2015 (10) TMI 180 - AT - Income Tax

Transfer pricing adjustment - rejection of comparables on the ground of related party transactions - Held that - It can be seen from the assessee s letter dated 26.10.2006 addressed to the TPO, a copy of which is available that the assessee submitted computation of related party transactions at more than 25% in respect of Datamatics Technologies Ltd. and Hinduja TMT Ltd. Since the details about the computation of RPTs being more than 25%, in these two companies were filed by the assessee before the TPO, which have not been adversely commented, we do not find any reason on the part of the ld. CIT(A) in not accepting such calculation which was made before the TPO himself. We, therefore, uphold the exclusion of these two companies. As regards the third company, namely, Mukand Engineers Ltd., in respect of which the ld. CIT(A) accepted the RPTs at 45%, the ld. AR candidly accepted that the calculation of such percentage of RPT was not before the TPO and the same was filed before the ld.CIT(A) for the first time. This calculation, on the basis of the Annual accounts of Mukand Engineers Ltd., in our considered opinion, constitutes an additional evidence. The ld. CIT(A) was required to seek the comments of the TPO before accepting the correctness of the percentage of related party transactions as calculated by the assessee. We, therefore, set aside the impugned order on this issue and send the matter to the AO/TPO for verifying the correctness of the percentage of the RPTs of this company as per law after allowing a reasonable opportunity of being heard to the assessee. If such computation shows RPTs at less than 25%, then, this company should be included in the list of comparables. In the otherwise situation, the view taken by the ld. CIT(A) in excluding it from the list of comparables, be upheld. Inclusion of Weal Infotech Ltd. - Held that - As regards the first issue, we do not find any reason to disturb the view of the ld. CIT(A) because the assessee included it in the list of comparables in its Transfer pricing study. The very comparability of this company was not disputed by the TPO. In that view of the matter, the ld. CIT(A) cannot be faulted with for directing to include the data of a company in the list of comparables, which was originally included by the assessee and not objected to by the TPO. As regards the second aspect of the computation of the profit margin of this company, we find that the ld. CIT(A) accepted the data furnished by the assessee of this company and proceeded to include the same in the list of comparables without affording any opportunity to the TPO for examining the same. We, therefore, find that there is violation of rule 46A to this extent. Accordingly, we set aside the impugned order on this score and send the matter back to the AO/TPO for verifying the correctness of the calculation of OP/TC of this company for the purposes of calculating arithmetic mean of PLI of the comparable companies. Exclusion of Tricom India Ltd. - Just like a situation in which the assessee chooses a company as comparable which can be excluded by the TPO on finding it as incomparable, there can be no fetters on the assessee requesting for the exclusion of a company originally considered by it as comparable by inadvertence. After all, it is for the TPO to examine and evaluate such contention and decide about its comparability on merits. To foreclose the raising of such a contention by the assessee for further appraisal at the TPO s end, is impermissible. The Special Bench of the Tribunal in the case of DCIT vs. Quark Systems Pvt. Ld. (2010) 132 TTJ (Chd) (SB) has allowed the assessee to claim exclusion of certain companies from the list of comparables, which were inadvertently included by it in its Transfer pricing study. We, therefore, reject this foundational argument raised on behalf of the assessee. On the merits, we remit the matter to the file of TPO/AO for examining the assessee s contention that the high profit of this company was due to abnormal circumstances. Here, we want to make it clear that a potential comparable cannot be excluded simply on the ground of high profit rate, unless it is conclusively shown that such higher profit was the result of some abnormal conditions prevailing in that case alone. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in this regard. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
1. Exclusion of comparables based on related party transactions.
2. Inclusion of a company in the list of comparables with incomplete data.
3. Exclusion of a company from the list of comparables due to high abnormal profit.

Issue 1: Exclusion of comparables based on related party transactions:
The appeal involved a dispute over the exclusion of certain companies from the list of comparables due to related party transactions (RPTs) exceeding 25%. The Revenue challenged the exclusion of three companies based on RPTs of 34%, 39%, and 45%. The Tribunal referenced precedents where companies with over 25% RPTs were ignored. The Tribunal upheld the exclusion of two companies where RPTs were disclosed to the Transfer Pricing Officer (TPO) but sent back the case of the third company for verification by the TPO.

Issue 2: Inclusion of a company in the list of comparables with incomplete data:
The Department contested the inclusion of a company in the list of comparables without complete data. The Tribunal found no issue with the initial inclusion by the assessee, but faulted the lack of opportunity for the TPO to verify the profit margin calculation. The matter was remitted back to the AO/TPO for proper examination and verification.

Issue 3: Exclusion of a company from the list of comparables due to high abnormal profit:
The assessee raised a cross objection regarding the exclusion of a company from the list of comparables. The Tribunal rejected the contention that the company should not be excluded due to high abnormal profit, emphasizing that such exclusion could be considered if abnormal circumstances were proven. The matter was sent back to the TPO/AO for further evaluation, ensuring the assessee's right to be heard.

In conclusion, the appeals were partly allowed for statistical purposes, with the Tribunal providing detailed reasoning and directions for each issue raised, emphasizing the importance of adherence to transfer pricing regulations and fair evaluation of comparables in line with established legal principles.