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2014 (12) TMI 891 - ITAT MUMBAITransfer pricing adjustment - profit from Indian operation taxable in India or not - automobile design and engineering services rendered to the TML - TMETC-UK sends its employees/engineers to India for rendering services – Whether the assessee was justified in carrying out comparative analysis on the basis of UK based comparables, rather than by selecting Indian comparables - Held that:- The tested party is TMETC, whose operating profit is to be bench marked by carrying out functional analysis of its controlled transactions for which reliable data for its comparability is available in the country where it is located, then such comparables has to be taken into account for carrying out the comparability analysis for the purpose of Transfer Pricing and bench marking the Arm’s Length Price - The TMETC for the purpose of rendering services in India is incurring all its cost in UK like direct costs, employee costs, legal and professional fees, rent and other operating expenses, then for the purpose of computation of PLI, these costs have to be taken into consideration for determining the profit margin. Since all the main costs attributable to the PE are based on cost incurred in UK, then it can be very well said that PE is influenced by the economic and financial conditions of UK, as against the Indian economic factors - The Indian economic factors are not at all influencing the cost or margin of the assessee, hence it cannot be held that Indian comparables can be used to bench mark the TMETC transaction and the price with Tata Motors - the finding of the TPO as well as DRP that PE is an Indian enterprise, working in India and therefore, its margin is to be bench marked with Indian comparables is not accepted - The PE in India is a service PE, having no establishment in India, nor incurring any costs, deployed any assets, therefore, cannot be held that it is an independent Indian enterprise - nothing has been brought on record that assessee’s PLI is influenced by the economic factors in India, viz, attribution of costs, assets or other factors relevant for determination of profits are based in India - Thus, the TPO and DRP were not correct in holding that UK comparables cannot be taken into consideration for the purposes of comparative analysis and bench marking the assessee’s margin - under the facts and circumstances of the case, the foreign comparables i.e. UK comparables can be taken into account for carrying out FAR analysis and bench marking the Arm’s Length margin of the assessee’s transactions with its AE and the selection of the Indian comparables by the TPO is not accepted. Since the TPO has not carried out any comparability analysis or FAR analysis in respect of UK comparables chosen by the assessee, therefore, he is directed to carry out such analysis and benchmark the assessee’s margin - If such comparables do not stand the test of comparability then, TPO may search other comparable after confronting to the assessee - for the search of comparability assessee will provide necessary assistance to the TPO – thus, the matter is remitted back to the TPO/AO for adjustment to be made – Decided partly in favour of assessee.
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