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2012 (11) TMI 347 - AT - Income TaxTransfer pricing adjustment - inclusion and exclusion of the various comparable companies by applying different filtration criteria - Held that - The first criterion of filtration adopted by the TPO for selecting the comparable companies by applying a search criteria of Sales trading / Total sales exceeding 75% is correct and the second filtration criterion for selection of comparables should be the companies having export sales of around 13% of the total sales be adopted. With regard to the elimination of Oregon Commercials Ltd., by the TPO, it is found that the reasoning given by the TPO is not correct as the TPO has clearly relied on the data of that company for F.Y. 2003-04, which is clearly violative of Rule-10B(4), which prescribes that the data to be used for comparison shall relate to the financial year of International Transaction and data relating to not more than two years prior to such F.Y., therefore, the said company should be taken into consideration after adopting the above two selection criteria - restore the matter to the file of the TPO and direct him to compute the assessee s average gross profit margin in determining the ALP in accordance with the observations made above - Revenue s appeal partly allowed for statistical purposes.
Issues Involved:
1. Transfer Pricing Adjustment 2. Selection of Comparable Companies 3. Filtration Criteria for Comparable Companies 4. Inclusion and Exclusion of Comparable Companies Detailed Analysis: 1. Transfer Pricing Adjustment: The sole dispute in the appeal concerns a transfer pricing adjustment of Rs. 34,20,335 made by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Income Tax Act, 1961, for the assessment year 2003-04. The assessee, an indirect subsidiary of Rhodia S.A. France, engaged in various international transactions, had its Arm's Length Price (ALP) computed by the TPO. The TPO accepted the ALP for certain transactions but disputed the ALP for the distribution segment involving the import of raw materials, sale, and purchase of finished goods. 2. Selection of Comparable Companies: The assessee used the Resale Price Method for benchmarking its gross profit margin against comparable companies, selecting six companies with an arithmetic mean gross profit of 6.56%. The assessee's gross profit margin was 8.29%, indicating that its transactions were at arm's length. However, the TPO rejected most of the assessee's comparable companies, arguing that the filtration criteria used by the assessee were incorrect. 3. Filtration Criteria for Comparable Companies: The TPO argued that the assessee's criteria of "Sales trading / Gross sales" being less than 90% should have been less than 75%. Additionally, the TPO contended that the export turnover criterion should be zero, as the assessee's exports were negligible. The TPO included additional comparable companies and excluded some of the assessee's selected companies based on these revised criteria. 4. Inclusion and Exclusion of Comparable Companies: The TPO included companies like K.P.L. International Ltd. and excluded companies such as Oregon Commercials Ltd., Anukaran Commercial Enterprises Ltd., Bijoy Hans Ltd., and Nikhil Adhesives Ltd. The Commissioner (Appeals) accepted the assessee's contentions and deleted the entire adjustment made in the ALP, stating that the TPO's changes to the filtration criteria were unjustified and that the comparable companies selected by the assessee should be accepted. Judgment Analysis: The Tribunal examined the rival contentions and found that the TPO's first filtration criterion of "Sales trading / Gross sales > 75%" was correct, as it closely matched the assessee's trading sales percentage. However, the Tribunal disagreed with the TPO's rejection of the second filtration criterion of export sales being less than 20% of total sales, noting that the assessee's exports were around 13%. The Tribunal directed the TPO to use a filtration criterion of export sales around 13% for selecting comparable companies and to include Oregon Commercials Ltd. in the list of comparables. Conclusion: The Tribunal set aside the Commissioner (Appeals)'s order and restored the matter to the TPO for recomputation of the assessee's average gross profit margin in determining the ALP, in accordance with the Tribunal's observations. The appeal was partly allowed for statistical purposes.
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