2017 (2) TMI 1460 - AT - Income Tax

TP Adjustment - comparable selection - Functional similarity - HELD THAT - Alpha Geo India Ltd. - Since the profile of this company is not similar to the assessee's profile, this company cannot be called a good comparable for determining the ALP. Therefore, we are of the view that this company has to be excluded from the list of comparables on account of functional difference. Celestial Labs Ltd. - Since this company is also functionally different from the assessee company, it can also not be compared as a good comparable. Accordingly, this company has to be excluded from the list of comparables. Vimta Labs Ltd. - This company offers wide spectrum of services and in the absence of proper revenue/segmental break-up, the company should not be considered as a comparable. The bifurcation of revenue is not available and for reference, our attention was invited to page 496, where the profile and services of this company was mentioned and from a careful perusal of these details of profile and services, we are of the view that this company is also functionally different, therefore cannot be taken as a good comparable. We accordingly direct the TPO/AO to exclude this company from the list of comparables. Comparables Research Support International Ltd., Neeman Medical International Ltd., Pfizer Ltd. (Seg.), Choksi Laboratories Ltd. and Tata Life Sciences Ltd. - Though assessee has contended that these comparables are functionally similar and can be called to be good comparables, but it requires a proper verification by the TPO. Accordingly, we restore the matter to the AO/TPO to examine these comparables and if they are found to be good comparables, they can be considered for determining the ALP of the international transactions. The TPO is also at liberty to search more comparables which are similar to assessee's profile in order to determine the ALP of international transactions. Appeal of the assessee stands allowed for statistical purposes.

Summary

Issues:
1. Incorrect interpretation of law by AO and DRP
2. Assessment of total income at NIL instead of returned loss
3. Addition to total income on account of adjustment in arm's length price
4. Disregarding economic analysis by AO/TPO
5. Violation of natural justice by AO/TPO and DRP
6. Use of outdated data for determining arm's length margin
7. Inadequate comparable search process by TPO
8. Rejection of certain comparable companies
9. Rejection of companies with different accounting year
10. Rejection of companies with insufficient foreign exchange earnings
11. Application of 'service income lesser than ?1 crore' as comparability criterion
12. Unreasonable acceptance/rejection of certain companies
13. Failure to make suitable adjustments for working capital differences
14. Failure to make suitable adjustments for risk profile differences
15. Non-compliance with the proviso to section 92C of the Act

Analysis:
The appeal was filed against the AO's order following directions from the DRP. The grounds included challenges to the interpretation of law, assessment of income, adjustments in arm's length price, and violation of natural justice. The AO/TPO were criticized for disregarding economic analysis, using outdated data, and inadequately conducting the comparable search process. Issues were raised regarding the rejection of certain companies based on various criteria such as operating losses, accounting year, and foreign exchange earnings. The AO/TPO were faulted for applying inappropriate comparability criteria and making unreasonable decisions. Furthermore, the failure to make adjustments for working capital and risk profile differences was highlighted. The judgment directed the AO/TPO to reconsider the comparables and make necessary adjustments, ultimately allowing the appeal for statistical purposes. The decision emphasized the importance of selecting functionally similar comparables for determining the arm's length price of international transactions.