2015 (5) TMI 1095 - AT - Income Tax

Addition made on account of determination of arm s length price of assessee s international transaction - selection of comparable - Held that - While benchmarking the international transactions of tested party and while applying TNMM method endeavor has been made to select such companies, which are functionally similar. Where the comparables are functionally dissimilar to the tested party, the margins of such companies cannot be utilized for determining the arm s length price of international transactions carried out by the tested party. In the above said facts and circumstances, we find no merit in the selection process carried out by the TPO and we direct the TPO to exclude the margins of Agrima Consultants International Limited while benchmarking the arm s length price of international transactions of the assessee and applying the margins of other comparables as selected by DRP, determine the arm s length price of international transactions of assessee. Another objection raised by the assessee was against the selection of Rolta India Limited, while benchmarking the international transaction with respect to design engineering services provided by the assessee to its AEs. The learned Authorized Representative for the assessee pointed out that the margins of Rolta India Limited could not be applied as it had different year end as against the assessee s year end 31.03.2008. The said company s year end was 30.06.2007. It was pointed out by the learned Authorized Representative for the assessee that since the data of comparables concerned does not correspond to the financial year of the year, the same was un-comparable. We find merit in the plea of the assessee as even the provisions of Rule 10B(4) of the Income-tax Rules, 1962 provided that the data to be used in analyzing the comparability of an un-controlled transactions with an international transaction, shall be the data relating to the financial year, in which the international transaction had been entered into. In the present case, the data adopted by Rolta India Limited does not relate to the financial year, in which the international transaction has been carried on by the assessee and hence, the said concern is to be excluded from the list of comparables.

Summary

Issues:
1. Determination of arm's length price of international transactions.
2. Selection of comparables for benchmarking.

Issue 1: Determination of arm's length price of international transactions:
The appeal challenged the addition made based on the determination of the arm's length price of the assessee's international transactions. The Transfer Pricing Officer (TPO) proposed adjustments under marketing support service functions and design engineering services. The assessee applied the TNMM method and found its margins to be at arm's length price. However, the TPO proposed new comparables and adjustments. The Dispute Resolution Panel (DRP) directed adjustments under section 92CA(3) following the final set of comparables. The Assessing Officer reworked the additions after giving working capital adjustments, resulting in additional amounts added to the international transactions. The issue revolved around the margins of comparables and the need for adjustments.

Issue 2: Selection of comparables for benchmarking:
The TPO and DRP selected different sets of comparables for benchmarking the international transactions. The assessee objected to the inclusion of Agrima Consultants International Limited as a comparable, citing functional differences. The Revenue argued that Agrima Consultants International Limited was broadly comparable to the assessee's functions. Upon review, it was found that Agrima Consultants International Limited was functionally dissimilar to the assessee, and its margins could not be used for benchmarking. The TPO was directed to exclude Agrima Consultants International Limited and use other comparables selected by the DRP. Another objection was raised regarding Rolta India Limited, as its data did not correspond to the financial year of the assessee, leading to its exclusion as a comparable. The Tribunal directed the Assessing Officer to exclude Rolta India Limited from the list of comparables.

In conclusion, the judgment addressed the issues of determining the arm's length price of international transactions and the selection of comparables for benchmarking. The Tribunal directed the exclusion of certain comparables due to functional differences and mismatched financial data, resulting in adjustments to the additions made to the international transactions. The appeal was partly allowed based on these findings.