2017 (6) TMI 350 - HC - Income Tax

Checking the veracity of Operating Profit (OP)/Total Costs (TC) of the comparable Datamatics Limited only if the Assessee succeeds in providing the relevant data of the said company - Held that - The Court is in the view that the ITAT could not possibly have placed a restriction on the Assessee to the effect that it had to place before the AO/TPO only the relevant data of the said company for the concerned financial year on the basis of the information available from their annual reports, without making any calculations at its own. Such a restriction was contrary to what is envisaged in the proviso to Rule 10 B (4) of the Rules. Consequently, the question framed is answered in the negative i.e. in favour of the Assessee and against the Revenue. It is clarified, for checking the veracity of the OP/TC of Datamatics Ltd. as a comparable, the AO/TPO will consider the relevant data consistent under Rule 10 B(4) of the Rules read with first proviso thereto.

Summary

Issues involved:
Appeal under Section 260 A of the Income Tax Act 1961 against an order of the Income Tax Appellate Tribunal (ITAT) regarding the validity of comparison of financial data for transfer pricing analysis.

Analysis:
The appeal was filed by the Assessee challenging the order of the ITAT dated 28th September 2016 for Assessment Year 2005-06. The main issue raised was whether the ITAT was correct in remanding the matter to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) for checking the veracity of Operating Profit (OP)/Total Costs (TC) of a comparable company, Datamatics Limited, based on the financial data comparison. The ITAT observed that a valid comparison could only be made if the comparable company had the same financial year as the Assessee. The ITAT's observation was based on Rule 10 B (4) of the Income Tax Rules 1962, which specifies that the data for comparability analysis should relate to the financial year in which the international transaction was entered into.

The Court noted that the ITAT overlooked the first proviso to Rule 10 B (4), which allows considering data from a period not more than two years prior to the financial year if it could influence the determination of transfer prices. The Court held that the restriction imposed by the ITAT on the Assessee to provide data only for the concerned financial year without making any calculations on its own was contrary to the rules. Therefore, the Court answered the question framed in the negative, in favor of the Assessee and against the Revenue.

As a result, the appeal was disposed of, clarifying that for verifying the OP/TC of Datamatics Ltd. as a comparable company, the AO/TPO should consider the relevant data consistent with Rule 10 B(4) of the Rules along with the first proviso. The judgment emphasized the importance of following the rules and provisions while conducting transfer pricing analysis to ensure a fair comparison of financial data for tax assessment purposes.