2020 (10) TMI 1353 - AT - Income Tax

TP Adjustment - Comparable selection - OP/OC margin of the 4 comparable companies of the assessee be calculated on the basis of the financial data reported in their audited financial statements, and not on the basis of the data reported in the prowess database - HELD THAT - As the financial data reported in the prowess database involves classification of items of income or expenses as per its own standard format, therefore, the calculation data base may differ from the OP/OC margin as per the audited financial statements. As observed by us hereinabove, the assessee had furnished the annual reports‟ of the aforementioned comparable companies in the course of the proceeding before the TPO, vide its letter dated 21.12.2012. We are unable to comprehend as to why the lower authorities had shirked from calculating the OP/OC margin of the aforementioned 4 comparable companies on the basis of the financial data reported in their audited financial statements, which would be more authentic as in comparison to that reported in prowess database. We herein restore the matter to the file of the TPO, with a direction, to calculate the OP/OC margin of the aforesaid 4 comparable companies on the basis of the financial data reported in their annual reports‟ for the year under consideration. The Ground of Appeal No. 2.1 is allowed for statistical purposes. Inclusion of 4 insurance broking companies (out of the set of 19 comparable companies selected by the assessee before the TPO), in the backdrop of the fact that the CIT(A) himself had held that insurance broking companies were a valid comparable to business facilitation service segment of the assessee - Now when the aforementioned 5 insurance broking companies viz. (i) Almondz Insurance Brokers Pvt. ltd.; (ii) India Infoline Brokers Ltd; (iii) Aditya Birla Capital Insurance Ltd; (iv) Bajaj Capital Insurance Ltd. and (v) Spectrum Business Solutions Ltd. have been accepted by the CIT(A) as valid comparables for benchmarking the international transactions of the assessee, we find no reason for exclusion of the aforesaid 4 insurance broking companies which were selected by the assessee in the course of the proceedings before the TPO. Accordingly, we are persuaded to subscribe to the claim of the ld. A.R that the aforesaid 4 insurance broking companies (out of 19 companies) which were selected by the assessee in the course of the proceedings before the TPO, viz. (i) Anand Rathi Insurance Brokers Ltd; (ii) Edelweiss Insurance Brokers Ltd.; (iii) Karvy Insurance Broking Ltd.; and (iv) India Infoline Marketing Service ltd., merits to be included in the finallist of the comparables for the purpose of determining the ALP of the international transactions of the assessee for the captioned year. Accordingly, we restore the matter to the file of the A.O/TPO for benchmarking the international transactions of the assessee in terms of our aforesaid observations.

Summary

Issues Involved:
1. Validity of the TPO's order under Section 92CA(3) of the Income-tax Act, 1961.
2. Upward transfer pricing adjustment made by the AO based on the TPO's order.
3. Calculation of OP/OC margin based on audited financial statements versus prowess database.
4. Inclusion and exclusion of comparable companies for benchmarking international transactions.
5. Comparability adjustments for material differences between the assessee and comparable companies.
6. Application of the +/- 5% tolerance limit as per Section 92C(2) of the Act.

Detailed Analysis:

1. Validity of the TPO's Order:
The assessee argued that the TPO's order and the consequent AO's order were invalid as they were passed without serving a written show cause notice as mandated by Section 92CA(3) r.w.s. 92C(3) of the Income-tax Act, 1961. The Tribunal did not directly address this issue in detail in the judgment, focusing instead on the substantive issues related to transfer pricing adjustments.

2. Upward Transfer Pricing Adjustment:
The assessee contested the upward transfer pricing adjustment made by the AO based on the TPO's order. For A.Y. 2009-10, the TPO suggested an upward adjustment of Rs. 1,20,17,520, which was later revised to Rs. 93,96,751 following the CIT(A)'s directions. For A.Y. 2010-11, the adjustment was Rs. 1,05,84,252. The Tribunal addressed the methodology and comparables used for these adjustments.

3. Calculation of OP/OC Margin:
The assessee claimed that the OP/OC margin of its comparable companies should be calculated based on audited financial statements rather than the prowess database. The Tribunal found merit in this claim, noting that data from audited financial statements is more reliable and authentic. The Tribunal directed the TPO to recalculate the OP/OC margin based on audited financial statements for the relevant years.

4. Inclusion and Exclusion of Comparable Companies:
The assessee identified 19 comparable companies, but the TPO rejected 15 of them. The CIT(A) included 5 insurance broking companies as comparables. The Tribunal agreed with the assessee's contention that if insurance broking companies are valid comparables, then the 4 insurance broking companies identified by the assessee should also be included. The Tribunal directed the AO/TPO to include these 4 companies as comparables.

5. Comparability Adjustments:
The assessee argued for adjustments for material differences, including risk adjustment, functional profile adjustment, and working capital adjustment, as provided under Rule 10B(1)(e)(iii) and 10B(3) of the Income Tax Rules. The Tribunal did not specifically address these adjustments in detail, focusing on the inclusion of comparable companies and the calculation of OP/OC margins.

6. Application of +/- 5% Tolerance Limit:
The assessee contended that the benefit of the +/- 5% tolerance limit should be allowed as per the proviso to Section 92C(2) of the Act. The Tribunal noted that if the assessee's contentions on the calculation of OP/OC margins and inclusion of comparables were accepted, the OP/OC margin of its business facilitation service segment would fall within the arm's length range of +/- 5%, rendering the TP adjustment unnecessary.

Conclusion:
For both A.Y. 2009-10 and A.Y. 2010-11, the Tribunal allowed the assessee's appeals, directing the AO/TPO to recalculate the OP/OC margins based on audited financial statements and to include the 4 insurance broking companies identified by the assessee as comparables. The Tribunal's directions aimed to ensure a more accurate benchmarking of the assessee's international transactions.