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2016 (9) TMI 1592 - AT - Income TaxTransfer pricing adjustment - data management services - TPO did not exclude two comparables viz. M/s Cosmic Global Ltd and M/s E4E Healthcare Business Services Pvt. Ltd. from the list of comparables - HELD THAT - DRP had not adjudicated the correctness of the claim of the assessee solely for a reason that these companies were part of the list of the TP study of the assessment. By virtue of the decision of Special Bench in the case of Quartz Systems(P) Ltd 2011 (5) TMI 508 - PUNJAB AND HARYANA HIGH COURT we are of the opinion that assessee can seek exclusion of a company though it appeared in the list of comparables if it could show before the authorities below that it was functionally different from it. In the case of CIT vs Quartz Systems (P) Ltd 2011 (5) TMI 508 - PUNJAB AND HARYANA HIGH COURT had upheld the decision of the Special Bench cited supra for the single reason that the comparability of the companies for which exclusions were sought were remitted to the lower authorities by the Tribunal. Accordingly here also we are of the opinion that whether M/s Cosmic Global Ltd and M/s E4E Healthcare Business Services Pvt. Ltd. could be considered as good comparables have to be looked afresh by the Assessing Officer/TPO. We therefore set aside the orders of the authorities below and remit the issue regarding the comparability of M/s Cosmic Global Ltd and M/s E4E Healthcare Business Services Pvt. Ltd. back to the file of the Assessing Officer/TPO for consideration afresh in accordance with law. Assessee is free to raise all its objections against inclusion of the above companies before the Assessing Officer/TPO and these have to be considered by the Assessing Officer/TPO while passing the orders. Computation of the PLI of the comparable companies selected was not properly done - Profit level indicator considering the margins prior to depreciation would give better results in the comparable analysis and benchmarking of the transactions of the assessee in the given facts and circumstances. We direct the Assessing Officer/TPO to rework the PLI of the comparables after excluding the depreciation cost and benchmark the PLI of the assessee also excluding the depreciation cost. Ordered accordingly. Ground of the assessee are allowed for statistical purposes.
Issues Involved:
1. Transfer pricing adjustment related to data management services. 2. Exclusion of certain comparables from the list considered by the Transfer Pricing Officer (TPO). 3. Computation of the Profit Level Indicator (PLI) of the comparable companies. Detailed Analysis: 1. Transfer Pricing Adjustment: The appeal was directed against the order dated 26.2.2014 of the Deputy Commissioner of Income-tax, Company Circle II(3), Chennai, passed under section 143(3) of the Income-tax Act, 1961, pursuant to the direction given by the Dispute Resolution Panel (DRP) under section 144C(13) of the Act. The assessee, a wholly owned subsidiary of M/s ICON Plc., provided clinical trial services and data management services to ICON Clinical Research Ltd, Ireland. The TPO made a transfer pricing adjustment of ?3,37,17,672/- in relation to its data management services. 2. Exclusion of Comparables: The assessee objected to the inclusion of M/s Cosmic Global Ltd and M/s E4E Healthcare Business Services Pvt. Ltd. as comparables for benchmarking the value of international transactions. The TPO had selected these companies, but the assessee argued that they were functionally dissimilar. The DRP rejected the assessee's contentions, holding that the selection of comparables by the TPO was in order. The Tribunal noted that the DRP and TPO had not considered the merits of the assessee's claim for exclusion of these comparables, solely because they were part of the assessee’s own TP study. The Tribunal cited the decision of the Special Bench in the case of DCIT vs Quartz Systems (P) Ltd, which allowed for the exclusion of a comparable if it was functionally different. The Tribunal remitted the issue back to the Assessing Officer/TPO for fresh consideration. 3. Computation of PLI: The assessee raised concerns about the computation of the PLI of the comparable companies, arguing that it had charged depreciation at a higher rate than prescribed by Schedule XIV of the Companies Act, 1956. The Tribunal noted that three of the comparables selected by the TPO had applied the depreciation rate prescribed in Schedule XIV. The Tribunal referenced the Guidance Note issued by the Institute of Chartered Accountants of India, which suggests that the operating margin on operating cost before depreciation should be taken as the profit level indicator when different depreciation rates are adopted by the comparables. The Tribunal directed the Assessing Officer/TPO to rework the PLI of the comparables after excluding the depreciation cost and to benchmark the PLI of the assessee also excluding the depreciation cost. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, setting aside the orders of the lower authorities and remitting the issues regarding the comparability of M/s Cosmic Global Ltd and M/s E4E Healthcare Business Services Pvt. Ltd. back to the file of the Assessing Officer/TPO for fresh consideration. The Tribunal also directed the reworking of the PLI after excluding depreciation costs. The order was pronounced in the open court on 21st September 2016, at Chennai.
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