2015 (7) TMI 438 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - When both parties agree that the company M/s LAN ESADA Industries Ltd. is a comparable, then the correct financial data of that company as reflected by its annual report, which were not available before the TPO, has been rightly considered by the ld. CIT(A). We also do not find any merit in the submission of the ld. DR that pro rata data should not be taken. Comparables M/s Kushagra Software Limited to be excluded - Decided in favour of assesse. Bad debts - whether are extraordinary items and cannot be considered as operational cost and hence, they should have been removed before arriving at operational margins? - Held that - While arriving at operational profit ratio, extraordinary items should be eliminated. Bad debts or provision for bad debts are extraordinary items and have to be eliminated for arriving at the operational profit. - Decided in favour of assesse.

Summary

Issues:
1. Appeal by Revenue against CIT (Appeals) order on reduction of addition on account of Arms Length Price in international transaction.
2. Cross-objection by assessee on various grounds related to comparability analysis, financial data, and adjustments.

Analysis:
1. The appeal by the Revenue challenged the CIT (Appeals) order to reduce the addition on account of Arms Length Price in an international transaction. The Revenue contended that the CIT (Appeals) erred in law by not providing an opportunity to the Transfer Pricing Officer (TPO) before admitting evidence and by considering non-operating expenditure in calculating the margin of a comparable company. However, the Tribunal dismissed the appeal, stating that the correct financial data of the comparable company, as per its annual report, was rightly considered by the CIT (Appeals), and pro rata data was acceptable for benchmarking purposes.

2. The cross-objection by the assessee raised multiple grounds related to the comparability analysis. The Tribunal allowed one ground where fresh comparables with current year data were not considered by the CIT (Appeals) and remanded the issue back to the Assessing Officer (AO) for fresh adjudication. Another ground regarding the exclusion of a comparable company was allowed based on a binding judgment. The Tribunal also allowed the exclusion of bad debts from operational costs for calculating operational profit ratio. Grounds not pressed by the assessee were dismissed, and the appeal of the Revenue was ultimately dismissed while the cross-objection of the assessee was allowed in part.

This detailed analysis covers the issues raised in the appeal and cross-objection, outlining the arguments presented by both parties and the Tribunal's decisions on each point, ensuring a comprehensive understanding of the judgment.