2011 (1) TMI 933 - AT - Income Tax

Arms Length Price - case referred to Dispute Resolution Panel(DRP) - Assessee s submission in this regard is that these are super normal profit making companies and should be excluded from comparables set - Held that - TPO has not given any comment regarding objection of the assessee regarding inclusion of Crane Software International Limited in the comparables. Regarding Jayamaruthi Software Systems Ltd. he brushed assessee s objection by simply stating that it is a listed company and results are audited. Regarding assessee s objection for inclusion of M/s GDA Technologies Ltd. that the said company has sufficient related party transaction, but the TPO has brushed the contention by ignoring the documents submitted by the assessee and holding that data available with him does not show details of related party transaction. It is undisputed that these three companies have shown supernormal comparable profits as compared to the other comparable. There exclusion from the list of comparable is quite correct. By excluding these three companies from the comparables and showing the computation on the basis of TPO data the arithmetic mean of OP/OC to 17.15% which falls within the -5% range as permitted by section 92(C)(2). As assessee has made voluminous submissions including paper books before the DRP who has passed a very cursory and laconic order without going into the details of the submissions this is quite contrary to the mandate of section 144C of the IT Act. In favour of assessee.

Summary

Issues:
1. Interpretation of transfer pricing regulations under IT Act for international transactions.
2. Inclusion of supernormal profit-making companies in comparables set for transfer pricing analysis.
3. Rejection of certain comparables by the Transfer Pricing Officer (TPO).
4. Use of updated data for financial year 2005-06 by the Assessing Officer.

Issue 1: Interpretation of transfer pricing regulations under IT Act for international transactions:
The appeal challenged the assessment order under section 143(3) read with section 144C of the IT Act, focusing on the addition of Rs. 10,40,75,727 to the assessee's income due to adjustments in the Arms Length Price of international transactions. The TPO made an upward adjustment based on the OP/OC margin of comparables, leading to a dispute over the correctness of the adjustment.

Issue 2: Inclusion of supernormal profit-making companies in comparables set:
The assessee argued against the inclusion of companies like Cranes Software International Ltd., GDA Technologies Limited, and Jayamuruthi Software Systems Limited in the comparables set, labeling them as supernormal profit-making entities that would skew the results. The contention was supported by referencing the Mentor Graphics case ruling and OECD guidelines on transfer pricing.

Issue 3: Rejection of certain comparables by the TPO:
The TPO rejected the assessee's objections regarding the inclusion of certain companies in the comparables set, citing reasons such as being a listed company, audited results, and lack of related party transaction details. The TPO's decisions were challenged by the assessee, emphasizing the functional differences and abnormal profit levels of the rejected companies.

Issue 4: Use of updated data for financial year 2005-06:
The Assessing Officer utilized updated data for the financial year 2005-06 instead of the mean ALP of earlier years as computed by the assessee. The assessee contended that even excluding companies with supernormal profits, the OP/OC margin would fall within the permissible range under section 92(C)(2), highlighting the consistency in transfer pricing assessments over the years.

In the judgment, the ITAT New Delhi analyzed the arguments presented by the assessee and the tax authorities. The tribunal found merit in the assessee's contentions regarding the exclusion of supernormal profit-making companies from the comparables set, emphasizing the need to maintain consistency and reliability in transfer pricing analyses. The tribunal criticized the TPO's decisions for lacking substantive reasoning and upheld the assessee's objections against the inclusion of certain companies in the comparables set. Additionally, the tribunal noted the cursory nature of the order passed by the DRP, highlighting the importance of detailed consideration in transfer pricing disputes. Ultimately, the tribunal set aside the Assessing Officer's order, ruling in favor of the assessee and allowing the appeal.