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2018 (3) TMI 1565 - AT - Income TaxDetermination of arm s length price under section 92C - comparability analysis - Held that - Once there is functional comparability keeping into consideration the assets employed and risks, then exclusion of some companies whose functions are broadly similar on the ground that it was loss making, cannot be sustained. We are therefore of the view that the two companies excluded by the TPO from the list of comparable companies on the ground that they were making loss that too at the net level, cannot be sustained. CIT(A) in our view erred in confirming the action of the TPO. The special bench ITAT Chandigarh in the quark systems (P) Ltd. 2009 (10) TMI 591 - ITAT, CHANDIGARH has taken a view that merely because a comparable is making loss, it cannot be excluded from the list of comparable companies for the purpose of computation of arm s length price. The other decision cited by the Assessee before the CIT(A) also supports the same view. We direct the TPO to include the aforesaid two loss making companies also in the list of final comparable companies. If the two companies are included then the price of the disputed international transaction carried out by the Assessee is within the ( ) (-) 5% range difference permitted by the 2nd proviso to Sec.92CA(2) of the Act. Therefore addition on account of adjustment to ALP should be deleted.
Issues Involved:
1. Limitation of the assessment order. 2. Addition to international transactions. 3. Exclusion of loss-making companies from comparables. 4. Functional similarity of comparables. 5. Segmented financials and allocation basis. Issue-wise Detailed Analysis: 1. Limitation of the Assessment Order: The Assessee argued that the assessment order dated 29th December 2006, served on 17th January 2007, was barred by limitation and thus invalid. However, this ground was not pressed during the appeal, and hence no further adjudication was required on this issue. 2. Addition to International Transactions: The Assessee contested the addition of ?42,21,952/- to the international transactions with its Associated Enterprises (AEs). The Assessee, a subsidiary engaged in selling spare parts and refurbishing jobs for coal mining companies, had adopted the Cost Plus Method (CPM) to determine the Arm's Length Price (ALP) of its international transactions. The Transfer Pricing Officer (TPO) accepted the CPM but adjusted the ALP by excluding two comparable companies, leading to a proposed transfer pricing adjustment of ?50,63,987/-. The Tribunal directed the TPO to include the excluded companies, resulting in the Assessee's transactions being within the permissible range, thus deleting the addition. 3. Exclusion of Loss-Making Companies from Comparables: The TPO excluded two loss-making companies, Dee Greaves Ltd. and Ricoh India Ltd., from the comparables, which was upheld by the CIT(A). The Assessee argued that loss-making companies should not be excluded if they are otherwise comparable based on function, assets employed, and risks assumed. The Tribunal agreed with the Assessee, citing the Special Bench ITAT decision in Quark Systems Pvt. Ltd., which held that companies cannot be excluded solely because they incurred losses. The Tribunal directed the inclusion of the two companies, as their exclusion was not justified merely on the ground of being loss-making at the net level. 4. Functional Similarity of Comparables: The Assessee argued that the TPO and CIT(A) failed to explore the functional similarity of the comparables with the Assessee. The Tribunal noted that the TPO had accepted the functional comparability of the excluded companies based on functions, assets employed, and risks assumed. The Tribunal emphasized that the exclusion of companies should be based on functional comparability, and merely being loss-making should not be a criterion for exclusion. 5. Segmented Financials and Allocation Basis: The Assessee contended that the CIT(A) did not consider the correct segmented financials and a fair basis of allocation submitted during the appellate proceedings. This ground was presented as an alternative plea and did not require adjudication since the main grounds regarding ALP adjustment were allowed. Conclusion: The Tribunal allowed the appeal partly, directing the inclusion of the two loss-making companies in the list of comparables, which brought the Assessee's transactions within the permissible range, leading to the deletion of the addition on account of ALP adjustment. The other grounds were either not pressed or did not require adjudication.
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