Genisys Integrating Systems vs. DCIT (ITAT Bangalore)

Transfer Pricing: Important Principles on scope, data & comparability set out

In a transfer pricing matter, the Tribunal had to consider the following issues (i) whether transfer pricing adjustments have to be restricted to AE transactions only, (ii) whether a turnover filter can be applied and only companies with turnover within the range can be considered for comparison; (iii) whether the TPO is entitled to collect information u/s 133(6) for determining the ALP or he is confined to data available in public domain on the specified date, (iv) Whether the +/-5% adjustment is a “standard deduction”, (v) whether an adjustment to the ALP can be made for “low capacity utilization”? HELD by the Tribunal:

(i) Under Chapter X, only international transactions between AEs are required to be computed having regard to the ALP. Accordingly, the transfer pricing adjustments have to be restricted to the AE transactions by adopting the operating revenue and operating costs of only those transactions (Starlite 133 TTJ 425 (Mum) followed);

(ii) Though the Act & Rules does not provide for a turnover filter, there has to be an upper and lower limit because size does matter in business. A big company is in a position to bargain the price and attract more customers. It also has a broad base of skilled employees who are able to give better output. A small company may not have these benefits and the turnover would come down reducing profit margin. When are loss making companies are excluded from comparables, super-profit making companies should also be excluded. A reasonable classification of companies on the basis of net sales or turnover has to be made (Sony India 114 ITD 448 (Del), Indo American Jewellery 41 SOT 1 (Mum) & Philips Software 26 SOT 226 followed);

(iii) While Rule 10D(4) requires that the information should be “contemporaneous” and exist latest by the “specified date”, there is no “cut-off date” upto which only the information available in public domain can be considered by the TPO. Even data that becomes available in the public domain after the specified date can be considered. If the TPO collects information u/s 133(6), he is not required to inform the assessee about the process used by him nor is he required to furnish the entire information to the assessee. However, the assessee must be given proper hearing if any information is proposed to be used against it;

(iv) The +/-5% adjustment is a “standard deduction” and not merely the range within which if the ALP falls that the ALP of the assessee is required to be accepted (Philips Software 26 SOT 226, Development Consultants 23 SOT 455 followed)

(v) All comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure.