2015 (11) TMI 1628 - HC - Income Tax

Challenged comparables in transfer pricing analysis upheld and questioned by Court. Functional similarity and correct benchmarking emphasized.

The Commissioner of Income Tax8 Versus Petro Araldite Pvt. Ltd.

The appeal challenges the Tribunal's rejection of certain comparables for transfer pricing analysis. The Court upholds the rejection of one comparable due ... Transfer pricing adjustment - selection of comparable - Held that:- The appeal is admitted on question nos. (i) and (ii). (i) Whether on the facts and in law, the Tribunal was justified in rejecting MIL as a comparable on the ground that the Annual Report of MIL did not provide segmental information without appreciating that under TNMM, broad functional similarity is required to be seen more so as the assessee itself had not furnished audited segmental accounts? (ii) Whether on the facts and in law, the Tribunal was justified in rejecting M/s. Pidilite Industries Ltd.(PIL) as a comparable on the ground of there being a merger and demerger during the year without appreciating that merger and acquisition is a normal business practice which does not affect FAR analysis and hence not relevant as PIL is a proper comparable being functionally similar to the assessee company? Issues:1. Rejection of MIL as a comparable for lack of segmental information under TNMM.2. Rejection of PIL as a comparable due to merger and demerger.3. Direction to benchmark only the AE transactions based on entity level PLI.Analysis:1. The first issue raised in the appeal challenges the Tribunal's rejection of MIL as a comparable due to the absence of segmental information in its Annual Report. The Revenue argues that under TNMM, broad functional similarity is crucial, especially since the assessee did not provide audited segmental accounts. The Tribunal's decision is being contested on the grounds of misunderstanding the requirements of TNMM and the significance of functional similarity.2. The second issue questions the Tribunal's decision to reject PIL as a comparable because of a merger and demerger during the relevant year. The Revenue contends that such corporate actions are common business practices that do not impact FAR analysis. PIL is considered functionally similar to the assessee company, making it a suitable comparable despite the restructuring events. The dispute centers on the Tribunal's failure to appreciate the functional similarity and relevance of PIL as a comparable entity.3. The third issue pertains to the Tribunal's direction to benchmark only the AE transactions based on entity level PLI, disregarding the assessee's choice of PLI in the transfer pricing study report. The Revenue argues that the TPO correctly applied a revised PLI at the entity level due to the assessee's failure to provide audited segmental accounts. However, both parties agree that the issue is settled against the Revenue by a previous court decision, rendering it non-justiciable. Consequently, the issue is not entertained, and the appeal is admitted only on the first two questions for further consideration.In conclusion, the judgment addresses the challenges raised by the Revenue against the Tribunal's decisions regarding the comparability of entities for transfer pricing analysis. While some issues are set aside based on precedent, others are admitted for detailed examination, emphasizing the importance of functional similarity and proper benchmarking methodologies in transfer pricing assessments.