2020 (7) TMI 817 - AT - Income Tax

TP Adjustment - adjustment to the Arm s Length Price of the assessee s international transaction - Comparable selection - Persistent loss making companies - HELD THAT - A company can be accepted as comparable if it has not suffered persistent losses. The expression persistent loss is not defined under the Act or the Rules framed thereunder. The expression has evolved in judicial rulings. One of the initial decisions of Tribunal supporting this principle is Bobst India (P.) Ltd. vs. Dy. CIT 2015 (12) TMI 684 - ITAT PUNE Persistent loss means losses in three consecutive financial years including the Financial Year corresponding to the Assessment Year under dispute and immediately two preceding Financial Years. The thumb rule of excluding persistent loss making company has been accepted in various judicial precedents over the period of time. The company at Sr.No.1 has suffered losses in only one year and the companies at Sr. No.2 3 have incurred losses in two financial years. Thus, none of the above said three companies fall within the ambit of persistent loss making companies. The CIT (A) has directed the TPO to include AMI Computer (I) Ltd., Mercury Travels Ltd. and Nucleus Netsoft GIS India Ltd. as these are not continuous loss making companies. We concur with the findings of CIT (A). The impugned order is upheld, ergo, the appeal of revenue is dismissed sans merit.

Summary

Issues:
1. Appeal by Revenue for assessment year 2003-04
2. Selection of comparables for transfer pricing adjustment

Issue 1: Appeal by Revenue for assessment year 2003-04

The Revenue's appeal for the assessment year 2003-04 was against the Commissioner of Income Tax (Appeals) order, specifically challenging the deletion of an addition made on account of adjustment to the Arm's Length Price of the assessee's international transaction. The Tribunal had earlier remanded the matter to the Assessing Officer for fresh adjudication, which was upheld by the Hon'ble Bombay High Court. The dispute primarily revolved around the selection of comparables for benchmarking the international transactions. The Transfer Pricing Officer (TPO) had excluded certain companies from the comparables list, leading to an upward adjustment. However, the CIT (A) accepted the contentions of the assessee and directed the inclusion of three companies in the final set of comparables, resulting in the margin falling within the acceptable range. The Tribunal upheld the CIT (A)'s decision, dismissing the appeal by the Revenue.

Issue 2: Selection of comparables for transfer pricing adjustment

The key contention in the transfer pricing study was the selection of comparables. The assessee had chosen nine companies as comparables, out of which the TPO excluded five, including three companies that had incurred losses. The TPO's exclusion was based on the companies' loss-making status without providing additional reasons. The Hon'ble Jurisdictional High Court had previously established that persistent loss-making companies should not be considered as comparables. The financial statements of the three excluded companies showed losses in one or two financial years, not meeting the criteria for persistent loss-making companies. The CIT (A) directed the TPO to include these companies as they were not continuous loss-making entities. The Tribunal concurred with the CIT (A)'s findings, upholding the decision and dismissing the Revenue's appeal for the assessment year 2003-04.

In summary, the judgment addressed the Revenue's appeal for the assessment year 2003-04, focusing on the transfer pricing adjustment and the selection of comparables. The Tribunal upheld the CIT (A)'s decision to include certain companies in the comparables list, leading to the dismissal of the Revenue's appeal. The judgment emphasized the importance of considering persistent loss-making companies while selecting comparables for transfer pricing analysis.