2022 (9) TMI 832 - AT - Income Tax

TP Adjustment - Comparable selection - Ma Foi Global Search Services Limited and Ma Foi Management Consultants Ltd.excluded on the ground that they maintained their accounts following calendar year as against the assessee following financial year - HELD THAT - Having heard both the sides and gone through the relevant material on record, it is seen that this issue is no more res integra in view of the judgment of PTC Software (I) Pvt. Ltd. 2016 (9) TMI 1282 - BOMBAY HIGH COURT holding that two companies with different financial year endings cannot be considered as comparable. The ld. AR was fair enough to accept the position against the assessee. We, therefore, countenance the exclusion of these two companies from the list of companies. ICC International Agencies Limited (Segment) company was wrongly included - In principle, there can be no bar on the assessee seeking exclusion of a company which was inadvertently included in the list of comparables. What is relevant for consideration is the comparability and not the suo motu inclusion or exclusion by the assessee. The way in which the TPO can exclude certain companies, included by the assessee in the list of comparables, which are actually not found out to be so, the assessee can also seek exclusion of a company which was wrongly treated by it as comparable. Our view is fortified by the judgment of the Hon ble jurisdictional High Court in CIT Vs. Tata Power Solar Systems Ltd. 2016 (12) TMI 1600 - BOMBAY HIGH COURT . ICC International Agencies Ltd.company returning higher OP/OC for the year - We reiterate that an otherwise comparable company with a high or low profit margin cannot be excluded just because of low or high profit rate. It would merit exclusion if it is proved that such high or low profit margin was because of some abnormal business conditions relevant to the year under consideration. Apart from contending that this company returned higher OP/OC for the year, no specific argument was put forth by the ld. AR to show that such profit margin was not the normal incidence of business. The assessee has not disputed the functional comparability of this company or the FAR analysis. AR failed to bring to our notice the company not passing any of the filters. In view of the fact that the AR has simply harped on the high profit margin as a reason for seeking exclusion without pointing out any abnormal business conditions existing with that company for the year under consideration, we find no reason to disturb the conclusion drawn by the CIT(A) in echoing the inclusion of ICC International Agencies Ltd. (Segment) in the list of comparables.

Summary

Issues:
1. Time bar appeal due to Covid-19 pandemic
2. Transfer pricing adjustments based on international transactions
3. Exclusion of companies from the list of comparables
4. Inclusion of a company in the list of comparables

Issue 1: Time bar appeal due to Covid-19 pandemic

The appeal was time-barred by 57 days, filed during the Covid-19 pandemic. The Appellate Tribunal, considering the Supreme Court's judgments related to the extension of limitation due to Covid-19 challenges, condoned the delay and admitted the appeal for disposal on merits.

Issue 2: Transfer pricing adjustments based on international transactions

The case involved the assessee engaged in providing after-sales and market support services, trading of spares and tools, and job work. The Transfer Pricing Officer (TPO) made adjustments to the international transactions, leading to a transfer pricing adjustment of Rs. 1,26,70,656. The appeal focused on the exclusion and inclusion of certain companies from the list of comparables based on their profitability margins.

Issue 3: Exclusion of companies from the list of comparables

Two companies were excluded from the list of comparables due to different financial year endings, following a precedent set by the jurisdictional High Court. The exclusion was upheld, considering the lack of comparability due to the financial year differences.

Issue 4: Inclusion of a company in the list of comparables

The inclusion of ICC International Agencies Limited in the list of comparables was disputed by the assessee. The Tribunal emphasized that comparability is crucial, allowing for the exclusion of companies based on valid reasons. The Tribunal analyzed the profit margins of the company and concluded that high or low profit margins alone do not warrant exclusion unless abnormal business conditions exist.

In this case, the Tribunal upheld the inclusion of ICC International Agencies Limited in the list of comparables, as the high profit margin was not proven to be due to abnormal business conditions. The Tribunal dismissed the appeal, emphasizing the importance of valid reasons for excluding potential comparables based on profit margins.

This detailed analysis covers the issues of time bar appeal, transfer pricing adjustments, exclusion of companies from the list of comparables, and the inclusion of a company in the list of comparables based on the judgment delivered by the Appellate Tribunal ITAT Pune.