2015 (10) TMI 1077 - AT - Income Tax

Transfer pricing adjustment - upward adjustment of Arm s Length Price of the Internation Transaction - CIT(A) deleted the two comparables, namely, M/s Datamatics Technologies Ltd. and Infotech Enterprises Ltd. on the ground that these companies had substantial related party transactions - Held that - The law is fairly well settled to the extent that the companies having in related party transactions more than 15% cannot be considered as comparable. But in the present case, though the CIT(A) adopted the same parity of reasoning while deleting the two comparables chosen by TPO, he had not referred to any evidence on the record in support of the conclusion drawn that these comparables had related party transactions exceeding 15%, nor the Authorized Representative of the respondent assessee company could establish this fact conclusively before us. No relief can be granted based on mere reliance on the legal proposition without supporting evidence on record. Therefore, we are of the considered opinion that the interest of justice would be met, if the matter is restored to the file of the Assessing Officer for the verification of this issue, after affording reasonable opportunity of being heard to the assessee company. If it is found on verification that the ratio of related party transactions is more than 15%, these companies may be excluded as comparables. - Decided partly in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition on account of upward adjustment of Arm's Length Price (ALP) of the international transaction.
2. Selection of comparables for determining ALP.
3. Verification of related party transactions ratio for comparables.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Upward Adjustment of ALP:
The Revenue appealed against the order of the CIT(A) which deleted the addition of Rs. 53,23,591/- made by the Transfer Pricing Officer (TPO) based on the upward adjustment of the ALP of the international transaction. The TPO had computed the arm's length price by using a different set of comparables, leading to a higher adjustment. The CIT(A) deleted this adjustment, leading to the Revenue's appeal.

2. Selection of Comparables for Determining ALP:
The respondent assessee-company, engaged in providing IT-enabled services, had initially chosen 12 comparables with an average operating profit margin of 4.82%. The TPO, however, rejected these comparables and selected his own set, which included Datamatics Technologies Ltd. and Infotech Enterprises Ltd., resulting in an average OP/TC margin of 11.85%. The CIT(A) excluded these two companies from the TPO's comparables on the grounds of substantial related party transactions, reducing the average margin to 7.01%. This exclusion was based on the principle that companies with related party transactions exceeding 10-15% of total revenue should not be considered as comparables, as established in the case of Sony India (P.) Ltd. Vs. DCIT.

3. Verification of Related Party Transactions Ratio for Comparables:
The CIT(A)'s decision was challenged by the Revenue on the basis that there was no concrete evidence to prove that Datamatics Technologies Ltd. and Infotech Enterprises Ltd. had substantial related party transactions. The Tribunal noted that while the legal principle was correctly applied by the CIT(A), there was no evidence on record to support the claim that the related party transactions of these companies exceeded 15%. Consequently, the Tribunal directed that the matter be remitted back to the Assessing Officer for verification. The AO was instructed to exclude these companies as comparables only if it was verified that their related party transactions ratio exceeded 15%.

Conclusion:
The Tribunal partially allowed the Revenue's appeal for statistical purposes, remanding the case back to the Assessing Officer for verification of the related party transactions ratio of the disputed comparables. The decision emphasized the importance of concrete evidence in applying legal principles related to the selection of comparables in transfer pricing cases. The order was pronounced in the open court on 9th September, 2015.