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TMI Blog2016 (6) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of these two figures, there emerges figure of 45%. If we go ahead with the correct ratio of the assessee’s Personnel cost to total cost at 45%, even the filter applied by the TPO between 48% to 53.5% becomes erroneous because that was based on the TPO’s calculation of the assessee’s ratio of Personnel expenses to total expenses at 52.11%, which itself is wanting. Under the given circumstances, we are of the considered opinion that the impugned order treating these two companies as comparable cannot be upheld on the assigned reasoning and, at the same time, the action of the TPO in excluding these two companies on the basis of incorrect calculation of the assessee’s percentage of Personnel cost to Total expenses and the consequential wrong filter also cannot be countenanced. In our considered opinion, the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the AO/TPO for a fresh determination of the comparability or otherwise of CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd. - ITA No.1382/Del/2012 - - - Dated:- 16-5-2016 - SHRI R. S. SYAL, AM AND SHRI KULDIP SINGH, JM For the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 companies with the current year data alone. Average OP/TC of these three companies was worked out at 27.31%. By applying this profit rate of 27.31% as benchmark on the assessee s total costs, the TPO proposed transfer pricing adjustment amounting to ₹ 2,86,92,601/-. The AO made the above addition and computed total income of the assessee at ₹ 2.87 crore. The assessee challenged the assessment order before the ld. CIT(A), who deleted the transfer pricing addition by excluding Airline Financial Support Services (I) Ltd. from the final list of three comparables drawn by the TPO and treating two more companies as comparable, namely, CS Software Enterprises Ltd. and Spanco Telesystems and Solutions Ltd. The Revenue is aggrieved against the above alterations made by the ld. CIT(A) in the list of comparables leading to the deletion of addition. 4. We have heard the rival submissions and perused the relevant material on record. The only grievance of the Revenue is against the exclusion of Airlines Financial Support Services (I) Ltd. from the final set of comparables drawn by the TPO and including two companies in the list, namely, CS Software Enterprises Ltd. and Spanco T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstanding of the functional profile of the assessee, we now espouse the three companies as discussed supra for considering their comparability or otherwise. (i) Airline Financial Support Services (I) Ltd. 6.1. Since this company was chosen by the assessee itself as a comparable, there was no occasion for the TPO to discuss the functional profile of this company because it was added by him in the list of comparables, whose nature of work was admitted by the assessee itself as comparable. However, the assessee assailed the inclusion of this company in the set of comparables before the ld. CIT(A) by arguing that its related party transactions were 37.38% of its sales. The ld. CIT(A) concurred with the submissions advanced on behalf of the assessee and ordered for the elimination of this company from the list of comparables. The Revenue is aggrieved against the exclusion of this company. 6.2. We have heard the rival submissions and perused the relevant material on record. We are disinclined to sustain the preliminary objection taken by the ld. DR that the assessee should have restrained from challenging the inclusion of this company in the list of comparables before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transaction undertaken by an enterprise. In a case where a company has entered into controlled as well as uncontrolled transactions, we apply RPT filter for considering whether on totality, such a company should be considered as comparable or not. When 25% RPT filter is applied, it means that if the related party transactions of such company are more than 25%, then, it should be considered as a controlled transaction and the company should be excluded from the list of comparables. If, however, the related party transactions are less than 25%, then, notwithstanding the fact that there are certain related party transactions, but, on the overall scenario, such a company can be considered as comparable. 6.4. Adverting to the facts of this company, we find that the ld. CIT(A) has excluded it by finding the ratio of its RPTs at more than 37%. The predominant view of the Tribunal across the country laid down in several cases is that the transactions of a company having more than 25% Related Party Transactions is considered as controlled, thereby failing the test of comparability. This view has been taken in several decisions including by the Delhi Bench in Toluna India Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in subsequent year. This fact, in our considered opinion, is not decisive in deciding the comparability for the year under consideration. There can be change in the functional profile of a company from one year to another. What is always relevant is to see comparability for the year under consideration and not earlier or later years. The impugned order is conspicuously silent on this aspect of the matter. Apart from devoting only one line in para 5.3 to the effect that: these two companies are in the similar line of business and qualifying the filters employed by the TPO and the assessee , there is no discussion whatsoever about the nature of business carried out by these two companies and how it is similar with that of the assessee. 7.3. At the same time, we note that the TPO has noted on page 14 of his order that the ratio of the assessee s Personnel expenses to Total expenses is 52.11% and that appears to be the reason for his applying filter of 48% to 53.5%. On a careful perusal of the assessee s Profit Loss Account, which is available on page 176 of the paper book, it is vivid that the assessee incurred Personnel expenses to the tune of ₹ 10,97,53,391/- and Tot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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