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2016 (5) TMI 402 - AT - Income TaxSelection of comparable - transfer pricing adjustment - whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the assessee in transfer pricing analysis? - Held that - Hon ble Bombay High Court in the case of CIT v. Pentair Water India Pvt. Ltd. 2016 (5) TMI 137 - BOMBAY HIGH COURT has taken the view that turnover is a relevant criteria for choosing companies as comparable companies in determination of arm s length price in transfer pricing cases. we uphold the order of the Dispute Resolution Panel excluding 6 companies from the list of comparable companies chosen by the Transfer Pricing Officer on the basis of turnover and size. Treatment on gain on account of foreign exchange fluctuation as part of the operating revenue for the purpose of working the profit margins - Held that - Foreign exchange fluctuation gains are required to be added to operating revenue. Following the same, the Assessing Officer is directed to accept the claim of the assessee in this regard. As far as the provision for bad debts are concerned, the Transfer Pricing Officer has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The assessee in reply to the query of the Transfer Pricing Officer on the above aspect has not furnished any details. We are of the view that the assessee should be afforded opportunity to explain its position on the above and the Assessing Officer is directed to consider the same in accordance with law. As far as fringe benefit tax (FBT) is concerned, the same was not considered by the Transfer Pricing Officer as part of operating cost in the case of comparables and therefore the same should also not be considered as part of operating cost of the asses see. We hold, accordingly, and direct the Assessing Officer to compute the operating cost of the assessee Computation of arithmetic mean - Held that - We find that the detailed submissions as made by the assessee before the Dispute Resolution Panel and before us, were not made before the Transfer Pricing Officer. It was the stand of the assessee that the Transfer Pricing Officer did not confront the assessee with the various queries that were raised in his order and, therefore, the answers to those queries were provided before the Dispute Resolution Panel. The Dispute Resolution Panel has not considered those submissions. We are of the view that there has been a complete failure on the part of the Dispute Resolution Panel to have considered these submission made by the assessee before it. We are also of the view that the Transfer Pricing Officer should also have the benefit of going into the submissions made by the assessee before us, as there was lack of opportunity of being heard afforded to the assessee both by the Transfer Pricing Officer and the Dispute Resolution Panel. We, therefore, deem it fit and proper to remand this issue to the Transfer Pricing Officer/Assessing Officer for fresh consideration in the light of the submissions made before us. The Transfer Pricing Officer/Assessing Officer will decide the issue in accordance with law after giving the assessee opportunity of being heard. The Transfer Pricing Officer/Assessing Officer is directed to compute the arithmetic mean of the remaining comparable companies and allow adjustment of plus or minus 5 per cent. of the net margin as contemplated by the provisions of section 92C of the Act, if the assessee is entitled to such adjustment as a result of exclusion of the comparable companies. The Transfer Pricing Officer/Assessing Officer will also rework the operating cost while determining the arm s length price after considering the submissions of the assessee. Benefit of set off of brought forward losses and unabsorbed depreciation allowances against the transfer pricing adjustment while computing total income of the assessee - Held that - We find that the Dispute Resolution Panel has directed the Assessing Officer to allow set off as permissible in law. We are of the view that the above direction will be sufficient as the Assessing Officer is bound to give the benefit of set off, if the other requirements of law are satisfied. We, accordingly, direct the Assessing Officer to give effect to the directions of the Dispute Resolution Panel.
Issues Involved:
1. Addition to total income due to determination of arm's length price (ALP) for international transactions. 2. Treatment of reimbursement of expenses as an international transaction. 3. Selection of comparable companies for transfer pricing analysis. 4. Application of turnover filter in selecting comparable companies. 5. Inclusion of foreign exchange gain/loss in operating revenue. 6. Granting of risk adjustment. 7. Segmentation of business activities for transfer pricing purposes. 8. Set off of brought forward losses and unabsorbed depreciation against transfer pricing adjustment. Detailed Analysis: 1. Addition to Total Income Due to Determination of ALP for International Transactions: The primary issue was the addition made to the total income of the assessee consequent to the determination of the arm's length price (ALP) for international transactions with its associated enterprises (AE). The Transfer Pricing Officer (TPO) had initially made an adjustment of Rs. 27,88,16,211, which was later reduced to Rs. 26,58,66,665 by the Dispute Resolution Panel (DRP). The assessee contested the remaining adjustment, while the Revenue challenged the reliefs granted by the DRP. 2. Treatment of Reimbursement of Expenses as an International Transaction: The TPO treated the payment of Rs. 3,88,63,270 as an international transaction. This amount was claimed by the assessee as reimbursement of expenses incurred by the AE on behalf of the assessee in relation to its mobile payment platform segment. The TPO aggregated this reimbursement with the software development segment expenses, leading to a higher operating cost and, consequently, a higher ALP adjustment. 3. Selection of Comparable Companies for Transfer Pricing Analysis: The assessee had chosen 14 comparable companies, while the TPO accepted only two and proposed nine additional companies. The DRP directed the exclusion of six companies with turnovers exceeding Rs. 200 crores, resulting in a final list of six comparable companies. The Tribunal upheld the exclusion of these companies based on the turnover filter. 4. Application of Turnover Filter in Selecting Comparable Companies: The Tribunal reiterated that turnover is a crucial factor in selecting comparable companies, following previous decisions such as Trilogy E-Business Software India P. Ltd. v. Deputy CIT. Companies with turnovers significantly higher than the assessee's were excluded to ensure comparability. 5. Inclusion of Foreign Exchange Gain/Loss in Operating Revenue: The Tribunal upheld the DRP's direction to include foreign exchange gain/loss as part of the operating revenue, citing the decision in Trilogy E-Business Software India P. Ltd. This inclusion was deemed appropriate for determining the profit margins. 6. Granting of Risk Adjustment: The DRP directed the TPO to grant risk adjustment, providing guidelines for its calculation. The Tribunal found these directions sufficient and emphasized that the TPO/Assessing Officer should consider any additional relevant circumstances presented by the assessee. 7. Segmentation of Business Activities for Transfer Pricing Purposes: The assessee argued that its mobile payment platform segment, which dealt with non-AE transactions, should not be aggregated with the software development segment for ALP determination. The Tribunal noted that the TPO had not provided the assessee an opportunity to explain the segmentation and remanded the issue for fresh consideration, emphasizing the need for a fair hearing. 8. Set Off of Brought Forward Losses and Unabsorbed Depreciation Against Transfer Pricing Adjustment: The Tribunal directed the Assessing Officer to allow the set off of brought forward losses and unabsorbed depreciation allowances against the transfer pricing adjustment, as per the DRP's directions, if the legal requirements were met. Conclusion: The Tribunal partially allowed the assessee's appeal, remanding certain issues for fresh consideration by the TPO/Assessing Officer, and dismissed the Revenue's appeal. The decision emphasized the importance of fair hearing, appropriate segmentation of business activities, and adherence to established principles in transfer pricing analysis.
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