2017 (7) TMI 1161 - HC - Income Tax

Adjustment of the Arm s Length Price of the international transaction on payment of royalty by assessee to its Associated Enterprise, from the income of the assessee u/s 92C - Held that - Companies functionally dissimilar with of assessee need to deselected from final list.

Issues involved:
1. Interpretation of substantial questions of law in relation to the adjustment of Arm’s Length Price of international transactions.
2. Justification for the deletion of additions made by the Tribunal.
3. Applicability of the Comparable Uncontrolled Price method.
4. Comparison of companies for benchmarking purposes.
5. Consideration of related party transactions in determining comparables.

Interpretation of Substantial Questions of Law:
The High Court examined the substantial questions of law raised in the appeals regarding the adjustment of Arm’s Length Price (ALP) of international transactions. The questions revolved around the deletion of additions made on account of royalty payments to Associated Enterprises under section 92C of the Income Tax Act. The Court analyzed whether the Tribunal was legally justified in upholding the non-applicability of the Comparable Uncontrolled Price (CUP) method and in determining the operating margin for benchmarking purposes.

Justification for Deletion of Additions:
The Court referred to a previous decision involving similar issues to support its stance. It highlighted the importance of the Assessing Officer's (AO) comparison of companies for benchmarking purposes. The Court emphasized the need for a valid justification in rejecting or including companies as comparables. The Tribunal's decision to delete additions and modify the ALP based on its assessment was scrutinized for error, with the Court ultimately upholding the Tribunal's decision.

Applicability of Comparable Uncontrolled Price Method:
The Court deliberated on the applicability of the CUP method in determining the ALP of international transactions. It assessed the reasoning provided by the Tribunal for not applying the CUP method and examined the implications of such a decision on the overall assessment of the transactions. The Court considered the relevance of the CUP method in the context of the specific international transactions under scrutiny.

Comparison of Companies for Benchmarking:
A detailed analysis of the companies identified for benchmarking purposes was conducted by the Court. It reviewed the rationale behind including or excluding specific companies as comparables and assessed the impact of related party transactions on the selection process. The Court evaluated whether the companies selected truly represented a fair comparison for benchmarking the transactions in question.

Consideration of Related Party Transactions:
The Court also addressed the significance of related party transactions in determining comparables. It examined the threshold for related party transactions that would render a company ineligible as a comparable. The Court scrutinized the criteria used to filter out companies with significant related party transactions and assessed the impact of such transactions on the overall assessment of the international transactions.

In conclusion, the High Court upheld the Tribunal's decision, answering the issues in favor of the assessee against the department. The judgment emphasized the importance of a thorough and justified analysis in determining the Arm’s Length Price of international transactions and the selection of comparables for benchmarking purposes. The Court's detailed examination of the legal justifications and factual assessments led to the dismissal of the appeals and the affirmation of the Tribunal's decision.

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