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2014 (9) TMI 258 - AT - Income TaxSelection of comparables High and low profit margin companies Held that - Following the decision in Deputy Commissioner of Income-tax, Circle-2(2) Versus Hellosoft India (P.) Ltd. 2013 (10) TMI 747 - ITAT HYDERABAD - companies having extraordinarily high profit/loss cannot be considered as comparables - the companies having extraordinarily high profit or loss are to be excluded as comparables - the AO is directed to re-calculate the ALP Decided partly in favour of Assessee. Determination of ALP - Data of company not available from last 12 months Held that - The financial data of Maple e-Solution is not available for full financial year, it is available only for four months during the FY 2004-05 - the part period data cannot be considered as a comparable to determine the ALP - The AO considered the financial data of partial period of operation of Maple e-Solutions - the financial data of Maple e-Solutions cannot be considered as comparable to determine the ALP since it is part period data Decided in favour of Assessee. Functionally different company Salary cost as percentage of the total cost is very abnormal Held that - M/s. Vishal Information Technologies cannot be considered as a comparable case as this company was rejected in Brigade Global Services (P.) Ltd v. ITO 2014 (9) TMI 143 - ITAT HYDERABAD - the employee's cost to total cost ratio is worked out at 2% as compared to the industry average of 30 to 40% - The assessee's employee's cost to total cost ratio is worked out at 47% - Since the employee's cost form major cost base in ITES service industries, the low ratio of comparables implies that it would not be providing services by employing its own sources - the assessee is not alike to M/s. Vishal Information Technologies Ltd. - M/s. Vishal Information Technologies Ltd., cannot be considered as comparables and it is to be excluded from comparables - Decided in favour of Assesse. Adjustment for the difference in rate of depreciation charged not granted - Profit before Depreciation and Tax to total cost as Profit Level Indicator not considered Held that - Assessee rightly contended that the TPO did not consider the fact that the margin of the Assessee Company falls within the 5% range of the arithmetic mean of the comparables relying upon Market Tools Research Pvt. Ltd. Versus Asst. Commissioner of Income-tax 2013 (12) TMI 414 - ITAT HYDERABAD - the rates of depreciation adopted by the assessee are significantly different from straight line as compared with WTP, higher rate than that prescribed in schedule VI those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered - the depreciation has impact on the profit margin of the assessee - depreciation adjustment is to be made - the AO is directed to use the PLI as PBDIT Decided in favour of Assessee.
Issues Involved:
1. Determination of arm's length price (ALP) 2. Selection of comparable companies 3. Use of non-contemporaneous data 4. Non-allowance of appropriate adjustments to comparable companies 5. Variation of 5% from the arithmetic mean Detailed Analysis: 1. Determination of Arm's Length Price (ALP): The primary issue raised by the assessee was the addition of Rs. 3,21,54,200 under section 92CA of the Income Tax Act, 1961, to the Information Technology Enabled Services (ITES) rendered to its Associated Enterprises (AEs). The assessee argued that the CIT(A) erred in confirming this addition without considering the objections filed. The Tribunal directed the Assessing Officer (AO) to re-calculate the ALP, considering that companies with extraordinarily high profit or loss should be excluded as comparables. 2. Selection of Comparable Companies: The assessee contended that the Transfer Pricing Officer (TPO) and CIT(A) erred in rejecting loss-making companies and selecting high profit margin companies, which led to an inconsistent approach. The Tribunal agreed with the assessee, citing precedents such as Dy. CIT v. Quark Systems (P.) Ltd. and Teva India (P.) Ltd. v. Dy. CIT, which held that a comparable could not be excluded solely on the ground of losses. The Tribunal directed the AO to exclude companies with extraordinarily high profits or losses from the list of comparables. 3. Use of Non-Contemporaneous Data: The assessee argued that the TPO used non-contemporaneous data for benchmarking analysis, which was not in accordance with Rule 10B(4) of the Income Tax Rules. However, this ground was not pressed by the assessee during the hearing and was subsequently dismissed. 4. Non-Allowance of Appropriate Adjustments to Comparable Companies: The assessee claimed that the TPO and CIT(A) failed to allow adjustments for differences in business functions and risks assumed by the assessee vis-`a-vis comparables. Specifically, the assessee argued that Vishal Information Technologies Limited should be excluded as a comparable due to its significantly lower salary cost percentage, indicating a different functional profile. The Tribunal agreed, directing the AO to exclude Vishal Information Technologies from the list of comparables. 5. Variation of 5% from the Arithmetic Mean: The assessee argued that the TPO denied the benefit of a 5% variation from the arithmetic mean as provided in the proviso to Section 92C(2) of the Act. However, this ground was not pressed by the assessee during the hearing and was subsequently dismissed. Separate Judgments Delivered: There was no mention of separate judgments delivered by the judges in this case. Conclusion: The Tribunal partly allowed the appeal, directing the AO to re-calculate the ALP by excluding companies with extraordinarily high profits or losses and by considering appropriate adjustments for differences in business functions and risks. The Tribunal also directed the AO to use the Profit Before Depreciation and Tax (PBDIT) as the Profit Level Indicator (PLI) for determining the ALP.
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