2017 (1) TMI 1037 - HC - Income Tax

Transfer pricing adjustment - selection of comparable - SEL and VTI companies - Held that - Revenue has itself accepted SEL and VTI as comparables for the earlier assessment years. Therefore, if the Revenue were of the view that only because of the losses in the subject assessment year the two companies are not comparable, then further examination / enquiry ought to have been done by the Revenue to find out that whether the loss was a symptom of the reference points in Rule 10B(2) of the Rules making it noncomparable. This is more so as the Revenue before us does not dispute that otherwise the two companies are comparable to the respondent assessee even on the parameters laid down in Rule 10B(2) of the Rules. Therefore, if in the present facts, the Revenue seeks to discard the two companies SEL and VTI from the comparables for the subject assessment year, the onus would be upon the Revenue to justify the same. The issue with regard to the exclusion of the DEPB benefit stands concluded by virtue of order of this Court for earlier assessment years against the Revenue and in favour of the respondent assessee. So far as depreciation is concerned, we find that the analysis done by the Tribunal to include DEPB benefit to hold it to be an operating revenue to determine operating profit, would be equally applicable in case of depreciation for the purposes of holding it to be an operating expenses to determine operating costs. It must be borne in mind that the depreciation which is incurred by the comparables are not being excluded before arriving at the total cost while applying the TNMM method for the purposes of determining the ALP price of the respondent assessee s export to its Associated Enterprise. The comparison to determine the ALP has to the extent possible has to be done between like to like and similar to similar One sided exclusion would lead to distortion in comparison.

Summary

Issues:
1. Inclusion of certain companies in the list of comparables for transfer pricing analysis.
2. Treatment of DEPB benefit and depreciation in determining operating profit and total cost for transfer pricing analysis.

Issue 1: Inclusion of certain companies in the list of comparables:
The case involved a dispute regarding the inclusion of two companies, Santogen Exports Ltd. (SEL) and Vanasthali Textile Industries (VTI), in the list of comparables for transfer pricing analysis. The Tax Appellate Tribunal (Tribunal) had excluded these companies, leading to an enhanced income assessment for the respondent assessee. The Commissioner of Income Tax (Appeals) upheld the exclusion, citing the companies' loss-making status and lack of detailed analysis. However, the Tribunal reversed this decision, noting that the companies were accepted as comparables in the previous year and emphasizing the need for a comprehensive analysis before exclusion. The High Court agreed with the Tribunal, highlighting that the companies satisfied the FAR analysis and that a loss in one year does not automatically disqualify a company from comparability. The Court emphasized the exhaustive nature of Rule 10B(2) of the Income Tax Rules and the need for justification if excluding previously accepted comparables based solely on losses in the current year.

Issue 2: Treatment of DEPB benefit and depreciation:
The second issue revolved around the treatment of DEPB benefit and depreciation in determining operating profit and total cost for transfer pricing analysis. The Tribunal held that DEPB benefit should be included in operating profit and depreciation in total costs, aligning with the principle of comparing like with like. The Revenue challenged this decision, but the High Court noted that similar issues had been addressed in previous appeals where the Court ruled in favor of including DEPB benefit. The Court reasoned that excluding these elements would distort the comparison and emphasized the importance of consistency in treatment for accurate transfer pricing analysis. Therefore, the Court upheld the Tribunal's decision on including DEPB benefit and depreciation in the analysis, concluding that the issue did not raise any substantial question of law.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decisions on both issues related to the inclusion of companies in the list of comparables and the treatment of DEPB benefit and depreciation in transfer pricing analysis.