2011 (9) TMI 173 - AT - Income Tax

Arm s Length Price (ALM) - comparable cost - assessee was incorporated on 31.12.2002 as an indirect subsidiary of British Petroleum (BP).BP is one of the world s largest petroleum and petrochemical group - As per the Audit Report in Form No.3CEB the Arm s Length Price of the international transactions was same as recorded in the books of account. - The difference in computation of ALP has arisen because of the exclusion by the TPO of FI and ME from the list of comparable cases supplied by the assessee. The learned CIT(A) vide para 4.16 of the impugned order extracted above has held that these two cases ought to have been retained in the set of comparable cases. - Held that - These two cases which have been excluded by the TPO are not only substantially incomparable having different functional as well as product profile as compared to that of assessee-company but encompass wholly or majority of controlled transactions thereby failing both the conditions of rule 10B. - these cases were rightly excluded by the TPO. The impugned order holding otherwise is consequently set aside. - Decided in favor of revenue. Expunging two extreme profit cases from the list of comparables - Held that - CIT(A) without considering any data of HT and DT or comparing it with the assessee s facts simply ordered for elimination on sole the reason of their having high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule 10B. As such we are not inclined to uphold the impugned order on this score. - the cases of DT and HT shall be considered by the Assessing Officer/TPO as to whether they qualify their exclusion or not. The remaining exercise of the computation of ALP will be consequently done. - Appeal of the revenue allowed partly.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in including the cases of FI and ME in the list of comparables.
2. Whether the CIT(A) was justified in excluding the cases of HT and DT from the list of comparables.

Detailed Analysis:
1. Inclusion of FI and ME in the List of Comparables:
The assessee, an indirect subsidiary of British Petroleum, engaged in providing support and advisory services, had international transactions with its associated enterprises (AEs). The Transfer Pricing Officer (TPO) excluded FI and ME from the list of comparables provided by the assessee, citing different functional and product profiles. The CIT(A) reinstated these two companies, considering them functionally comparable.

The Tribunal observed that FI's income from software services constituted more than 53% of its total revenue, which was functionally different from the services provided by the assessee. Additionally, a significant portion of FI's income from IT-enabled services was from a related party, failing the criterion of "uncontrolled transactions" as per Rule 10B(1)(e)(ii) read with Rule 10A(a). Similarly, ME's income from Infotech training, which was considered comparable, constituted only 26% of its total income, with all transactions being with related parties.

The Tribunal concluded that both FI and ME were rightly excluded by the TPO due to their different functional profiles and controlled transactions, setting aside the CIT(A)'s decision to include them.

2. Exclusion of HT and DT from the List of Comparables:
The CIT(A) excluded HT and DT, which had high-profit margins, from the list of comparables, reasoning that if low-profit cases were excluded, high-profit cases should also be excluded to maintain balance. The Tribunal disagreed, stating that higher or lower profit rates are not determinative factors for comparability. Instead, comparability should be judged based on specific characteristics of services, assets employed, risks assumed, contractual terms, and market conditions as per Rule 10B(2) and (3).

The Tribunal noted that the CIT(A) did not examine the relevant factors of HT and DT but excluded them solely based on their high-profit margins. The Tribunal remitted the matter back to the Assessing Officer (AO)/TPO to re-examine whether HT and DT are comparable, considering the relevant factors and allowing the assessee a reasonable opportunity to present its case.

Conclusion:
The Tribunal held that FI and ME should be excluded from the list of comparables due to their different functional profiles and controlled transactions. The Tribunal also directed the AO/TPO to re-examine the comparability of HT and DT based on relevant factors, setting aside the CIT(A)'s decision to exclude them solely based on high-profit margins. The appeal of the Revenue was partly allowed, and the cross-objection of the assessee was dismissed.