2015 (9) TMI 1600 - HC - Income Tax

TPA - revenue challenges the exclusion of companies on the basis of lower or higher depreciation as a percentage of total costs and on the basis of sales either less than 5 crores or more than 50 crores - Held that - On perusal of the order of the CIT (A) it is plain that the TPO has accepted the filter on the basis of depreciation to the total costs less than 5% and more than 50%. Taking into account that the Assessee s sales was in the vicinity of approximately 10 crores the CIT (A) held that the companies having turnover of more than 50% should not be included as comparables. The decision in Chryscapital Investment (2015 (4) TMI 949 - DELHI HIGH COURT) also underscores that any one parameter cannot ipso facto be determinative of how an ALP has to be determined. In the facts and circumstances of the present case where the TPO has accepted both filters i.e. the filter on the basis of depreciation to the total costs less than 5% and more than 50% as well as the turnover filter the Assessee is right in contending on the strength of the decision MCorp Global (P) Ltd. v. CIT Ghaziabad (2009 (2) TMI 5 - SUPREME COURT) that the benefit granted to the Assessee by the AO who has accepted and acted upon the report of the TPO could not have been taken away by the ITAT.

Summary

Issues:
Transfer Pricing Adjustment - Application of Filters for Comparability Analysis

Analysis:
The judgment pertains to an appeal under Section 260A of the Income Tax Act, 1961, regarding transfer pricing adjustments for the Assessment Year 2002-03. The Assessee, a subsidiary of Nokia Corporation, Finland, engaged in various business segments, including mobile phone sales, network services, internet communication research, and technology R&D. The Transfer Pricing Officer (TPO) applied the Transaction Net Margin Method (TNMM) for comparability analysis. The TPO excluded certain companies based on quantitative filters to arrive at a final set of comparables with an operating profit/total cost margin of 19.17%.

The Commissioner of Income Tax (Appeals) (CIT (A)) subsequently excluded companies from the set of comparables adopted by the TPO. The ITAT, in the impugned order, disagreed with the exclusion of certain companies based on filters related to depreciation, turnover, and related party transactions. The ITAT upheld the exclusion of companies based on related party transactions but questioned the exclusion based on depreciation and turnover filters.

The Revenue challenged the exclusion of companies based on depreciation and turnover filters. The Court examined Rule 10B (1) & (2) and noted that the provisions provide broad guidelines for determining the arm's length price (ALP) without specifying the basis for choosing or excluding comparables. The Court emphasized considering industry norms, market behavior, and other parameters for determining ALP.

The Court found that the ITAT's detailed explanation for not interfering with the CIT (A)'s order was justified. The TPO's acceptance of filters on depreciation and turnover was crucial. The Court emphasized that a single parameter cannot solely determine ALP. Relying on precedent, the Court held that the benefit granted by the AO, based on the TPO's report, could not be revoked by the ITAT. Consequently, the Court dismissed the appeal, finding no substantial question of law in the ITAT's order.

In conclusion, the judgment addresses the application of filters for comparability analysis in transfer pricing adjustments. It underscores the importance of considering various parameters beyond specific rules for determining ALP. The Court's decision highlights the need for a holistic approach in transfer pricing assessments, considering industry practices and market dynamics.