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2017 (10) TMI 1488 - AT - Income TaxTP Adjustment - Comparability - HELD THAT:- A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis Operating Profit - The Operating Profit, for the purposes of TNMM, is the net profit of the Tested Party from the controlled transaction; and the net profit of Uncontrolled Comparable Enterprises from comparable uncontrolled transactions. The income and expenses of only operating nature are taken into account for working out the Operating Profit of the Tested Party from the controlled transaction. And the Operating Profit of the Uncontrolled Comparable Enterprises from comparable uncontrolled transactions is also worked out on similar basis. Loss making Comparables - In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT] has held that ‘the mere fact that an entity makes high/extremely high profits/losses does not, ipso facto , lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.’ Current year vs. Multiple year data - Data of only the relevant year should be considered for comparison. This is what Rule 10B(4) prescribes. In order to analyze comparability of an uncontrolled transaction with an international transaction, data relating to the financial year in which the international transaction or specified domestic transaction has been entered into should be used. Proviso to Rule 10B(4) carves out the exception i.e. data relating to two years prior to such financial year may be considered if such data reveals facts which could have an influence on determination of transfer prices. In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT [2015 (4) TMI 949 - DELHI HIGH COURT] has held that while determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4) and thus, it is not open to assessee to rely upon previous year’s data as a general rule. Related Party Transactions - In CIT v.Thyssen Krupp Industries India (P) Ltd. [2016 (4) TMI 88 - BOMBAY HIGH COURT] has held ‘applying consistent filter of 25% or less of related party transaction alone shall be considered comparable.’ Segmentation vs. Aggregation - In Aztec Software & Technology v. ACIT [2007 (7) TMI 50 - ITAT BANGALORE] it is held that ‘ALP to be determined on transaction by transaction basis and not on aggregate basis.’ It has been held in LG Soft India (P.) Ltd. DCIT [2014 (6) TMI 924 - ITAT BANGALORE] ) that in absence of segmental details, a company cannot be taken into account for comparability analysis. Economic adjustments - If differences are so material that adjustment cannot be made then the company should be rejected. TNMM is more tolerant to minor functional and risk level differences. Certain significant risks like market risks, contract risks, credit and collection risks, infringement of intellectual property right etc. are material and can lead to major difference in the value of transaction. Mean - It is the ‘Mean PLI of Comparable’ which is arrived at. We set aside the order of the TPO/AO and direct the TPO/AO to make an assessment de novo after examining the said comparables in the light of our observations hereinbefore at para 6 and after giving reasonable opportunity of being heard to the assessee. We also direct the assessee to file the relevant documents/ evidence before the TPO/AO.
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