|B. Ramakotiah (AM), Saktijit Dey (JM)
|October 24, 2014 (Date of pronouncement)
|October 26, 2014 (Date of publication)
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|Transfer pricing principles on right of TPO to collect info u/s 133(6), exclusion of high profit comparables, adjustment for limited risk environment, exclusion of reimbursement costs for computing operation margins explained
(i) The TPO conducted search in the data bases for finding additional comparable by applying 25% employee cost filter. After examining the information obtained from the company u/s 133(6) of the Act the TPO treated it as comparable by observing that the company is engaged in IT enabled services and qualifies all the filters adopted by the TPO. It is very much clear from the order of the Assessing Officer that the assessee was not given any opportunity/ information to examine the comparability of the aforesaid company. Though the TPO is empowered under the provisions of the Act to obtain information with regard to selection of comparables, however before utilising the information obtained, he has to give fair opportunity to the assessee to have its say in the matter. The DRP has also over-looked this aspect.
(ii) Company showing extraordinarily high profit cannot be treated as comparable and have to be excluded as held in Avineon India P. Ltd Zavata India P. M/s. Capital IQ, M/s. HSBC Electronic Data Processing India P. Ltd., Information Systems India Pvt. Ltd and also Special Bench decision of the Mumbai Tribunal in Maersk Global Centres (India) P. Ltd., Mumbai vs. ACIT, Circle 6(3), Mumbai dated 07.03.2014.
(iii) The assessee is a captive provider functioning under a limited risk environment with most of the risks being assumed by its AEs and comparables selected for analysis include companies which have fairly diversified areas of specialisation, bearing risks akin to any third party independent service provider. Since assessee is operating in a risk mitigated environment vis-à-vis the comparable companies performing entrepreneurial risk taking functions, the assessee seeks adjustment for the risk being taken by the comparable, whose profit would be more dependent on the risk involved. Since the assessee does not bear any risk of incurring losses and since comparable companies work in the market environment, the margins earned by the comparable companies would be comparatively more to reflect the higher level of functions and risks.
(iv) Reimbursement transactions towards travel, air fare and site expenses relating to employees of AE travelling to India for business purposes. Even though these transactions are considered as international transactions for the purposes of TP, since there is no mark up on these reimbursements, these transactions are to be excluded for working out the operative costs/operative margins as held in DCIT V/s. Cheil Communications India P. Ltd. (2010 TII 60 ITAT DEL TP) and Four Soft Ltd. V/s. DCIT (ITA No.1495/Hyd/2010)(142 TTJ 358).