2016 (10) TMI 1296 - HC - Income Tax

TP Adjustment - comparable selection - grievance of the Revenue is that the Respondent Assessee had itself relied upon M/s. Megasoft Ltd., M/s. Software Technology Group International Ltd. and M/s. Transworld Infotech Ltd. as comparable for the Respondent Assessee's operations for the financial year 2005 -06 - HELD THAT - The requirement under Rule 10B(4) of the Income Tax Rules are clear in as much as it obliges that the data to be used for comparability analysis should be contemporaneous with the time when international transactions are entered into by the tested parties. In view of the clear mandate of the law, no question of estoppal can arise. Moreover, the provisions of Rule 10B(4) of the Act, being self evident, the question as proposed, does not give rise to any substantial question of law. Thus, not entertained. Transfer Pricing Officer was referring to a financial year other than the subject financial year. Consequently, it could not be read as a comparable. Thus, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. Tested party is not functionally comparable to M/. Ultra Marine Pigments Ltd. as it is engaged in rendering Engineering and Technical Services while the Respondent Assessee is engaged in routine customer support services. Thus, the two services are not comparable. The bench marking for the purposes of arriving at Arms Length Price (ALP) has necessarily to be done with companies functionally similar. Once the functional profile is different, then the resources to be used and the profits earned would inherently be different. The Revenue is not able to point out why this finding on facts by the Tribunal is perverse. Accordingly, this question also does not give rise to any substantial question of law

Summary

Issues:
1. Exclusion of companies from the list of comparable companies for Transfer Pricing analysis.
2. Interpretation of Rule 10B(4) of the Income Tax Rules.
3. Functionality-based comparability in Transfer Pricing analysis.

Analysis:

Issue 1: Exclusion of companies from the list of comparable companies
The Revenue challenged the exclusion of certain companies from the list of comparables for Transfer Pricing analysis. The Tribunal had excluded M/s. Megasoft Ltd., M/s. Software Technology Group International Ltd., and M/s. Transworld Infotech Ltd. The Revenue argued that the Assessee had initially submitted these companies as comparables for the relevant financial year. However, Rule 10B(4) of the Income Tax Rules requires contemporaneous data for comparability analysis. The Court held that the law's mandate is clear, and no question of estoppel can arise. The Tribunal's decision to exclude these companies was upheld as they did not meet the contemporaneous data requirement.

Issue 2: Interpretation of Rule 10B(4) of the Income Tax Rules
Regarding the interpretation of Rule 10B(4) of the Income Tax Rules, the Court emphasized the necessity of contemporaneous data for comparability analysis. The Revenue's argument that the Transfer Pricing Officer had specifically used data for the relevant financial year was dismissed. The Court reiterated that the law obliges the use of contemporaneous data when international transactions are conducted. The question raised did not give rise to any substantial question of law and was not entertained.

Issue 3: Functionality-based comparability in Transfer Pricing analysis
The Tribunal had excluded M/s. Ultra Marine & Pigments Ltd. from the comparables list, stating that the company's services were not functionally comparable to the Assessee's services. The Revenue contended that the two companies were comparable due to low related party transactions. However, the Court upheld the Tribunal's decision, highlighting the importance of functional comparability in Transfer Pricing analysis. The Court found no reason to challenge the Tribunal's factual finding on the functional dissimilarity of the companies, leading to the dismissal of the appeal.

In conclusion, the Court dismissed the appeal challenging the Tribunal's order on Transfer Pricing analysis for Assessment Year 2006-07. The issues of exclusion of companies from comparables list, interpretation of Rule 10B(4), and functionality-based comparability were thoroughly analyzed, with the Court upholding the Tribunal's decisions based on legal mandates and factual findings.