Transfer Pricing: If TPO does not give cogent reasons to reject a comparable, it must be presumed to be comparable & DR cannot argue to the contrary
The assessee, a captive service provider rendering back office support services to its AEs, earned an adjusted Net Cost plus Margin of 7.90%. The assessee adopted TNMM and computed the mean of margins earned by the comparables at 7.62%. The TPO held that “No companies were identified as comparables” by the assessee and after selecting 12 companies as comparables, determined an arithmetic mean of 27.80% and made an adjustment of Rs. 10.49 crores. The CIT(A) deleted the addition. On appeal by the department, HELD dismissing the appeal:
(i) The TPO was wrong in stating that the assessee has not provided any comparables. The initial prerogative of choosing comparable cases is always that of the assessee because it is the best judge to know the exact services rendered by it and finding the comparable cases from the data base. If the TPO wants to exclude any of such comparables, he has to justify the exclusion by adducing cogent reasons and cannot act on whims and fancies. If the TPO fails to show expressly as to how the cases are not comparable, a presumption has to be drawn that those cases are comparable;
(ii) The department’s argument that even if the TPO had not given reasons to exclude the assessee’s comparables, the CIT(A) ought to have done so is not acceptable. Going by the presumption of acceptability of such cases, the appellate authority is under no duty to check whether the work was properly done by the AO/TPO to the prejudice of the assessee. The fact that the CIT (A) has the power to enhance does not mean that he has a duty to do so;
(iii) The Dept Representative, while arguing the appeal, cannot improve the order of the AO/TPO by contending that the TPO was wrong in accepting a particular claim of the assessee. While the DR has the duty to defend the order of the TPO, he cannot find flaws in the order of the TPO in an attempt to show that the TPO failed to do what was required to be done by him. If the DR is allowed to fill in the gaps left by the TPO it would amount to conferring the jurisdiction of the CIT u/s 263 to the DR. The DR cannot be allowed to take a stand contrary to the one taken by the TPO. Accordingly, the DR cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO failed to point out as to how such cases were distinguishable (Mahindra & Mahindra 122 TTJ (Mum) (SB) 577 followed, Quark Systems 38 SOT 307 (Chd) (SB) distinguished).