2013 (11) TMI 817 - AT - Income Tax

Determination of ALP by TPO Selection of comparables Held that - Rule 10B(4) makes it clear that only the data relating to the relevant financial year has to be relied upon for computing the OP/TC margin of the comparable company. Therefore, when the current year data of the comparable companies were available on public domain, the TPO was not justified for using multiple data in violation of Rule 10B(4) of I T Rules - The average OP/TC margin of comparable companies, even after including Hinduja TMT Ltd., as a comparable, comes to 8% which is much below the margin of 11.03% shown by the assessee - No adjustment can be made to the arm's length price declared by the assessee Decided against the Revenue. No opportunity to the TPO while disturbing the margins by adopting financials Held that - TPO has used multiple year data for arriving at the average OP/TC margin of the comparable companies. Whereas Rule 10B(4) of IT Rules specifically provides for considering the current year data of the comparable companies unless it falls within the exception as provided in proviso to Rule 10B(4). It is also a fact on record that current year data of the comparable companies were available in public domain. The CIT (A) has simply followed the statutory provision while determining the OP/TC margin of the comparable companies by applying the current year data, hence in these circumstances, the grievance of the department that no opportunity was granted to the TPO cannot be accepted Decided against the Revenue.

Summary

Issues:
1. Exclusion of Hinduja TMT Limited as a comparable company.
2. Use of multiple year data for determining OP/TC margin.
3. Rejection of one comparable company by TPO.
4. Mark up on recharges received by the taxpayer.
5. Opportunity provided to TPO for disturbing margins using financials for the year ended on 31-3-2003.

Exclusion of Hinduja TMT Limited as a Comparable:
The case involved the exclusion of Hinduja TMT Limited as a comparable company due to significant related party transactions. The assessee argued that using multiple-year data for determining the OP/TC margin was in violation of Rule 10B(4) of the IT Rules. The CIT (A) agreed with the assessee that only current year data should be considered. By excluding Hinduja TMT Limited, the average OP/TC margin of comparables was calculated to be 8%, lower than the assessee's 11.03%. Consequently, no transfer pricing adjustment was warranted, and the addition made by the Assessing Officer was deleted.

Use of Multiple Year Data for Determining OP/TC Margin:
The Tribunal noted that the TPO had used multiple-year data for determining the average OP/TC margin of comparable companies, contrary to Rule 10B(4) of the IT Rules, which mandates using data from the relevant financial year. The Tribunal upheld the CIT (A)'s decision that only current year data should be relied upon. By considering the current year data, the average OP/TC margin of comparables was found to be 8%, lower than the assessee's margin of 11.03%, leading to the dismissal of the department's appeal.

Rejection of One Comparable Company by TPO:
The TPO rejected one comparable company selected by the assessee, Vans Information Limited, citing functional dissimilarity and persistent losses. The CIT (A) did not address this issue in the appeal, as it was not relevant to the current case. Therefore, the rejection of Vans Information Limited was not considered in the final decision regarding transfer pricing adjustments.

Mark up on Recharges Received by the Taxpayer:
The department raised a ground regarding the mark up on recharges received by the taxpayer, but it was found that this issue did not arise from the orders of the TPO or CIT (A). As a result, the Tribunal dismissed this ground as not maintainable, as it was not a part of the original dispute.

Opportunity Provided to TPO for Disturbing Margins Using Financials for the Year Ended on 31-3-2003:
The department contended that the CIT (A) did not provide an opportunity to the TPO when disturbing margins using financials for the year ended on 31-3-2003. However, the Tribunal found that the CIT (A) followed statutory provisions by considering current year data of comparable companies, and since the TPO had used multiple-year data, no additional opportunity was required. Consequently, the ground raised by the department on this issue was dismissed.

In conclusion, the Tribunal upheld the CIT (A)'s decision to exclude Hinduja TMT Limited as a comparable, emphasized the importance of using current year data for determining OP/TC margin, and dismissed the department's appeal on various grounds related to transfer pricing adjustments and procedural matters.