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TMI Blog2014 (12) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... d professional fees, rent and other operating expenses, then for the purpose of computation of PLI, these costs have to be taken into consideration for determining the profit margin. Since all the main costs attributable to the PE are based on cost incurred in UK, then it can be very well said that PE is influenced by the economic and financial conditions of UK, as against the Indian economic factors - The Indian economic factors are not at all influencing the cost or margin of the assessee, hence it cannot be held that Indian comparables can be used to bench mark the TMETC transaction and the price with Tata Motors - the finding of the TPO as well as DRP that PE is an Indian enterprise, working in India and therefore, its margin is to be bench marked with Indian comparables is not accepted - The PE in India is a service PE, having no establishment in India, nor incurring any costs, deployed any assets, therefore, cannot be held that it is an independent Indian enterprise - nothing has been brought on record that assessee’s PLI is influenced by the economic factors in India, viz, attribution of costs, assets or other factors relevant for determination of profits are based in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case of the appellant. C) The TPO/ AO has erred in law and on facts in disregarding that in the previous assessment year, department has accepted and considered UK companies as comparables for the purpose of benchmarking of international transactions and hence the AO/ TPO should have followed the same as there is no change in the facts of the case. 2. Without prejudice to Ground No. 1 above,: A) The TPO/ AO has erred in law and on facts in cherry picking 7 Indian companies as comparables which are functionally not comparable with the appellant. B) The TPO/ AO has erred in law and on facts in picking up companies with high margin instead of following detailed, systematic and methodical search process. C) The learned TPO/ AO has erred in law and on facts in non granting Opportunity of cross examining the comparables selected by the TPO/ AO. 3. The learned TPO / AO has erred in law and on facts in not granting credit of TDS of ₹ 11,79,35,990/- out of total TDS credit of ₹ 12.06.64,360. 4. The learned TPO / AO has erred in law and on facts in levying interest under section 23413 of the Act of ₹ 1,77,76,885. The learned TPO / AO has erred in law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate method and PLI as OP/TC, the assessee selected four overseas comparables located in UK to benchmark the Arm Length Price of the transactions with the AE i.e TML, which were as under : S.No. Name of the comparables 2007 % 2006 % 2005% 3 year weighted Avg.(%) 1 Dytcna limited 4.17 6.74 4.86 5.26 2 Ricardo PLC 8.34 10.11 6.90 8.47 3 Online Design and engineering Ltd. 6.98 5.85 5.47 6.22 4 Acteon group Ltd 21.87 19.63 10.60 18.31 Average 10.34 10.59 6.96 9.57 Assessee's profit margin 9.28% Since, for the year 2007 the average profit margin of the comparables was arrived at 10.34%; therefore, the assessee's profit margin being at 9.28%, was stated to be at Arm's Length range. 4. The Transfer Pricing Officer (TPO) though accepted the TNMM method and the PLI employed by the assessee for determining the ALP of its international transactions, however, completely disagreed with the selection of foreign comparables based in UK, as he held that it is not tenable under the Indian Transfer Pricing Rules and provisions. His other reasoning was that, that since the PE of the assessee is located in India and carrying out its business within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as distinct and separate enterprise of the foreign company and therefore, the TPO has rightly selected Indian companies as comparables. For other objections also, the DRP rejected the assessee's contention and upheld the order of the TPO. 6. Before us, ld. counsel Shri Rajan Vora, submitted that the assessee being UK based company having its principal business in UK from where it manages the services provided to TML motors and all its employees are UK nationals having technical knowledge of automotive industries and economic environment of European Countries and therefore, based on the nature of business and geographical factors, the comparability analysis can be done only through selection of UK comparables engaged in the similar activities, for the proper determination of ALP. The TMETC-PE is not influenced by the Indian economic/financial environment and there are no Indian employees. All the costs considered for attribution of PLI are incurred by TMETC in UK only. Even under the Indian Transfer Pricing Regulations, comparability analysis based on FAR is the most crucial part for bench marking the Arm's Length Price, which is mainly based on selection of comparables having s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected TMETC as the tested party, since all its operating cost are incurred in UK, having employees based in UK, therefore, it has selected comparable companies from UK having similar kind of functions and rendering similar services. It has selected four UK based comparables having average arithmetic mean of 10.3% for the year 2007, and therefore, it was stated that its margin of 9.8% (OP/TC) is at arm's length range. 9. The sole issue before us is, whether the assessee was justified in carrying out comparative analysis on the basis of UK based comparables, rather than by selecting Indian comparables. The TPO's main objection is that, since the Indian PE is performing its function in India and rendering services to Indian company, therefore, margins for the Indian operation has to be bench marked with the Indian comparables. Indian Transfer Pricing Regulations specifically Rule 10B of the Income Tax Rules, 1962 does not specify that the comparability analysis of international transactions has to be strictly with the Indian companies but, it only lays down that comparability with uncontrolled transactions has to be chosen with reference to : (2) For the purposes of sub-rule (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the comparability factors. The relevant paragraph of the OECD guidelines reads as under : "A.4.3.2 Foreign source or non domestic comparables 3.5 Taxpayers do not always perform searches for comparables on a country-by-country basis, e.g. in cases where there are insufficient data available at the domestic level and/or in order to reduce compliance costs where several entities of an MNE group have comparable functional analyses. Non-domestic comparables should not be automatically rejected just because they are not domestic. A determination of whether non- domestic comparables are reliable has to be made on a case-by-case basis and by reference to the extent to which they satisfy the five comparability factors. Whether or not one regional search for comparables can be reliably used for several subsidiaries of an MNE group operating in a given region of the world depends on the particular circumstances in which each of those subsidiaries operates. See paragraphs 1.57-1.58 on market differences and multi-country analyses. Difficulties may also arise from differing accounting standards" 10. If the tested party has been selected consistent with the functional analysis of the contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpliance. The preliminary onus of proving the arm's length price of the transaction lies with the taxpayer, The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprises is the less or least complex entity and requisite information is available about the tested party and comparables." Thus, the Indian Transfer Pricing does not reject the concept of foreign comparables, if the tested party is foreign AE. The blanket assumption by the TPO and DRP that foreign comparables cannot be accepted at all, is not correct. Similarly, US TP Regulations for the purpose of Bench marking under comparable method has laid down the following criterion for selection of tested party: "(2) Tested party -(i) In general. For purposes of this section, the tested party will be the participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and requiring the fewest and most reliable adjustments, and for which reliable data regarding uncontrolled comparables can be located. Consequently, in most cases the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic factors are not at all influencing the cost or margin of the assessee, hence it cannot be held that Indian comparables can be used to bench mark the TMETC transaction and the price with Tata Motors. For this reason, the finding of the TPO as well as DRP that PE is an Indian enterprise, working in India and therefore, its margin is to be bench marked with Indian comparables is not accepted. The PE in India is a service PE, having no establishment in India, nor incurring any costs, deployed any assets, therefore, cannot be held that it is an independent Indian enterprise. Nothing has been brought on record that assessee's PLI is influenced by the economic factors in India, viz, attribution of costs, assets or other factors relevant for determination of profits are based in India. Thus, in our opinion, the Transfer Pricing Officer and DRP were not correct in holding that UK comparables cannot be taken into consideration for the purposes of comparative analysis and bench marking the assessee's margin. Accordingly, we hold that under the facts and circumstances of the case, the foreign comparables i.e. UK comparables can be taken into account for carrying out FAR analysis and bench m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in not considering the correct operating margin of the appellant i.e. 27.61% (i.e. OP/OC), while computing the arms-length price of appellants international transactions and instead of considering 9.28% as operating margin of the appellant" 20. In the assessment year 2009-10 also the assessee has raised exactly similar ground. However, In view of the decision given in respect of ground No.1, the additional grounds have become purely academic and the same is dismissed as infructuous. ITA No.1698/Mum/2014 (AY-2009-10) 22. The sole issue raised in this appeal by the appellant is that the AO has erred in making addition on account of transfer pricing adjustment of ₹ 5,38,24,761/- by selecting the Indian companies as comparables, instead of foreign companies for benchmarking the international transaction of provision of services, with the AE . 23. Since the issue raised is similar to ground raised in the appeal of assessee for the assessment year 2008-09 vide ground No.1, on similar set of facts, therefore, finding given therein will apply mutatis mutandis to this ground also in this year. Therefore, ground raised by the assessee is treated as partly allowed for sta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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