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2021 (7) TMI 897 - AT - Income TaxTP Adjustment - comparable selection - Rejection of filter which was applied by the ld. TPO wherein companies having export sales less than 75% of the total sales - HELD THAT:- We find that assessee is mainly into operations being a low risk captive service provider providing back office support services in the nature and operations of technology, oversight services and other share services to its associated enterprises. It is not in dispute that assessee’s ITES segment is mainly catering to export market. Hence, there is absolutely no harm in ld. TPO applying the filter by rejecting the companies having export sales less than 75% of its total sales. The arguments of AR that the comparable companies having more domestic sales than the export sales could also be considered as comparable as per Rule 10A(a) of the Rules could be appreciated in the event, where the percentage of export sales and domestic sales are equal or the differences between them are not huge. As stated earlier in the instant case, there is no dispute that assessee in its ITES segment had been catering predominantly in export market to its AEs. Hence, it would be just and fair to have comparable companies which are also having more than 75% of its sales derived from export market. Hence, we hold that the filter adopted by the ld. TPO in this regard would be a valid filter. Rejection of filter which was applied by the ld. TPO wherein companies having related party transactions more than 25% of sales - We are unable to persuade to accede to these arguments of the ld. AR in view of the fact that any comparable company having more than 25% of related party transactions would be able to have advantage in prices negotiated between the controlled entities (that is related parties) and it becomes controlled transactions and that such negotiated advantageous pricing mechanism would certainly have a major bearing on the PLI of the said comparable company that is why the spirit of provisions of Chapter X of the Act mandate that a controlled transaction should be always comparable with uncontrolled transaction for the purpose of determination of arm’s length price. Hence, it would be just and fair to apply a filter by rejecting comparable companies having related party transactions more than 25% of the operating revenues. Hence, we hold that this filter applied by the ld. TPO for the purpose of determination of arm’s length price is to be considered as a valid filter.None of the observations considered by the ld. TPO were even addressed by the ld. CIT(A) in his order, as rightly pointed out by the ld. DR before us. Accordingly, the ground No.2B raised by the revenue is allowed. Rejection of filter which was applied by the ld. TPO wherein companies having consistent losses - We find that A.Y.2010-11 is the first year of operation of the assessee company. We are in agreement with the argument advanced by the ld. AR that consistent loss making companies are to be construed as those companies which are incurring operational losses year after year or atleast in the last three years including the year under consideration. We are also in agreement with the argument advanced by the ld. AR that if a particular comparable had made profits in the earlier two years and had incurred losses during the year under consideration alone, then, the said company would not fall under the ambit of persistent loss making company. Since assessee is in the first year of operation where due to heavy investments made in the initial year and claim of depreciation thereon, among other factors, the assessee is bound to incur losses and therefore, assessee indeed is justified in comparing the companies which had incurred losses during the year under consideration. Hence, the loss making company per se cannot be eliminated for the purpose of comparability. It has to be seen depending upon the facts and circumstances of each and every case. This filter applied by the ld. TPO would not be a valid filter for the purpose of comparability of benchmarking analysis vis-à-vis assessee company. Hence, we hold that the ld. CIT(A) had rightly rejected this filter applied by the ld. TPO.
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