2016 (11) TMI 1399 - AT - Income Tax

TPA - selection of comparable - Held that - If the turnover of the comparables is more than 10 times of the turnover of the tested party, the same has to be excluded from the list of comparables. Companies functionally dissimilar with that of assessee need to be excluded from final list of comparable.

Summary

Issues Involved:
1. Exclusion of companies with related party transactions as comparables.
2. Exclusion of companies with profits exceeding 50% of the cost.
3. Consideration of size, turnover, and brand in determining comparables.
4. Treatment of foreign exchange loss or gain in operating cost or income.
5. Eligibility for a standard deduction of 5% from the Arm's Length Price (ALP).
6. Rejection of the assessee's economic analysis and use of fresh economic analysis by the AO/TPO.
7. Consideration of financial year data not available at the time of documentation.
8. Application of different quantitative and qualitative filters for comparables.
9. Use of information obtained under section 133(6) of the Act for comparability purposes.
10. Rejection of companies with margins less than the assessee's margin.
11. Adjustments for differences in the risk profile of the assessee vis-a-vis comparables.

Detailed Analysis:

1. Exclusion of Companies with Related Party Transactions:
The CIT(A) directed the exclusion of companies with related party transactions regardless of the percentage involved. This was contested by the Revenue, arguing that the percentage of related party transactions should be considered. The Tribunal upheld the exclusion, emphasizing the need for comparables to be free from related party influences to ensure accurate benchmarking.

2. Exclusion of Companies with Profits Exceeding 50% of Cost:
The CIT(A) excluded companies with profits exceeding 50% of the cost from the list of comparables. The Revenue challenged this, but the Tribunal supported the CIT(A)'s decision, stating that such high-profit margins indicate functional differences that make these companies unsuitable as comparables.

3. Consideration of Size, Turnover, and Brand:
The CIT(A) excluded companies like Infosys Technologies Ltd. based on their size, turnover, and brand, which were significantly larger and more established than the assessee. The Tribunal agreed, noting that these factors create substantial differences in market positioning and operational scale, making them inappropriate comparables.

4. Treatment of Foreign Exchange Loss or Gain:
The CIT(A) held that foreign exchange loss or gain should be considered part of operating cost or income. The Revenue opposed this, but the Tribunal upheld the CIT(A)'s view, aligning with the principle that such gains or losses are integral to the operational results of companies engaged in international transactions.

5. Eligibility for Standard Deduction of 5% from ALP:
The CIT(A) allowed a standard deduction of 5% from the ALP determined by the TPO/AO. The Revenue contested this, but the Tribunal confirmed the CIT(A)'s decision, recognizing the statutory provision for such a deduction to account for minor variations in transfer pricing calculations.

6. Rejection of Assessee's Economic Analysis:
The CIT(A) did not fully accept the assessee's economic analysis and supported the AO/TPO's fresh analysis. The assessee argued that their analysis complied with the Act and Rules. The Tribunal examined the comparables and upheld the CIT(A)'s approach, emphasizing the need for accurate and reliable data in transfer pricing assessments.

7. Consideration of Financial Year Data:
The CIT(A) used financial year 2004-2005 data, which was not available to the assessee during documentation. The assessee argued this was unfair. The Tribunal noted the importance of using contemporaneous data but did not find sufficient grounds to overturn the CIT(A)'s decision, given the need for accurate benchmarking.

8. Application of Different Filters for Comparables:
The CIT(A) applied various filters, such as excluding companies with onsite revenues greater than 75%, economic performance contrary to industry trends, and different accounting years. The Tribunal reviewed these filters and upheld their application, noting that they ensure the selection of truly comparable companies.

9. Use of Information Obtained Under Section 133(6):
The CIT(A) upheld the TPO's use of information obtained under section 133(6) for comparability purposes. The assessee argued this information was not publicly available. The Tribunal supported the CIT(A), recognizing the TPO's authority to gather necessary data for accurate transfer pricing analysis.

10. Rejection of Companies with Lesser Margins:
The CIT(A) excluded companies with margins less than the assessee's margin. The Tribunal found this exclusion unjustified, directing the inclusion of such companies if they meet other comparability criteria, emphasizing that margin differences alone do not justify exclusion.

11. Adjustments for Differences in Risk Profile:
The CIT(A) did not make adjustments for differences in the risk profile between the assessee and comparables. The assessee argued this was necessary for accurate comparability. The Tribunal acknowledged the importance of risk adjustments but found no specific grounds to mandate them in this case, given the overall comparability analysis.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections, directing specific inclusions and exclusions of comparables based on detailed functional and financial analyses. The judgment emphasized the need for accurate, reliable, and comparable data in transfer pricing assessments to ensure fair and equitable tax administration.