2012 (12) TMI 1060 - AT - Income Tax

Transfer pricing adjustment on account of provisions of technical services - selection of comparables - Held that - Assessee received income on account of application research and technical services from its parent company which are international transactions as defined u/s 92B thus companies dissimilar with that of assessee need to be deselected from final list. Exclusion of the comparables due to high profit margin or loss we find that the action of the TPO excluding the two comparables on the ground that these companies are persistent loss making concluded merely on the basis of two years data and without going into the details whether the loss is because of factors as prescribed under Rule 10B(2) r.w. sub rule (3) is not justified. Disallowance in respect of global support service charges - Held that - There is no dispute that the agreement between the parties was entered into during the year relevant to assessment under consideration and the debit note in respect of the expenses was also received during the year under consideration therefore the expenditure has been crystallised during the year under consideration. The CIT(A) has allowed the claim of the assessee by considering both the AYs . Therefore in the facts and circumstances of the case we do not find any error or illegality in the order of the CIT(A),

Issues Involved:
1. Transfer pricing adjustment for provision of technical services.
2. Transfer pricing adjustment for provision of back-office support services.
3. Disallowance of global support service charges.

Detailed Analysis:

1. Transfer Pricing Adjustment for Provision of Technical Services:
The primary issue concerns the transfer pricing adjustment on account of provisions of technical services. The assessee, a subsidiary of Exxon Mobil Corporation, used the Transactional Net Margin Method (TNMM) to benchmark its transactions and calculated an operating profit margin of 13.04%. The Transfer Pricing Officer (TPO) rejected two comparables provided by the assessee and recalculated the Operating Profit/Total Cost (OP/TC) ratio of the comparables at 36.19%, leading to an adjustment of Rs. 1,19,31,647/-.

On appeal, the CIT(A) observed that if the TPO rejected loss-making comparables, high-margin comparables should also be excluded. The CIT(A) recomputed the average margin at 14.79% by excluding high-margin companies, thereby deleting the adjustment. The Tribunal upheld this approach, noting that comparables should not be selected or rejected merely based on profitability but should consider factors like functional similarity, asset employed similarity, risk assumed similarity, and other prevailing economic conditions.

2. Transfer Pricing Adjustment for Provision of Back-Office Support Services:
The second issue pertains to the transfer pricing adjustment for back-office support services. The assessee showed a margin of 13.59% using two years of data and selected 16 comparables. The TPO rejected ten comparables and recalculated the mean margin at 22.48%, leading to an adjustment of Rs. 81.31 lacs.

The CIT(A) further rejected two high-margin comparables and included two loss-making comparables, revising the mean margin. The Tribunal reiterated that comparables should be selected based on functional analysis and not merely on profitability. The Tribunal set aside the issue for fresh examination by the Assessing Officer, emphasizing the use of single-year data as per Rule 10B(4).

3. Disallowance of Global Support Service Charges:
The third issue involves the disallowance of global support service charges amounting to Rs. 38,26,277/-. The assessee claimed these charges for services rendered by Exxon Mobil Asia Pacific Pte Ltd. The Assessing Officer disallowed the claim, treating it as a prior period expense.

The CIT(A) found that the charges crystallized during the year under consideration and allowed the claim. The Tribunal upheld this decision, noting that the Assessing Officer did not dispute the genuineness of the expenditure but only disallowed it on the ground of being a prior period expense. The Tribunal referenced several judicial precedents supporting the allowance of such expenses if they crystallized during the relevant financial year.

Conclusion:
The Tribunal partly allowed the revenue's appeal, emphasizing the need for a detailed functional analysis for selecting comparables in transfer pricing cases and upholding the CIT(A)'s decision on the allowability of global support service charges. The Tribunal directed the Assessing Officer to re-examine the transfer pricing issues afresh, considering the principles laid down in the judgment.

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