TaxTMI 
TaxTMI 
2016 (2) TMI 228
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.... documentation requirements; 2.3. selecting companies earning super profits/abnormal profits as comparable to the Appellant; 2.4. selecting companies which had exceptional year of operation as comparable to the Appellant; 2.5. selecting companies, the segment results for which are not completely reliable as comparable to the Appellant;" 3. Inviting attention to the above-mentioned grounds it was submitted that on earlier occasions although the assessee had put up a case before the Co-ordinate Bench that three comparables may be excluded. However, today on instructions from the client he is arguing only for excluding one comparable i.e. Saket Projects Ltd. The said comparable it was submitted was no doubt offered by the assessee however notwithstanding that reliance was placed on the jurisprudence available in support of the said prayer. Inviting attention to ITA No. 4765/Del/2011 & 427/Del/2013 in Nortel Networks India Pvt. Ltd. vs Addl. CIT and ITA No.5293/Del/2012 in Premier Exploration Services Private Ltd vs ITO, it was submitted that the exclusion of the said comparable is sought on the ground that it is functionally not comparable and its segmental data is unreliab....
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....in facts: namely that Qualcomm India Pvt. Ltd. (hereinafter referred to "QIPL") is engaged in the business of conducting research and development ("R&D") in new technologies for enhancements and improvement of QUALCOMM's existing products and new product QIPL undertakes development of wireless communications and applications software, DSP firmware and hardware for the products of QUALCOMM and its group companies QIPL also provides business support, technical support and market research services. 6.1. The TPO considering the relevant Business Support Agreements and the functions performed concluded that when considered with the functions performed qua the "Business Support Services" segment the selection of the comparables made by the assessee was not correct not only on account of the fact that multiple year data had been used but also on account of the fact that a remuneration of only 10% mark up over costs was provided. Considering the vital service provided, he was of the view that the comparables chosen necessitated a relook and accordingly a show cause notice was issued by him. The relevant extract is reproduced hereunder from the TPO's order at pages 29 to 31 (Appeal set pag....
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....ible (that eventually bring benefit to your AE. This is recognized by the AE, hence the provision regarding the intellectual property that has been included in the service agreement. You are entitled to remuneration higher than what will be available to a routine service provider. Under these circumstances, it will be imperative that we choose the comparables carefully. 6.1. As per your TP report you have earned a margin of 10.77% on cost. As against this you have chosen a set of 14 comparables, which have an average margin of 11.97% using multiple year data. As explained in the case of software/chip designing segment, this approach is faulty-as the mandate of Rule 10D(4) is to use current year data unless it is demonstrated that factors of earlier years have affected the transfer prices in the current year. In all your submissions so far, you have not been able to do so. During the course of these proceedings, you were asked to provide the updated margins of the comparables used by you. You provided the same vide your submission dated 21.02.2011. You have provided the margins in respect of 7 comparables, while the rest are either stated to be 'not available' or 'not ....
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....ever, the assessee has obviously carried out a functional analysis on the basis of data of previous years. That means that this company was comparable based on earlier year data. The company would validly cease to be a comparable on the use of current year data if there was a change in the functions of this company. There no doubt about the fact that there is no change in the functions of this company as compared to earlier years. Para 3.63 of the OECD Guidelines, 2010 state as below. 3.63 Extreme results might consist of fosses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An ....
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....he assessee itself has chosen this company based on proviso three years' data. In earlier years also, this company was taken by the assessee as comparable for transfer pricing analysis. It may be mentioned here that the functional profile of this company is same in the current year as was in earlier years. Subsequently, when the TPO asked the assessee to provide current year's margin, the assessee changed its stand, obviously, for the reasons of its high margin in the current year. The assessee can't be allowed to change its stand unless: i) the functional profile of either the comparable or the assessee has changed in the current year or ii) there are some ostensible reasons to justify the same which is not the case here. Moreover, event management is also part of the marketing activities and minor functional differences can be tolerate if TNMM is used as most appropriate method. Therefore, this company can be considered as a comparable for Marketing and after sales services segment." 6.5. In the said background, we are required to consider the allowability of assessee's prayer for exclusion of the said comparable relying upon the facts as found considered by the Co-ordinate Ben....
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....des on this ground. TPO had considered the event management Division of Saket Projects Ltd. as comparable to assessee's functions. Although assessee had taken this company as comparable on the basis of past years data but in our considered view, the Saket Projects Ltd. was not comparable to assessee because the event management was done by sponsorships which is evident form various documents placed in paper book. Further the segment allocation of expenses also appears to be not reliable. We agree with the view of revenue that no comparable can be rejected merely on the basis of high margins if the comparable is functionally comparable to the assessee and also that there is miner variation in functional similarity. However, in the case of Saket Projects Ltd. there is functional dissimilarity. The company is organizing events with various kinds of sponsorships. The facts also suggest that segmental allocation of expenses were not reliable. We also hold that when direct comparables are available then segmental results of companies engaged in other business should not be taken as comparable. On the basis of these facts, we hold that Saket Projects Ltd. was not comparable to the extent ....