2016 (7) TMI 1565 - HC - Income Tax

Judgment on Exclusion of Comparables in Transfer Pricing under Income Tax Act

Pr. Commissioner of Income Tax, Delhi- 9 Versus Trend Micro India Pvt. Ltd.

The Court upheld the ITAT's decision to exclude certain comparables for determining the arm's length price under the Income Tax Act. It clarified that the ... TP Adjustment - Comparable selection - ITAT rejected three comparables Aptico Limited, Global, Procurement Consultants Limited and TSR Darashaw Limited as they were functionally dissimilar - HELD THAT:- Heard Revenue, and having perused Rule 10B(3)(ii) of the Income Tax Rules, 1962 read with Section 92 C of the Income Tax Act 1961 the Court is not persuaded to hold that the first issue urged gives rise to a substantial question of law requiring examination by the Court. Scope of the powers of the ITAT while hearing an appeal - point now urged by the Revenue is that if three of the nine comparables are to be excluded, then the ITAT ought to suo motu have required the TP adjustment exercise to be undertaken afresh by the TPO since the TP adjustment based on six comparables that were to some extent functionally dissimilar to the Assessee could not have reflected the correct picture as far as the determination of ALP was concerned - HELD THAT:- Admittedly, during the AY in question there was no provision in the Act permitting the Revenue to appeal against the inclusion or exclusion of a comparable by the TPO. which is affirmed by the DRP. While the Assessee had a remedy by filing an objection before the ITAT, the Revenue could not during the relevant AY, do so. It has been urged on the strength of the decision of this Court in Commission of Income Tax v. Jansampark Advertising and Marketing Limited [2015 (3) TMI 410 - DELHI HIGH COURT] that in such circumstances it is incumbent upon the ITAT to exercise suo motu powers and in the interest of justice direct the exercise of TP adjustment to be undertaken afresh. The Court is unable to agree with the above submissions. As rightly pointed out by the ITAT, the statutory scheme at the relevant time did not envisage permitting the Revenue to prefer an objection in the circumstances pointed out hereinabove. The circumstances under which certain observations were made by this Court in Jansampark (supra) concerned an inquiry to be undertaken in proceedings initiated under Section 147/148 of the Act in order to find out the genuineness of the creditors, their credit worthiness etc. There is no comparison with the facts on hand. The Finance Act, 2016 has is done away with the above provision of the Act that permitted the Revenue to file objections against the order of DRP. In the present case we are concerned with AY is 2010-11 when there was no such provision permitting the filing of cross objection by the Department. It was introduced by the Finance Act, 2012 and again removed under the Finance Act, 2016. Clearly, there is legislative policy governing the insertion of the said provision in Finance Act, 2012 and its deletion in Finance Act, 2016. This Court is not inclined to frame a question on the above issue urged by the Revenue. Issues:1. Rejection of comparables by the ITAT for determination of arm's length price (ALP).2. Scope of powers of the ITAT while hearing an appeal regarding the exclusion of comparables by the TPO.Issue 1:The first issue in the judgment pertains to the rejection of three comparables by the ITAT for determining the arm's length price (ALP) of international transactions by the Assessee under Section 92CA (3) of the Income Tax Act 1961. The ITAT excluded the comparables - Aptico Limited, Global, Procurement Consultants Limited, and TSR Darashaw Limited, deeming them functionally dissimilar and justified their exclusion based on various factors. The Court, after considering Rule 10B(3)(ii) of the Income Tax Rules, 1962 and Section 92 C of the Income Tax Act 1961, did not find the issue substantial enough to warrant examination as a question of law.Issue 2:The second issue raised concerns the scope of powers of the ITAT when hearing an appeal regarding the exclusion of comparables by the Transfer Pricing Officer (TPO). The Revenue argued that if three out of nine comparables were to be excluded, the ITAT should have directed the TPO to redo the transfer pricing adjustment exercise afresh. However, during the relevant assessment year, there was no provision for the Revenue to appeal against the inclusion or exclusion of comparables by the TPO, which was affirmed by the Dispute Resolution Panel (DRP). The Court noted that the statutory scheme at the time did not allow the Revenue to object in such circumstances. The Court also highlighted the legislative changes introduced by the Finance Acts of 2012 and 2016, which governed the provision for filing cross objections by the Department. Ultimately, the Court dismissed the appeal, emphasizing that the legislative policy guided the insertion and deletion of provisions related to objections against DRP orders.In conclusion, the judgment delves into the rejection of comparables by the ITAT for determining the arm's length price and the limitations on the Revenue's powers to appeal against such exclusions during the relevant assessment year. The Court's analysis provides a detailed examination of the legal framework and legislative changes impacting the Revenue's ability to challenge transfer pricing adjustments based on excluded comparables.