Yum! Restaurants (India) Pvt Ltd vs. ACIT (ITAT Delhi)

Transfer Pricing: Despite FAR matching, Loss Co to be excluded

The assessee was engaged in providing franchise support services to Pizza Hut, Kentucky Fried Chicken and Taco Bell franchisees and received royalty. From the list of comparables provided by the assessee (after excluding persistent loss-making companies), the TPO rejected some other loss-making companies & determined the ALP applying the TNMM and made an adjustment of Rs. 2.28 crores. This was upheld by the DRP. Before the Tribunal, the assessee relied on Sony India 114 ITD 448 (Del) & Quark System 38 SOT 307 (SB) and claimed that loss was a normal incident of business and merely because a company is showing loss, it does not cease to be a comparable. HELD dismissing the appeal:

Merely because a company is showing losses, it does not lose its status of comparable if the other criteria depict its status as a comparable because the declaration of loss is an incident of business which is at par with profit. However, while the assessee considered these companies on the basis of their FAR Analysis i.e. (function performed, assets employed and risk assumed), the TPO held that FAR of a company indicated the avowed objective of the company and the tools that it sought to employ to achieve that objective but it was the financial result which decided whether that company has been successfully in achieving the objective or not. The TPO held that if the assessee’s contention based on FAR analysis only is accepted then the process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Further, while the assessee itself applied a filter of persistent operative losses and companies on that basis, what was the basis for inclusion of the loss making companies? The loss making companies had not been excluded simplicitor on the ground that they are declaring loss but the TPO had pointed out that their comparablity has been taken into consideration by the assessee on the basis of FAR analysis and “other aspects” have not been considered. TPO had looked into “other aspects” also