2013 (10) TMI 591 - AT - Income Tax

Adjustment of Arm s length price - Held that - The basis of the adjustment made by the TPO is that while reporting the transactions of the related party, the assessee has shown the value of the purchases more than the sales disclosed by CTTL India by Rs.9,72,874/-. The DRP has not at all discussed anything on the submission made by the assessee nor has taken any pains to verify the correctness of the assessee s claim. The assessee has filed the Paper book in which the revised copy of the audit report is also filed - the difference in the figure cannot be treated only on the surmises and presumption basis for making the adjustment u/s.92CA(3) of the Act. Moreover, it is purely a purchase transaction and assessee has no PE in India. Otherwise also there is no tax implication even though there is a difference - Decided in favour of Assessee. Rejection of Comparables - Onus of reasons to disapproval - Held that - Data base adopted by the assessee for selecting the comparables can be tested on FAR and there is likely to be some difference. Merely because some loss making companies are there those cannot be straightly rejected as comparables unless the abnormal loss is projected. As the same way, super profit comparables also should not be included. Transfer Pricing adjustment is not a law in strict sense though base on certain legal principles but it is arithmetic and while making the plus minus, the balance is required to be maintained - in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report - Decided in favour of assessee

Summary

Issues Involved:
1. Adjustment of Rs. 9,72,874/- to the transactions of purchases with Associate Enterprises (AE).
2. Adjustment of Rs. 6,33,761/- to the value of international transactions rendering Information Technology Enabled Services (ITES).

Detailed Analysis:

1. Adjustment of Rs. 9,72,874/- to the transactions of purchases with Associate Enterprises (AE):

The assessee, a foreign company, reported international transactions with its AEs, including purchases from CTTL India amounting to Rs. 54,02,60,392/-. The Transfer Pricing Officer (TPO) identified a discrepancy, noting that CTTL India's audit report showed sales to the assessee at Rs. 53,92,87,518/-, resulting in a difference of Rs. 9,72,874/-. The assessee claimed this was a reporting error and provided a revised audit report. However, the TPO insisted the discrepancy was not an error and made an adjustment under Section 92CA(3) of the Income Tax Act, 1961.

The Dispute Resolution Panel (DRP) confirmed the adjustment, rejecting the assessee's argument that the difference was due to an error and that the transactions were not taxable in India. The Tribunal found merit in the assessee's argument, noting that the DRP did not verify the correctness of the claim and that the difference did not have tax implications as the transaction was purely a purchase transaction with no Permanent Establishment (PE) in India. The Tribunal allowed the assessee's ground and deleted the addition.

2. Adjustment of Rs. 6,33,761/- to the value of international transactions rendering Information Technology Enabled Services (ITES):

The assessee adopted the Transactional Net Margin Method (TNMM) for benchmarking ITES transactions, using 14 external comparables with a weighted average margin of 13.89%. The TPO excluded five comparables (Kirloskar Computer Services Ltd., Mercury Outsourcing Management Ltd., Pentasoft Technologies Ltd., Nucleus Netsoft and GIS (India) Ltd., and Wipro BPO Solutions Ltd.), citing reasons such as functional dissimilarity, persistent losses, and lack of data for the relevant financial year.

The TPO recalculated the average Operating Profit/Operating Cost at 26.43% using the remaining comparables and made an adjustment of Rs. 9,16,677/-. The assessee contested the exclusion of its comparables, arguing that the TPO's reasons were not justified and that the comparables complied with the FAR (Functions, Assets, and Risks) analysis.

The Tribunal found that the TPO did not provide sufficient data to support the exclusion of the comparables and that merely showing losses was not enough to exclude them without proving consistent loss-making. The Tribunal emphasized the need for a balanced approach, considering both loss-making and profit-making companies to reflect market conditions accurately. The Tribunal deleted the adjustment made under Section 92CA(3) of the Act.

Conclusion:

The Tribunal allowed the assessee's appeal, deleting both adjustments made by the TPO. It directed the Assessing Officer to verify the computation of interest under Section 234B. The judgment emphasized the importance of a balanced and justified approach in Transfer Pricing adjustments, considering the overall market conditions and ensuring that both profit-making and loss-making comparables are treated fairly.