2014 (1) TMI 72 - AT - Income Tax

Transfer pricing adjustment - Selection of comparables Held that - Following Deputy Commissioner of Income-tax, Circle-1(2), Hyderabad Versus Deloitte Consulting India (P.) Ltd. 2011 (7) TMI 583 - ITAT HYDERABAD - The giant companies namely Wipro and Infosys which are taken as comparables as turnovers of these companies are multiple number of times higher compared to that of the assessee are excluded Thus, the Dispute Resolution Panel erred in considering their profit level indicator to arrive at the arithmetic mean. TPA - Rejection of including amount received as reimbursements Arithmetic mean profit level indicator applied for adjustment Held that - The difficulty in adjudicating the issue agitated by the assessee is that there is absence of clarity on the subject - As the assessee has not clearly explained its case, the Dispute Resolution Panel refused to interfere with the order of the Transfer Pricing Officer no materials brought out in respect of the claim of the assessee against including the amount received as reimbursement while applying arithmetic mean, profit level indicator for adjustment - In the absence of any additional information on this issue, the Commissioner of Income-tax (Appeals) s order is upheld Decided partly in favour of Assessee.

Issues Involved:
1. Rejection of objections against comparables with minuscule turnovers.
2. Rejection of objections against comparables with significantly higher turnovers.
3. Inclusion of sales with non-associated enterprises in the arithmetic mean profit level indicator.
4. Inclusion of reimbursement amounts in the arithmetic mean profit level indicator.

Issue-wise Detailed Analysis:

1. Rejection of objections against comparables with minuscule turnovers:
The assessee's objections against the inclusion of comparables with significantly lower turnovers, such as Avani Cincom and Kais Information, were dismissed by the Dispute Resolution Panel (DRP). The assessee argued that these companies' turnovers were minuscule compared to its own, affecting the profit level indicator (PLI) calculation. However, this ground was not pressed further by the assessee during the appeal, leading to its dismissal as not pressed.

2. Rejection of objections against comparables with significantly higher turnovers:
The assessee contended that Infosys Ltd. and Wipro Ltd. should not be considered as comparables due to their significantly higher turnovers. The DRP had included these companies in the comparables list, leading to a higher arithmetic mean PLI. The Tribunal, referencing the Delhi ITAT decision in Agnity India Technologies and its own decision in Deloitte Consulting India Pvt. Ltd., agreed with the assessee. It held that the giant companies like Infosys and Wipro, with turnovers multiple times higher than the assessee, should be excluded from the comparables list. Consequently, ground No. 3 was allowed, and the DRP was found to have erred in considering their profit level indicators.

3. Inclusion of sales with non-associated enterprises in the arithmetic mean profit level indicator:
The DRP's inclusion of sales with non-associated enterprises while applying the arithmetic mean PLI for adjustment was contested by the assessee. However, this ground became infructuous following the Tribunal's decision on ground No. 3, which excluded the high-turnover comparables, thereby impacting the overall computation.

4. Inclusion of reimbursement amounts in the arithmetic mean profit level indicator:
The assessee argued against the inclusion of reimbursement amounts (Rs. 1,76,99,840) in the arithmetic mean PLI, stating that these did not result in any profit or gain. The DRP observed a lack of clarity on the nature of these expenses and refused to interfere with the Transfer Pricing Officer's (TPO) order. The Tribunal upheld the DRP's decision, noting the absence of additional information or clear explanation from the assessee regarding the reimbursement amounts. Consequently, the inclusion of these amounts in the PLI calculation was maintained.

Conclusion:
- Ground No. 1 was general and required no adjudication.
- Ground No. 2 was dismissed as not pressed.
- Ground Nos. 4 and 5 became infructuous due to the decision on ground No. 3.
- Ground No. 3 was allowed, leading to the exclusion of Infosys and Wipro from the comparables list.
- Ground No. 6 was dismissed due to a lack of clarity and additional information.

Result:
The appeal was partly allowed, with significant adjustments made to the comparables list, impacting the overall transfer pricing adjustments. The order was pronounced in the open court on April 25, 2013.

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