TMI Blog2014 (12) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... ken 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 purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. C) The TPO/ AO has erred in law and on facts in disregarding that in the previous assessment year, department has accepted and considered UK companies as comparables for the purpose of benchmarking of international transactions and hence the AO/ TPO should have followed the same as there is no change in the facts of the case. 2. Without prejudice to Ground No. 1 above,: A) The TPO/ AO has erred in law and on facts in cherry picking 7 Indian companies as comparables which are functionally not comparable with the appellant. B) The TPO/ AO has erred in law and on facts in picking up companies with high margin instead of following detailed, systematic and methodical search process. C) The learned TPO/ AO has erred in law and on facts in non granting Opportunity of cross examining the comparables selected by the TPO/ AO. 3. The learned TPO / AO has erred in law and on facts in not granting credit of TDS of ₹ 11,79,35,990/- out of total TDS credit of ₹ 12.06.64,360. 4. The learned TPO / AO has erred in law and on facts in levying interest under section 23413 of the Act of ₹ 1,77,76,885. The learned TPO / AO has erred in law and on facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in UK. Thus TMETC (i.e the assessee) was taken as tested party for benchmarking the ALP. Based on FAR analysis and by adopting TNMM as the most appropriate method and PLI as OP/TC, the assessee selected four overseas comparables located in UK to benchmark the Arm Length Price of the transactions with the AE i.e TML, which were as under : S.No. Name of the comparables 2007 % 2006 % 2005% 3 year weighted Avg.(%) 1 Dytcna limited 4.17 6.74 4.86 5.26 2 Ricardo PLC 8.34 10.11 6.90 8.47 3 Online Design and engineering Ltd. 6.98 5.85 5.47 6.22 4 Acteon group Ltd 21.87 19.63 10.60 18.31 Average 10.34 10.59 6.96 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables and made adjustment of ₹ 8,04,58,874/- in the following manner: Total Operating Income Rs.31,98,72,720/- Total operating cost Rs.29,27,04,244/- Operating profit Rs.2,71,68,476/- Profit Margin of assessee 9.28% Arm' Length Profit Margin (36.77% of OC) Rs.10,76,27,350/- Arm's Length value of transactions Rs.40,03,31,594/- 95% of Arm's Length Value Rs.38,03,15,014 Difference being shortfall in OP being adjustment Rs.8,04,58,874/- 5. One of the main objection of the assessee before the DRP was that, in the immediately preceding year i.e. in the assessment year 2007-08, on identical international transactions, the TPO has accepted the UK comparables, selected from foreign data for bench marking the international transactions of the assessee and therefore, in this year also the TPO should have accepted the foreign comparables. The DRP rejected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d submissions with regard to the 7 comparables chosen by TPO, to demonstrate that there are no actual comparables having similar profile and functions with that of the assessee and therefore, no company in India can be considered as comparable with the assessee. He also filed written synopsis, with regard to each comparables, to show, how they are functionally not comparable with the assessee. 7. On the other hand, the ld. CIT DR strongly relied upon the order of TPO and the direction given by DRP and submitted that, if the PE of the assessee has been considered as Indian entity, functioning in India and all its services are being rendered in India, then its margin for the Indian transaction have to be bench marked with the Indian comparables. Thus, the TPO has rightly adopted Indian comparables for bench marking the ALP of the assessee for its services rendered to Tata Motors. 8. We have heard the rival submissions, perused the relevant findings of the TPO as well as directions of DRP and also material placed on record. The assessee, TMETC is UK based company which is wholly owned subsidiary of Tata Motors Ltd, India. Its business activities primarily involved providing of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. Thus, the Indian Transfer Pricing Regulations while selecting comparable companies lays emphasis on FAR analysis, and conditions prevailing in the markets in which the parties operate for carrying out the comparability analysis. If such comparability analysis could not be done properly with the Indian comparables looking to the characteristics and nature of the functions performed and services rendered then, it has to be seen from the angle who is selected as tested party and based on that, comparables are to be chosen from the economic factors and the functions performed in the conditions prevalent of the tested party. If the tested party itself is foreign based and the services rendered by it is very specific, for which the Indian comparables are not available or functionally not comparable then, it cannot be held that foreign comparables cannot be selected for benchmarking the Arm s Length Price or margin. Indian Transfer Pricing Regulation does not puts any fetters on selection of foreign comparables, if con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the tested party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method. It is very pertinent to note here that in Chapter 10, of the UN Manual, in Para 10.4.1.3, Indian Transfer Pricing Regulation have accepted the foreign comparables in cases where the foreign AE is the least complex entity and requisite information about the test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustments for such differences is not available, then information derived from uncontrolled comparables in the most similar market for which reliable data is available may be used, but the extent of such differences may affect the reliability of the method for purposes of the best method rule. For this purpose, a geographic market is any geographic area in which the economic conditions for the relevant product or service are substantially the same, and may include multiple countries, depending on the economic conditions. 11. Here in this case, there can no dispute with regard to the fact 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 expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision as given in ground No.1, ground No.2 has become purely academic and therefore no adjudication is required. 13. Ground No.3 raised by the assessee is not pressed, therefore, same is dismissed as not pressed. 14. In Ground No.4, the assessee has challenged the levy of interest u/s 234B of the Act of ₹ 1,77,76,885/- 15. In this regard, the ld. AR submitted that this issue is squarely covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Director Of Income-tax (International Taxation). Vs. NGC Network Asia(2009) 313 ITR 187(Bom). Accordingly, we direct the AO to follow the decision of jurisdictional High Court (supra), if the ratio is applicable on the facts of the case. 16. In Ground No.5, the assessee has challenged the levy of interest u/s 234C of the Act of ₹ 10.878/- 17. Before us, the ld. counsel submitted that no interest u/s 234C should levied as the same is leviable on the returned income. Accordingly, we direct the AO to charge interest u/s 234C on the returned income. 18. Thus, the appeal of the assessee is treated as partly allowed for statistical purposes. 19. The assessee has also raised ..... 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