2016 (5) TMI 137 - HC - Income Tax

Selection of comparability - Transfer pricing adjustment - whether tribunal has erred in holding that the profits on costs of five comparable companies as abnormal without giving reasons how the functions discharged, assets deployed and risks assumed of such companies were different from the Respondent-Company - Held that - Appellant-Revenue has not been able to controvert or deny the data relied upon by the Authorities below to come to such conclusion. The said Companies are no doubt large and distinct companies where the area of development of subject services are different and as such the profit earned therefrom cannot be a bench-marked or equated with the Respondent- Company. Shri Jain, learned Counsel has rightly relied upon the Judgment reported in the case of Commissioner of Income-tax vs. Agnity India Technologies (P.) Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT ). Learned Counsel has also brought to our notice the Order of the Income Tax Appellate Tribunal whilst examining similar circumstances for the assessment year 2005-06. He has taken us through the findings therein to point out that the conclusions arrived at are based on a comparison that the condition in any uncontrolled transaction between an independent enterprises for the purpose of such comparison, economically relevant characteristics must be sufficiently comparable if two parties are to be placed in a similar situation. Learned Counsel as such submitted that it is not open for the appellant to now contend a different criteria to ascertain the comparability. In fact the Tribunal whilst passing the impugned Order has considered the said principles whilst coming to the conclusion that the said three Companies cannot be treated to be comparable to the Respondent-Assessee Company. The turn over is obviously a relevant factor to consider the comparability.

Summary

Issues Involved:
Transfer Pricing Adjustment - Comparable Companies Selection

Analysis:

Transfer Pricing Adjustment:
The case involves a dispute regarding transfer pricing adjustments made by the Tax Authorities. The Appellant, engaged in the business of manufacturing fiberglass pressure vessels, contested the adjustments made by the Transfer Pricing Officer (TPO) and the Assessing Officer (AO) in the assessment year 2007-2008. The Appellant argued that the Respondent-Company, a subsidiary of a US-based company, had rendered services to its group companies abroad and the adjustments made were erroneous. The Commissioner of Income Tax Appeal directed the AO to compute the Transfer Pricing (TP) adjustment based on a comparable rate of 22.92%. Both parties then appealed to the Income Tax Appellate Tribunal, which disposed of the case in 2014, leading to the current Appeal by the Appellant.

Comparable Companies Selection:
The Appellant raised substantial questions of law regarding the selection of comparable companies by the Tribunal. The Appellant argued that the Tribunal erred in considering the profits on costs of certain companies as abnormal without justifying the differences in functions, assets, and risks compared to the Respondent-Company. The Appellant also contested the exclusion of certain companies like HCL Comnet Systems & Services Ltd., Infosys BPO Limited, and Wipro Ltd. as comparables based on turnover criteria. On the other hand, the Respondent's Counsel contended that the Tribunal's findings on the comparability of companies were based on concurrent evidence and could not be re-evaluated by the Court. The Respondent cited precedents and principles emphasizing the relevance of turnover in determining comparability.

Judicial Analysis:
The High Court reviewed the Tribunal's order and upheld its decision regarding the exclusion of the three companies as comparables based on turnover differences. The Court emphasized that the Tribunal's findings were based on the evidence on record and endorsed the CIT Appeals' views. Referring to legal precedents, the Court highlighted the importance of economic comparability in transfer pricing analysis. The Court noted that the Appellant failed to challenge the data relied upon by the Authorities and that the distinct nature of the excluded companies justified their non-comparability. Ultimately, the Court rejected the Appellant's proposed questions of law, considering the concurrent factual findings of the lower Authorities.

In conclusion, the High Court dismissed the Appeal, affirming the Tribunal's decision on the selection of comparable companies for transfer pricing adjustments. The judgment underscores the significance of economic comparability and turnover criteria in determining the comparability of companies for transfer pricing purposes.