2016 (5) TMI 1183 - AT - Income Tax

Transfer pricing adjustment - inclusion of ICRA as comparable - Held that - If the TPO himself had included ICRA as a comparable in earlier and subsequent years there was no justification for not including the same for the year under consideration on the ground that it had suffered losses. As stated earlier, if the results of ICRA are considered for TP purposes, the case will fall within the range of 5% and the adjustment made by the TPO would not survive. Considering the peculiar facts and circumstances of the case we hold that while finalising the TP adjustment ICRA should have been included as a comparable and that the TPO was not justified in making the adjustment of ₹ 63.881akhs.Effective ground of appeal is decided in favour of the assessee.

Summary

Issues Involved:
1. Addition under Chapter-X of the Act for international transactions.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Rejection of comparables by the Transfer Pricing Officer (TPO).
4. Inclusion of a loss-making company (ICRA) as a comparable.
5. Adjustment made by TPO and its validation by Dispute Resolution Panel (DRP).

Detailed Analysis:

1. Addition under Chapter-X of the Act for international transactions:
The assessee-company, engaged in corporate treasury, financial reporting, and taxation services, declared a total income of ?1.25 crores. During the assessment, the AO added ?63.88 lakhs under Chapter-X of the Act due to international transactions with Associated Enterprises (AEs).

2. Determination of Arm's Length Price (ALP) for international transactions:
The AO referred the matter to the TPO to determine the ALP of the international transactions. The assessee used the Transactional Net Margin Method (TNMM) for benchmarking and reported a net cost-plus markup of 5% up to September 2008 and 7% from October 2008. The TPO questioned the profitability and ALP, using a weighted average NCP margin of six comparable companies, resulting in an arithmetic mean of 10.24%.

3. Rejection of comparables by the Transfer Pricing Officer (TPO):
The TPO rejected the use of multiple-year data by the assessee, directing the use of FY 2008-09 data. Out of six comparables provided by the assessee, the TPO rejected five, retaining only IDC (India) Limited. The TPO identified 19 new comparables but retained only one, Cameo Corporate Services Pvt. Ltd. (CCSPL), and set the average mean at 12.38%, higher than the assessee's PLI of 6.10%, resulting in an adjustment of ?63.68 lakhs.

4. Inclusion of a loss-making company (ICRA) as a comparable:
The assessee argued that if ICRA was included, it would fall within the permissible ±5% range. The TPO and DRP excluded ICRA due to its reported loss of (-1.84%). However, for earlier and subsequent years, the TPO had included ICRA. The Tribunal referenced the judgment in Goldman Sachs (India) Securities Pvt. Ltd., where the Hon'ble Bombay High Court held that a company should not be excluded solely due to losses if it was functionally similar.

5. Adjustment made by TPO and its validation by Dispute Resolution Panel (DRP):
The DRP upheld the TPO's rejection of five comparables and inclusion of CCSPL, agreeing with the TPO's analysis of functional differences and organisational structure. The DRP found the TPO's rejection of ICRA justified due to its unusual financial results. However, the Tribunal found that the TPO's exclusion of ICRA was inconsistent with its inclusion in other years and ruled that ICRA should be included for determining ALP, making the adjustment of ?63.68 lakhs unjustified.

Conclusion:
The Tribunal concluded that the inclusion of ICRA as a comparable would bring the assessee within the ±5% range, invalidating the TPO's adjustment. The appeal filed by the assessee was allowed, and the adjustment of ?63.88 lakhs was overturned. The order was pronounced on April 13, 2016.