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Issues: (i) Whether the segmental results furnished by the assessee should be accepted for transfer pricing analysis instead of entity-level results, and whether the additional audited segmental evidence filed before the Dispute Resolution Panel should be admitted. (ii) Whether loss-making comparable companies could be excluded or had to be included in the comparability set. (iii) Whether the assessee was entitled to the benefit of the +/- 5% variation under the proviso to section 92C(2) of the Income-tax Act, 1961.
Issue (i): Whether the segmental results furnished by the assessee should be accepted for transfer pricing analysis instead of entity-level results, and whether the additional audited segmental evidence filed before the Dispute Resolution Panel should be admitted.
Analysis: The transfer pricing exercise had to be confined to international transactions and not to the business as a whole. The assessee had produced segmental results to separate associated enterprise transactions from non-associated enterprise transactions, and the later audited version was filed only to satisfy a procedural objection regarding authentication. In view of the scheme of section 144C, the Dispute Resolution Panel was required to consider material and evidence relevant to the objections before issuing directions. The rejection of the audited segmental evidence solely because it was not earlier placed before the panel was held to be too technical, and the matter required reconsideration on the basis of the segmental figures.
Conclusion: The segmental results were held to be relevant, the audited additional evidence was admitted, and the transfer pricing issue was remitted for fresh consideration on that basis.
Issue (ii): Whether loss-making comparable companies could be excluded or had to be included in the comparability set.
Analysis: The exclusion of loss-making comparables by the Transfer Pricing Officer was not accepted in the appellate proceedings where the Dispute Resolution Panel had directed inclusion of the relevant loss-making company as a comparable. The Assessing Officer was required to follow the panel's direction while recomputing the transfer pricing adjustment.
Conclusion: The direction to include the loss-making comparable was upheld, and the matter was decided in favour of the assessee.
Issue (iii): Whether the assessee was entitled to the benefit of the +/- 5% variation under the proviso to section 92C(2) of the Income-tax Act, 1961.
Analysis: The proviso was treated as conferring an option on the assessee to adopt a price within the permissible margin. The reasoning followed the view that the arm's length price is an approximation and that the statutory margin is available as a taxpayer's option, not merely in marginal cases where the declared price is already within range.
Conclusion: The assessee was held entitled to the benefit of the +/- 5% variation, subject to application at its option in recomputation.
Final Conclusion: The appeal succeeded on the principal transfer pricing issues, with remand for fresh determination on segmental results and consequential relief on the statutory tolerance margin, while the remaining dismissed grounds did not alter the overall partial relief granted.
Ratio Decidendi: For determining arm's length price, international transaction segmental results must be considered where available, the DRP must take relevant additional evidence into account, and the proviso to section 92C(2) grants the assessee an optional 5% tolerance benefit in computing transfer pricing adjustment.
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