2017 (10) TMI 1488 - AT - Income Tax

TP Adjustment - Comparability - HELD THAT - A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis Operating Profit - The Operating Profit, for the purposes of TNMM, is the net profit of the Tested Party from the controlled transaction; and the net profit of Uncontrolled Comparable Enterprises from comparable uncontrolled transactions. The income and expenses of only operating nature are taken into account for working out the Operating Profit of the Tested Party from the controlled transaction. And the Operating Profit of the Uncontrolled Comparable Enterprises from comparable uncontrolled transactions is also worked out on similar basis. Loss making Comparables - In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT has held that the mere fact that an entity makes high/extremely high profits/losses does not, ipso facto , lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. Current year vs. Multiple year data - Data of only the relevant year should be considered for comparison. This is what Rule 10B(4) prescribes. In order to analyze comparability of an uncontrolled transaction with an international transaction, data relating to the financial year in which the international transaction or specified domestic transaction has been entered into should be used. Proviso to Rule 10B(4) carves out the exception i.e. data relating to two years prior to such financial year may be considered if such data reveals facts which could have an influence on determination of transfer prices. In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT 2015 (4) TMI 949 - DELHI HIGH COURT has held that while determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4) and thus, it is not open to assessee to rely upon previous year s data as a general rule. Related Party Transactions - In CIT v.Thyssen Krupp Industries India (P) Ltd. 2016 (4) TMI 88 - BOMBAY HIGH COURT has held applying consistent filter of 25% or less of related party transaction alone shall be considered comparable. Segmentation vs. Aggregation - In Aztec Software Technology v. ACIT 2007 (7) TMI 50 - ITAT BANGALORE it is held that ALP to be determined on transaction by transaction basis and not on aggregate basis. It has been held in LG Soft India (P.) Ltd. DCIT 2014 (6) TMI 924 - ITAT BANGALORE ) that in absence of segmental details, a company cannot be taken into account for comparability analysis. Economic adjustments - If differences are so material that adjustment cannot be made then the company should be rejected. TNMM is more tolerant to minor functional and risk level differences. Certain significant risks like market risks, contract risks, credit and collection risks, infringement of intellectual property right etc. are material and can lead to major difference in the value of transaction. Mean - It is the Mean PLI of Comparable which is arrived at. We set aside the order of the TPO/AO and direct the TPO/AO to make an assessment de novo after examining the said comparables in the light of our observations hereinbefore at para 6 and after giving reasonable opportunity of being heard to the assessee. We also direct the assessee to file the relevant documents/ evidence before the TPO/AO.

Summary

Issues Involved:
1. Comparability analysis of selected companies for determining arm's length price.
2. Selection of Sealion Sparkle Port & Terminal Services (Dahej) Ltd. as a comparable.
3. Use of multiple year data for calculation of Profit Level Indicator (PLI).
4. Consideration of companies with significant related party transactions.
5. Rejection of comparables proposed by the assessee.

Detailed Analysis:

1. Comparability Analysis of Selected Companies for Determining Arm's Length Price:
The primary issue revolves around the Transfer Pricing Officer (TPO) rejecting the five comparable companies proposed by the assessee and selecting Sealion Sparkle Port & Terminal Services (Dahej) Ltd. as a comparable. The assessee argued that the TPO erred in functionally comparing the business descriptions of the proposed comparables with that of the assessee. The Tribunal emphasized the importance of functional similarity and the need for a higher product and functional similarity to strengthen the efficacy of the method in ascertaining a reliable Arm's Length Price (ALP). The Tribunal cited the Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. vs. CIT, which stressed that comparables must be selected keeping in view the comparability factors specified.

2. Selection of Sealion Sparkle Port & Terminal Services (Dahej) Ltd. as a Comparable:
The assessee contended that Sealion Sparkle Port & Terminal Services (Dahej) Ltd. was functionally different as it was engaged in port management services rather than ship management services. Additionally, the company had significant related party transactions, which should disqualify it as a comparable. The Tribunal noted that the TPO failed to consider these functional differences and the significant related party transactions. The Tribunal emphasized that companies with dissimilar functional profiles or significant related party transactions should not be considered as comparables, as established in various case laws, including CIT v.Thyssen Krupp Industries India (P) Ltd.

3. Use of Multiple Year Data for Calculation of Profit Level Indicator (PLI):
The assessee argued that the TPO erred by not considering multiple year data for the calculation of PLI. The Tribunal referred to Rule 10B(4) of the Income Tax Rules, 1962, which prescribes that data relating to the financial year in which the international transaction has been entered into should be used for comparison. The Tribunal also cited the Delhi High Court's decision in Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT, which held that multiple year data can only be included in the manner provided in Rule 10B(4) and not as a general rule.

4. Consideration of Companies with Significant Related Party Transactions:
The Tribunal highlighted that companies with significant related party transactions should not be considered as comparables. This is consistent with the Bombay High Court's decision in CIT v.Thyssen Krupp Industries India (P) Ltd., which held that companies with related party transactions exceeding 25% should be excluded from comparability analysis.

5. Rejection of Comparables Proposed by the Assessee:
The Tribunal noted the reasons provided by the TPO for rejecting the comparables proposed by the assessee, including functional dissimilarities, lack of segmental details, and persistent losses. However, the Tribunal emphasized that the TPO should have conducted a more thorough analysis to determine whether the differences could be eliminated or adjusted. The Tribunal referred to various case laws, including CIT v. Welspun Zucchi Textiles Ltd. and Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT, which held that loss-making companies should not be excluded solely based on their losses unless the differences cannot be eliminated.

Conclusion:
The Tribunal set aside the order of the TPO/AO and directed them to make an assessment de novo after examining the comparables in light of the Tribunal's observations. The Tribunal also directed the assessee to file the relevant documents/evidence before the TPO/AO. The appeal was allowed for statistical purposes.

Order Pronounced:
The order was pronounced in the open Court on 27/10/2017.