2009 (10) TMI 591 - AT - Income Tax

Arm Length Price - Referred to Transfer pricing officer - No speaking order - It is variation between the arm s length price so determined and price at which the international transaction has actually been undertaken does not exceed 5% of the latter, the price at which international transaction has actually been undertaken shall be deemed to be arm s length price - Decided in the favour of the assessee by way of remand Whether or not the CIT (A) was justified in excluding Immercus - The risk analysis to the two organizations i e the assessee and the Imercius clearly show that these two entities are not on even ground - merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of arms length price - mercius is a case in which not only functional area is different, Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the assessee companies - Decided against the assessee When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred - transfer pricing was in the initial stages in this year and we are inclined to take a rather liberal approach by giving assessee an opportunity to make out its case properly and place all the relevant facts before the tax authorities so that proper arms length price can be determined in accordance with the law the proceedings before the tax authorities are not adversarial proceedings and the assessee should not therefore be placed at under advantage because of his inadvertent and bonafide mistakes - The matter stands restored to the file of the Assessing Officer as such - the appeals are allowed for statistical purposes

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) under section 92C(2) of the Income Tax Act.
2. Exclusion of Imercius Technologies India Pvt Ltd from the list of comparables.
3. Inclusion of Datamatics Technologies Ltd as a comparable.
4. Application of the 5% margin benefit under section 92C(2) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The primary issue in dispute pertains to the determination of the Arm's Length Price (ALP) under section 92C(2) of the Income Tax Act for the assessment year 2004-05. The assessee, an Indian subsidiary of a Switzerland-based company, provided various technical services to its parent company and received a fee based on associated costs plus a markup. The Transfer Pricing Officer (TPO) employed the Transaction Net Margin Method (TNMM) for computing the ALP but excluded one of the comparables, M/s Imercius Technologies India Pvt Ltd, due to it being a continuous loss-making company and having unreliable financial statements.

2. Exclusion of Imercius Technologies India Pvt Ltd:
The TPO and the CIT(A) excluded Imercius Technologies India Pvt Ltd from the list of comparables on several grounds: it was a start-up company with negative net worth, its turnover was significantly lower than that of the assessee, and it was engaged in telemarketing services, which were deemed not comparable to the technical support services provided by the assessee. The Tribunal upheld this exclusion, noting that the functional areas of the assessee and Imercius were inherently different, and the turnover and net worth disparities justified the exclusion.

3. Inclusion of Datamatics Technologies Ltd:
The assessee raised an additional ground of appeal, contending that Datamatics Technologies Ltd should be excluded from the comparables due to its significant transactions with associated enterprises and an arithmetical error in computing its profit ratio. The Tribunal admitted this additional ground, noting that the taxpayer is not estopped from pointing out mistakes in the assessment. The matter was remitted to the Assessing Officer for a de novo adjudication, emphasizing the need for a fair determination of the ALP considering all relevant details.

4. Application of the 5% Margin Benefit:
The Tribunal noted that the issue of the 5% margin benefit under section 92C(2) needed reconsideration in light of the amendment to the proviso effective from 1st October 2009. The matter was remanded to the Assessing Officer for adjudication de novo, allowing the assessee to raise all relevant contentions.

Conclusion:
The Tribunal upheld the exclusion of Imercius Technologies India Pvt Ltd from the list of comparables but remitted the matter regarding the inclusion of Datamatics Technologies Ltd to the Assessing Officer for fresh consideration. Both appeals were allowed for statistical purposes, directing the Assessing Officer to re-evaluate the ALP determination in accordance with the law and the Tribunal's observations.