which was claimed to be carried out at the arm length price based on TNMM after selecting certain comparable as elaborated in the order of the TPO. However, the TPO was not satisfied with the transfer pricing study of the assessee with respect to the international transaction carried out with the AE. Accordingly, the TPO rejected the comparable selected by the assessee and conducted a fresh TP study. The TPO in the fresh TP study selected 11 comparable for working out the ALP using the TNMM and operating profit/ operating cost as profit level indicator. The arithmetic mean calculated by the TPO was 22.71% of the comparable companies and thus proposed an upward adjustment of ₹ 8,81,19,940.00 to the total income of the assessee. The assessee raised the objection before the ld. DRP which dismissed the objections of the assessee with the direction to include one more comparable namely M/s Akshay Software Technologies Ltd. Thus, the ld. DRP granted partial relief to the assessee. Accordingly, the AO in the final assessment order reduced the upward adjustment to ₹ 8,09,48,991.00 with respect to the international transaction carried out by the assessee with its associated enterprises.

4. Being aggrieved by the order of ld. DRP/AO, the assessee is in appeal before us.

5. The learned AR before us filed a paper book running from pages 1 to 1403, case law compilation running from pages 1 to 201, synopsis of arguments running from 1 to 20 pages, additional synopsis of arguments running from pages 1 to 2 and contended that certain comparable selected by the TPO should be rejected based on the turnover filter. As per the ld. AR there were 6 companies selected by the TPO having turnover exceeding ₹ 200 crores whereas the turnover of the assessee stands at ₹ 53.58 crores for the year in dispute. Therefore, these 6 companies should not be considered as comparable for working out the ALP of the assessee. In holding so, the ld. AR relied on the order of Bangalore ITAT in the case of Autodesk India private limited versus DCIT reported in 96 taxmann.com 263. Such list of the comparable companies having turnover more than 200 crores with the associated enterprises is reproduced on page 6 of the synopsis of arguments of the assessee.

6. Besides the above the ld. AR also submitted that the impugned companies/comparable as discussed above are also functionally dissimilar to the assessee. The ld. AR to this effect has made a detailed submission in the synopsis of arguments.

7. The ld. AR further submitted that the companies namely ICRA techno analytics Ltd and Kals information systems Ltd. should also be excluded from the list of the comparable as selected by the TPO. As per the ld. AR, the company namely ICRA provides diverse range of IT solutions a