2018 (5) TMI 1941 - AT - Income Tax

TP Adjustment - comparable selection - working capital adjustment - HELD THAT - Hon ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. 2016 (9) TMI 1282 - BOMBAY HIGH COURT has held that the data for the same period is to be applied in order to hold the concerns selected, as comparable. We find that where the assessee is following financial years for compiling its data i.e. 01.04.2010 to 31.03.2011, the two concerns selected i.e. R System International Ltd. and Coral Hub Ltd. do not fulfill the said filter. The accounting periods of said two concerns are at variance to the accounting period followed by the assessee and consequently, the margins of said concerns could not be applied to benchmark the arm's length price of international transactions undertaken by the assessee. Accordingly, we hold so. Thus, we direct the Assessing Officer / TPO to exclude the margins of said two concerns i.e. R System International Ltd. and Coral Hub Ltd. The learned Authorized Representative for the assessee has filed the details of margins of the concerns selected as comparables after working capital adjustment and the mean margins of the concerns finally selected worked out to 15.82%. The assessee s PLI worked out to 14.46%. Where the margins shown by the assessee and the mean margins of comparables are within /-5%, then no transfer pricing adjustment is to be made in the hands of assessee. It may be pointed out herein itself that the Assessing Officer had also deleted proposed addition made by the TPO after giving effect to the directions of the DRP. Consequently, we allow the grounds of appeal raised by the Revenue, though tax effect in the said appeal would be nil.

Summary

Issues:
1. Inclusion of companies with different accounting periods as comparables in transfer pricing assessment.

Analysis:
The appeal before the ITAT Pune involved the Revenue challenging the order of DCIT, Circle 11, Pune, related to the assessment year 2011-12 under sections 143(3) and 144C(13) of the Income-tax Act, 1961. The Revenue raised concerns regarding the inclusion of R System International Ltd. and Coral Hub Ltd. as comparables by the Dispute Resolution Panel (DRP) despite these companies having different accounting periods. The Revenue argued that the data for the same period should be applied to hold selected concerns as comparable, as per the decision in CIT Vs. PTC Software (I) Pvt. Ltd. The ITAT Pune agreed with the Revenue's contention, stating that when the assessee follows financial years for data compilation, concerns with different accounting periods cannot be considered comparable. Therefore, the ITAT directed the Assessing Officer/TPO to exclude the margins of R System International Ltd. and Coral Hub Ltd. The ITAT noted that if margins of comparables are within +/-5% range of margins shown by the assessee, no transfer pricing adjustment is required. Consequently, the ITAT allowed the Revenue's appeal, even though the tax effect was nil.

The ITAT Pune considered the arguments presented by both the Revenue and the assessee. The Revenue contended that the concerns selected as comparables, R System International Ltd. and Coral Hub Ltd., did not meet the filter of using data for the financial year 2010-11, as maintained by the TPO. The ITAT found merit in the Revenue's plea, emphasizing the importance of aligning accounting periods for comparability. The ITAT referred to the decision in CIT Vs. PTC Software (I) Pvt. Ltd. to support its conclusion. The ITAT highlighted that discrepancies in accounting periods between the selected concerns and the assessee could impact the accuracy of benchmarking for arm's length price determination. Therefore, the ITAT directed the exclusion of R System International Ltd. and Coral Hub Ltd. from the comparables list, ultimately resulting in no transfer pricing adjustment for the assessee.

The ITAT Pune reviewed the transfer pricing assessment involving the Revenue's appeal and the assessee's Cross Objections. The Revenue raised concerns about including companies with different accounting periods as comparables, which the ITAT found valid based on established legal principles. The ITAT's decision to exclude R System International Ltd. and Coral Hub Ltd. from the comparables list was influenced by the need for consistency in accounting periods for accurate benchmarking. By ensuring alignment in data periods, the ITAT upheld the arm's length principle in transfer pricing, leading to the allowance of the Revenue's appeal. The ITAT's detailed analysis emphasized the importance of applying uniform standards in transfer pricing assessments to maintain fairness and accuracy in determining arm's length prices.