2016 (3) TMI 1258 - AT - Income Tax

Appeal partially allowed, excludes Accentia Technologies Ltd from comparables list in transfer pricing dispute

The Tribunal partly allowed the appeal, directing the exclusion of Accentia Technologies Ltd. from the list of comparables in a transfer pricing dispute. ... Comparability of comparable companies - transactional net margin method (TNMM) - exclusion of comparables due to amalgamation/acquisition as an extraordinary event - arithmetic mean in comparable set for arm's length determination - sufficiency of comparable sample size for transfer pricing studyComparability of comparable companies - exclusion of comparables due to amalgamation/acquisition as an extraordinary event - transactional net margin method (TNMM) - arithmetic mean in comparable set for arm's length determination - sufficiency of comparable sample size for transfer pricing study - Accentia Technologies Ltd. is not a suitable comparable for the assessee's ITES transactions for AY 2010-11 and must be excluded from the comparable set; exclusion does not render the remaining sample too small for TNMM. - HELD THAT: - The Tribunal examined the comparability objection to Accentia Technologies Ltd., noting earlier coordinate-bench decisions which excluded Accentia where an amalgamation/acquisition constituted an extraordinary event affecting results. The Tribunal followed the reasoning in the earlier decision (Novo Nordisk India P. Ltd. which in turn relied on Paraxel International and Excellence Data Research), observing that Accentia had undergone amalgamation during the relevant period and the amalgamated company's results incorporated those of the amalgamating entity for the year ended 31 March 2010. Those extraordinary events and functional dissimilarity justified exclusion. The Tribunal further observed that, even after exclusion of Accentia and other companies previously excluded by the DRP, four comparables remained-sufficient for an effective TNMM arithmetic-mean based study-and therefore directed exclusion of Accentia without requiring a fresh re-search of comparables by the lower authorities. [Paras 8, 10]Accentia Technologies Ltd. excluded from the comparable set for AY 2010-11; the remaining comparables constitute an adequate sample and the appeal is partly allowed accordingly.Final Conclusion: The Tribunal directed exclusion of Accentia Technologies Ltd. from the assessee's comparable set for AY 2010-11 on account of amalgamation/acquisition and functional dissimilarity; after exclusion, the remaining comparables were held sufficient for TNMM, and the assessee's appeal was partly allowed. Issues:Transfer Pricing - Exclusion of comparables considered by the TPO.Detailed Analysis:Issue: Transfer Pricing - Exclusion of comparables considered by the TPOIn this appeal, the assessee raised objections regarding the rejection of certain comparables by the Transfer Pricing Officer (TPO). The assessee, an export-oriented unit providing IT services, adopted the Transactional Net Margin Method (TNMM) for justifying the price of its international transactions. The TPO applied filters like Related Party Transactions (RPT), insignificant ITES segment, and absence of data in the public domain to arrive at a list of ten comparables. The TPO recommended a final adjustment of Rs. 54,46,46,045 based on the Arm's Length Mean Margin on cost. The assessee moved the Dispute Resolution Panel (DRP) against the TPO's recommendations. The DRP excluded five comparables from the list but did not accept the objection regarding Accentia Technologies Ltd. The assessee argued that Accentia Technologies Ltd. should be excluded due to functional dissimilarity, citing previous Tribunal decisions. The coordinate bench's decision in Novo Nordisk India P. Ltd v. DCIT supported the exclusion of Accentia Technologies Ltd. from the list of comparables in the ITES segment. The DRP did not accept the assessee's contentions regarding Accentia Technologies Ltd, leading to the inclusion of the company as a comparable by the Assessing Officer (AO). The Tribunal noted that the exclusion of Accentia Technologies Ltd. and four other comparables directed by the DRP left only four companies in the list, which was considered insufficient for an effective TP study. Therefore, the Tribunal directed the exclusion of Accentia Technologies Ltd. from the list of comparables. The appeal was partly allowed, and the Tribunal pronounced the order on March 9, 2016.This detailed analysis covers the issues related to the exclusion of comparables considered by the TPO in the transfer pricing assessment. The summary provides a comprehensive understanding of the legal judgment, including the arguments presented, the decisions made by the authorities, and the final outcome of the appeal.