2016 (2) TMI 261 - AT - Income Tax

Use of Foreign Comparables - TPA - Held that - Foreign comparables (i.e. UK comparables) can be taken into account for carrying out FAR analysis and benchmarking of the assessee s international transactions with its Associated Enterprise s for determining those Arm s Length Price. It is also accordingly held that the selection of Indian comparables by the Transfer Pricing Officer is not accepted. In view of the fact that the Transfer Pricing Officer has not examined the comparability of the UK comparables chosen by the assessee, he is directed to do so and if the assessee s comparables do not stand the test of comparability, the Transfer Pricing Officer may carry out his own search for fresh comparables and select the same, only after affording the assessee adequate opportunity of being heard and to file details/submissions in this regard, which shall be duly considered by the Transfer Pricing Officer before taking a final decision in the matter. With these observations, we restore the matter of the transfer pricing adjustment of provision of services to the file of the Assessing Officer/Transfer Pricing Officer. It is accordingly ordered. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Selection of Indian vs. Foreign Comparables for Benchmarking International Transactions.
2. Determination of the Permanent Establishment (PE) Status.
3. Functional Comparability of Selected Indian Companies.
4. Application of +/- 5% Benefit under Section 92C.
5. Grant of Refund with Interest under Section 244A.

Detailed Analysis:

1. Selection of Indian vs. Foreign Comparables for Benchmarking International Transactions:
The primary issue revolves around whether Indian or foreign companies should be used as comparables for benchmarking the international transactions of the assessee, which is a Permanent Establishment (PE) of Tata Motors European Technical Centre-UK (TMETC-UK). The assessee argued for using foreign comparables, specifically UK companies, as it did in its Transfer Pricing (TP) study, where it worked out its operating profit margin (OP/TC%) at 6.65% and selected five UK companies with an arithmetic mean of 4.53%.

The Transfer Pricing Officer (TPO) rejected this approach, insisting that only Indian companies should be used as comparables. The TPO selected four Indian companies with an average profit margin of 14.72%, leading to a TP adjustment of Rs. 2,89,12,090/-. The Dispute Resolution Panel (DRP) upheld the TPO's decision, rejecting foreign comparables due to geographical disparity and differences in financial years.

The Tribunal, however, referenced a prior decision in the assessee's own case for assessment years 2008-09 and 2009-10, which accepted the use of foreign comparables. The Tribunal reiterated that since the PE incurs costs in the UK, it is influenced by UK economic factors, not Indian ones. Therefore, UK comparables should be used for benchmarking.

2. Determination of the Permanent Establishment (PE) Status:
The assessee contested the TPO's and DRP's view that its PE should be treated as an Indian entity for TP purposes. The Tribunal supported the assessee's position that the PE is a service PE incurring costs in the UK, thus influenced by UK economic conditions. This reinforces the Tribunal's decision to use UK comparables.

3. Functional Comparability of Selected Indian Companies:
The assessee argued against the selection of the four Indian companies by the TPO, claiming they were functionally non-comparable and selected through a cherry-picking process. The Tribunal did not delve deeply into this issue, as it had already decided in favor of using foreign comparables, thus rendering this point less relevant.

4. Application of +/- 5% Benefit under Section 92C:
The assessee claimed the AO erred in not granting the benefit of the +/- 5% range as per Section 92C. However, this issue became academic following the Tribunal's decision to use foreign comparables for benchmarking, thus no specific adjudication was made on this ground.

5. Grant of Refund with Interest under Section 244A:
The assessee also raised the issue of not being granted a refund along with interest under Section 244A. Similar to the previous point, this issue was not specifically adjudicated due to the primary decision on the use of foreign comparables.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, directing the TPO to carry out a comparability analysis of the UK comparables chosen by the assessee. If these comparables do not meet the criteria, the TPO may search for other comparables after providing the assessee an opportunity to be heard. The decision underscores the importance of considering the economic environment of the PE's location for TP purposes.