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2013 (9) TMI 266 - AT - Income TaxTransfer pricing - ALP - Selection of comparables Revenue authorities have excluded Gilicon and Kitco and including Siro for the purpose of comparability analysis Held that:- As regards Siro, there is a functional similarity between the said company and the assessee company in as much as both of them are engaged in the business of providing services relating to clinical trials. The difference is only in the business model adopted by these two companies, in as much as Siro is doing the clinical trials on its own where as the assessee company is getting the clinical trials done from the third parties - business model adopted by Siro cannot be the basis to exclude the said company from the comparability analysis especially when there is a functional similarity in the main business carried on by Siro as well as by the assessee-company which is that of providing services in relation to clinical trials Decided against the Assessee. As regards Gilicon, Paper Book show that the consultancy work was substantially sub-contracted by Gilicon - Moreover, Gilicon is in the business of consulting engineers and advisors which is functionally different from the business of the assessee of providing clinical trial services - Gilicon is not only functionally different from that of the assessee company but even the business model adopted by the said company is different and the said company therefore cannot be included for the purpose of comparability analysis Decided against the Assessee. As regards Kitco, if items of non-operating income are excluded from the profits before Income Tax of Rs. 13.67 Lakhs and Rs. 19.45 Lakhs of Kitco for the Financial Year 2000-01 & 2001-02, there was an operating loss incurred by Kitco in the Financial Year 2000-01 and 2001-02 - On the ground that the said entity making consistently operating loss could not be taken as comparable with the assessee company which is a captive service provider. Validity of recomputation the operating profit by estimating notional indirect cost at 5% thereby altering the cost base Held that:- If the indirect cost was already included by the assessee in the total cost of Rs. 1080.25 Lakhs incurred in relation to the services provided to its AE for applying the mark up of 10%, there is no justification in adding indirect cost @ 5% of the direct cost separately as done by the authorities below relying on the terms of the relevant agreement - However, inclusion of indirect cost of Rs. 285.48 Crores in the total cost of Rs. 1080.25 Lakhs based on the break-up requires verification as there is no reference to any such details furnished by the assessee nor there is any finding given on verification of such details Issue restored to the file of A.O. to verify the relevant record - If the stand taken by the assessee that indirect cost of Rs. 285.48 Lakhs was already included in the total cost of Rs. 1080.25 Lakhs is found to be correct, the AO is directed not to add separately indirect cost @ 5% of the direct cost for the purpose of Transfer Pricing exercise Decided in favor of Assessee for statistical purpose. Inclusion notional interest in the cost base while working out the arm's length price Held that:- If the relevant interest expenditure was not actually incurred by the assessee and the same was included in the total cost of Rs. 1085.25 Lakhs for applying the mark up of 10% to the AE only on notional basis, the same cannot included in the cost base for the purpose of working out the arm's length price - . The same has to be excluded from the cost base and what should be taken as cost base to work out the profit margin of the assessee is the expenditure actually incurred by the assessee - Excluded the interest amount of Rs. 16.01 Lakhs from the cost base after verifying that the same was included by the assessee only on notional basis and it did not represent the expenditure actually incurred by the assessee Decided in favor of Assessee. Depreciation on assets located at Ankleshwar Plant closed unit - Held that:- During the year the entire unit was not put to use but since the same is forming part of the block of assets of the machinery of the entire company's other unit being used, examination of use of individual assets does not arise Reliance has been placed upon the judgment in the case of M/s. Swati Synthetics Ltd, wherein it has been held that the year under consideration is not the first year of the assets acquired. The assets of closed unit still remained exist/part of the block of assets. The said block of assets was used for the purpose of business during the year. Under the circumstances the assets of the said closed unit amounts to use for the purpose of business in the year under consideration, therefore assessee is entitled for deprecation Decided in favor of Assessee. Rental income - Classification of Head of Income - Income arising from Sub-leasing of property' is to be taxed in the hands of the assessee whether business income or house property income Held that:- Assessee is a deemed owner u/s 27(iiib) where an immovable property is acquired on lease for a period of more than 12 years Income assessable under head Income from House Property.
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