2015 (9) TMI 1170 - AT - Income Tax

Tribunal emphasizes precision in transfer pricing calculations, expense classification, and comparability analysis

The Tribunal found discrepancies in the Transfer Pricing Officer's calculation methodology, directing a reevaluation of profit margins with proper ... Calculation mistake committed by the Transfer Pricing Officer (TPO) in computing the profit margin of two comparable companies - Held that:- When there is a specific challenge to the calculation of OP/TC of the relevant segment of this company and the TPO has not mentioned how he determined this percentage of profit, we are helpless to evaluate the contention of the ld. AR. Under such circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is sent back to the file of AO/TPO. We order accordingly and direct the TPO to incorporate in his order the relevant figures leading to the determination of the computation of OP/TC at 26.45%. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. If, after considering the objections of the assessee, the TPO finds that this calculation of profit rate of 26.45% is incorrect as has been contended before us, then the TPO/AO should consider the correct percentage and, consequently re-determine the arm’s length price (ALP) of the international transaction. Similar is the position regarding working of OP/TC of M/s Agricultural Finance Corporation Ltd. The TPO computed PLI of this company at 7.43%. The ld. AR contends that this figure is incorrect. No relevant details leading to the computation of this profit rate are available in the TPO’s order, which position has been admitted by the ld. DR as well. Following the view taken hereinabove, we set aside the impugned order to this extent also and remit the matter to the file of AO/TPO for incorporation of correct OP/TC of this company in the profit rates of comparables, after allowing a reasonable opportunity of being heard to the assessee. Consideration by the TPO of deferred revenue expenditure as operating expense in the computation of the assessee’s own operating profit rate - Held that:- Neither the dates of incurring such revenue expenses, though capitalized as deferred revenue expenditure, are available on record nor there is any record to link these expenses with the earning of revenue from the AE. In the absence of the necessary details of these two factors relevant for deciding the question as to whether or not these should be treated as operating cost of the year and then their extent, we consider it appropriate to send the matter back to the file of the AO/TPO. The assessee incurred total preliminary expenses amounting to ₹ 25,498/- in the preceding year and only 20% of such expenses was written off in this year. However, the TPO instead of adding back such 20% to the overall net profit by treating it as nonoperating, by mistake added back the full amount of ₹ 25,498. The effect of this exercise done by the TPO is that 80% of ₹ 25,498 which was not debited to the Profit and loss account also got treated as nonoperating expense, which position is not correct. In the fresh exercise of finding out the amount to be treated as operating or non-operating out of total deferred revenue expenses, the TPO will also take the aspect of Preliminary expenses into consideration.Ex consequenti, the impugned order is set aside on this score and the matter is sent back to the file of the AO/TPO for a fresh determination in accordance with our above observations. Treatment of M/s Artefacts Software and Finance Ltd. as a comparable company - Held that:- The mere making of a claim does not make a comparable company incomparable or vice versa. Simply, the ball is sent to the court of the TPO for vetting such a claim made by the assessee and then decide whether it is really comparable or not. Throwing out a case at the very threshold without any examination, cannot be construed as proper. The Special Bench of the Tribunal in DCIT vs. Quark Systems (P) Ltd. (2009 (10) TMI 591 - ITAT, CHANDIGARH) has held that the assessee can rightly claim that it wrongly chose a company as comparable which is actually not comparable. Under the given circumstances, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for examining the assessee’s contention about the non-comparability of this company. If the related party transactions of this company turn out to be what has been contended by the ld. AR, then it would make the transaction as controlled. There is hardly any need to accentuate that only uncontrolled transactions can be considered for benchmarking. If on the other hand, the TPO finds the contention of the assessee as incorrect, he will continue to treat this company as comparable. - Decided in favour of assessee for statistical purposes. Issues involved:1. Alleged calculation mistake by the Transfer Pricing Officer (TPO) in determining profit margin of comparable companies.2. Treatment of deferred revenue expenditure as operating expense.3. Inclusion of M/s Artefacts Software and Finance Ltd. as a comparable company.Issue 1: Alleged calculation mistake by TPO:The appeal concerns a final assessment order under sections 143(3) and 144C of the Income-tax Act, 1961 for the assessment year 2006-07. The primary contention is the calculation error by the TPO in determining the profit margin of two comparable companies. The TPO's computation resulted in a transfer pricing adjustment, prompting the assessee to challenge the accuracy of the figures. The Tribunal found discrepancies in the TPO's calculation methodology and directed a reevaluation of the profit margins with proper documentation from the companies in question.Issue 2: Treatment of deferred revenue expenditure:Another issue raised was the inclusion of deferred revenue expenditure as an operating expense in the assessee's profit margin computation. The dispute revolved around the classification of certain expenses capitalized by the assessee, with arguments presented both for and against considering them as operating expenses. The Tribunal emphasized the need to establish a clear link between the expenses incurred and the revenue generated, directing a detailed examination of the nature and timing of these expenses for accurate classification.Issue 3: Inclusion of M/s Artefacts Software and Finance Ltd. as a comparable company:The final issue pertained to the inclusion of M/s Artefacts Software and Finance Ltd. as a comparable company, challenged on the grounds of significant related party transactions exceeding 50%. The Tribunal acknowledged the assessee's right to contest the comparability of chosen companies, emphasizing the TPO's authority to reassess the comparability criteria. The matter was remitted for further examination to determine the appropriateness of considering M/s Artefacts Software and Finance Ltd. as a comparable entity.In summary, the judgment addressed various intricacies related to transfer pricing adjustments, treatment of deferred revenue expenditure, and the selection of comparable companies for benchmarking purposes. The Tribunal emphasized the importance of accurate calculations, proper classification of expenses, and the flexibility for parties to challenge the comparability of chosen entities. The decision underscored the need for meticulous scrutiny and adherence to established principles in transfer pricing assessments.