|DATE:||(Date of pronouncement)|
|DATE:||June 20, 2011 (Date of publication)|
|Click here to download the judgement (exxon_transfer_pricing.pdf)|
Transfer Pricing: Loss/High-Profit cos need not per se be excluded
The Tribunal had to consider the following transfer pricing issues: (i) Whether if two distinct services are rendered to the AE and mark-up is received for one and not for the other, the aggregate position can be considered for determining ALP, (ii) whether multi-year data can be considered, (iii) whether if loss making comparables are rejected, high profit making comparables should also be rejected? HELD by the Tribunal:
(i) The assessee rendered three services to its AE and while it received a mark-up for “application of technical development services” and “promoting the licensing of technology”, it did not receive any mark-up for “application research”. The argument that the three activities should be aggregated to determine the ALP is not acceptable because the entire benefit of the “application research” was retained by the AE and not shared with the assessee and so there was no justification for not compensating the assessee;
(ii) Under Rule-10B(4), only the data relating to the financial year can be taken and as an exception, the data of two years prior to the financial year may be taken but only if such data reveals facts which could have influenced the determination of transfer pricing. If the assessee wants to consider previous year’s data, the burden is on it to demonstrate that the previous year’s data contained certain facts which would influence the determination of transfer pricing. In the absence of that, there is no scope for considering data other than that of the current year;
(iii) While in principle, it is correct that if loss making units are excluded, abnormal profit making units should also be excluded, on facts, the TPO had rightly rejected the loss making companies as not being comparable. In principle, neither loss making units nor high profit making units can be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits.