2011 (1) TMI 1210 - AT - Income Tax

Rejecting comparable - incurring loss - HELD THAT - It is observed that a similar issue was involved in assessee s own case for the immediately preceding year i.e. 2003-04 and the Tribunal passed for the said year has restored the same to the file of the A.O. with a direction to decide the same afresh in the light of the decision of ITAT in the case of Sony India ( P.) Ltd. 2008 (9) TMI 420 - ITAT DELHI-H wherein it was held that a comparable could not be excluded only on the ground of losses except in cases where there are other factors justifying exclusion of the said comparables. Respectfully following the said decision of the Tribunal in assessee s own case we restore this issue to the file of the A.O. for deciding the same afresh on the same line as directed by the Tribunal in A.Y. 2003-04. Ground is accordingly treated as allowed. Different Business activites - comparables for transfer pricing analysis - HELD THAT - the nature of business activity carried on by the four parties in question was entirely different from the business activity of the assessee. Moreover the services rendered by these parties were in the non-technical field whereas assessee company was found to be rendering services in the technical field of research and development. As rightly held by the authorities below the said concerns thus were functionally different from the assessee company and there was no justifiable reason to select the same as comparables for transfer pricing analysis. We therefore find no infirmity in the impugned or of the CIT(A) on this issue and upholding the same we dismiss ground of the assessee s appeal. disallowance of benefit of 5% variation claimed - HELD THAT - we restore this issue to the file of the A.O. with a direction to decide the same afresh in the light of the decision of ITAT in the case of Sony India (P.) Ltd. 2008 (9) TMI 420 - ITAT DELHI-H . claim for adjustment - difference in risks profile - transfer pricing analysis - we restore this issue to the file of the A.O. for deciding the same afresh on the same line as has been directed by the Tribunal in A.Y. 2003-04. Ground of the assessee s appeal is treated as allowed for statistical purpose. comparable case - transfer pricing analysis - HELD THAT - it is observed that M/s Ujjwal Ltd. was excluded by TPO/A.O. for the purpose of transfer pricing analysis on the ground of functional differentiation. The ld. CIT(A) however accepted the claim of the assessee for inclusion of the said party as comparable following his appellate order for A.Y. 2003-04. The Tribunal vide order dated 30.8.10 has upheld the said order of the ld. CIT(A) for A.Y. 2003-04. As the issue involved in the year under consider as well as all the material facts relevant are similar to that of A.Y. 2003-04 we respectfully follow the order of the Tribunal for 2003-04 and uphold the impugned order of the ld. CIT(A) allowing including of M/s Ujjawal Ltd. as comparable case for transfer pricing analysis. Ground of the Revenue s appeal is accordingly dismissed. deleting the addition - unrealised foreign exchange gain - HELD THAT - it is observed that the addition made by the A.O. on account of foreign exchange fluctuation gain relating to ECB obtained by the assessee from its associated enterprises was deleted by the ld. CIT(A) treating the same capital receipt not chargeable to tax on the ground that it represented unrealised foreign exchange gain in respect of foreign currency loan obtained for acquisition of capital asset in India. While allowing relief to the assessee on this issue the ld. CIT(A) followed his own appellate order passed in assessee s case for A.Y. 2003-04 on a similar issue. As the issue involved in the year under consideration as well as all the material facts relevant are similar to that of A.Y. 2003-04 we respectfully follow the order of the Tribunal for 2003-04 and uphold the impugned order of the ld. CIT(A) and allow the relief to the assessee. Ground of the Revenue s appeal is accordingly dismissed. application seeking admission - additional ground - inclusion of Vimta Labs Ltd. as comparable - HELD THAT - It is observed that although a detail submission was made on behalf of the assessee before the ld. CIT(A) on the basis of FAR analysis to show that the selection of M/s Vimta Labs as comparable is not justified the ld. CIT(A) has not accepted the stand of the assessee on this issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India (P.) Ltd. 2011 (1) TMI 933 - ITAT NEW DELHI has held that exclusion of companies showing supernormal profits as compared to other comparable is fully justified. We therefore set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the ld. CIT(A).

Summary

Issues Involved:
1. Selection of comparables for transfer pricing analysis.
2. Rejection of Kitco Ltd. as a comparable entity.
3. Rejection of four comparable cases (Bombay Intelligence Security India Ltd., Tanur Healthcare Ltd., Times Infotainment Media Ltd., and Top Security Ltd.).
4. Disallowance of benefit of 5% variation.
5. Adjustment in respect of difference in risk profiles.
6. Inclusion of M/s Ujjwal Limited as a comparable case.
7. Deletion of addition in respect of unrealized foreign exchange gain.
8. Inclusion of Vimta Labs Ltd. as a comparable entity.

Issue-wise Detailed Analysis:

1. Selection of Comparables for Transfer Pricing Analysis:
The assessee, engaged in R&D and development of pharmaceutical drugs, used the Transactional Net Margin Method (TNMM) to determine the arm's length price for its international transactions. The TPO, however, disregarded the arm's length margin computed by the assessee and conducted a fresh search, resulting in a higher arm's length margin of 33.26%. The TPO excluded certain companies on the basis of functional dissimilarity and included others, leading to a transfer pricing adjustment of Rs. 1,16,66,155.

2. Rejection of Kitco Ltd. as a Comparable Entity:
The Tribunal restored the issue of rejecting Kitco Ltd. as a comparable entity to the AO for fresh consideration, following the decision in the assessee's own case for the previous year (A.Y. 2003-04). It was emphasized that a comparable could not be excluded solely on the ground of losses unless other factors justify such exclusion.

3. Rejection of Four Comparable Cases:
The assessee challenged the rejection of four comparable cases (Bombay Intelligence Security India Ltd., Tanur Healthcare Ltd., Times Infotainment Media Ltd., and Top Security Ltd.) by the TPO on the basis of functional dissimilarity. The Tribunal upheld the rejection, agreeing with the AO's assessment that the business activities of these entities were entirely different from the assessee's R&D services, thus not suitable for comparison.

4. Disallowance of Benefit of 5% Variation:
The Tribunal restored the issue of disallowance of the benefit of 5% variation to the AO for fresh consideration, following the decision in the assessee's own case for A.Y. 2003-04 and in light of the decision of the Tribunal in the case of Sony India (P.) Ltd.

5. Adjustment in Respect of Difference in Risk Profiles:
The Tribunal restored the issue of adjustment for differences in risk profiles to the AO for fresh consideration, following the decision in the assessee's own case for A.Y. 2003-04. The assessee contended that it operated under a limited risk environment compared to the entrepreneurial risks borne by independent comparables.

6. Inclusion of M/s Ujjwal Limited as a Comparable Case:
The Tribunal upheld the inclusion of M/s Ujjwal Limited as a comparable case for transfer pricing analysis, following the decision in the assessee's own case for A.Y. 2003-04. The CIT(A) had included Ujjwal Limited based on functional similarity and consistency.

7. Deletion of Addition in Respect of Unrealized Foreign Exchange Gain:
The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 40,85,021 made by the AO in respect of unrealized foreign exchange gain. The CIT(A) treated the gain as a capital receipt not chargeable to tax, as it related to a foreign currency loan obtained for acquiring a capital asset in India, following the decision in the assessee's own case for A.Y. 2003-04.

8. Inclusion of Vimta Labs Ltd. as a Comparable Entity:
The Tribunal set aside the CIT(A)'s order on the inclusion of Vimta Labs Ltd. as a comparable entity and restored the matter to the AO for fresh consideration. The assessee argued that Vimta Labs Ltd. was not comparable due to differences in functional, asset, and risk profiles, and the CIT(A) had not provided sufficient reasoning for its inclusion. The Tribunal directed the AO to consider the submissions made by the assessee and the decision of the Delhi Bench of ITAT in the case of Adobe Systems India (P.) Ltd.

Conclusion:
The Tribunal's judgment involved a detailed analysis of the selection of comparables, adjustments for risk profiles, and the treatment of unrealized foreign exchange gains. The issues were largely restored to the AO for fresh consideration in light of previous decisions and specific case facts, emphasizing the need for functional similarity in transfer pricing analysis.