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TMI Blog2014 (12) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... d on facts in making addition of Rs. 8,04,58.874/- by adopting Indian comparables as comparables for benchmarking international transactions of provisioning of services to Tata Motors Ltd. ("TML"). B) The TPO / AO ought to have accepted benchmarking carried out by the assessee and selection of UK companies as comparables for benchmarking the international transactions of the company considering the facts of the case of the appellant. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not enter into any contract with outside party in India. Considering these factors and FAR analysis which was effected by demographic and economic factors in UK, the assessee searched for UK comparables rendering similar kind of 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 9.57 Assessee's profit margin 9.28% Since, for the year 2007 the average profit margin of the comparables was arrived at 10.34%; therefore, the assessee's profit margin being at 9.28%, was stated to be at Arm's Length range. 4. The Transfer Pricing Officer (TPO) though accepted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in this year also the TPO should have accepted the foreign comparables. The DRP rejected the assessee's contentions and other objections on the ground that the tested party is the Indian PE, who is working in the Indian business environment and the mere fact that the employees get paid in European or UK currency will not decide the selection of foreign comparables. For the purpose of Income tax, the PE has to be treated as distinct and separate enterprise of the foreign company and therefore, the TPO has rightly selected Indian companies as comparables. For other objections also, the DRP rejected the assessee's contention and upheld the order of the TPO. 6. Before us, ld. counsel Shri Rajan Vora, submitted that the assessee being UK based company having its principal business in UK from where it manages the services provided to TML motors and all its employees are UK nationals having technical knowledge of automotive industries and economic environment of European Countries and therefore, based on the nature of business and geographical factors, the comparability analysis can be done only through selection of UK comparables engaged in the similar activities, for the proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tata Motors Ltd, India. Its business activities primarily involved providing of automobile design and engineering services to the TML and for rendering these services the TMETC-UK sends its employees/engineers to India. It is in this background, the TMETC has been considered as having a service PE in India and therefore, its profit from Indian operation is taxable in India. For the purposes of TP analysis, the assessee has selected TMETC as the tested party, since all its operating cost are incurred in UK, having employees based in UK, therefore, it has selected comparable companies from UK having similar kind of functions and rendering similar services. It has selected four UK based comparables having average arithmetic mean of 10.3% for the year 2007, and therefore, it was stated that its margin of 9.8% (OP/TC) is at arm's length range. 9. The sole issue before us is, whether the assessee was justified in carrying out comparative analysis on the basis of UK based comparables, rather than by selecting Indian comparables. The TPO's main objection is that, since the Indian PE is performing its function in India and rendering services to Indian company, therefore, margins for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not puts any fetters on selection of foreign comparables, if conditions are as such, that the Indian comparables do not stand the test of comparability with the tested party. Answer to this has been given in the OECD Transfer Pricing Guidelines which provides that non-domestic comparables should not be automatically rejected and it has to be seen on case by case basis by the reference to the extent to which they satisfy the comparability factors. The relevant paragraph of the OECD guidelines reads as under : "A.4.3.2 Foreign source or non domestic comparables 3.5 Taxpayers do not always perform searches for comparables on a country-by-country basis, e.g. in cases where there are insufficient data available at the domestic level and/or in order to reduce compliance costs where several entities of an MNE group have comparable functional analyses. Non-domestic comparables should not be automatically rejected just because they are not domestic. A determination of whether non- domestic comparables are reliable has to be made on a case-by-case basis and by reference to the extent to which they satisfy the five comparability factors. Whether or not one regional search for comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... east complex entity and requisite information about the tested party and comparables re available. The relevant paragraph reads as under :- "10.4.1.3 The regulations prescribe mandatory annual filing requirement as well as maintenance of contemporaneous documentation by the tax payer in case international transactions between associated enterprises cross a threshold and contain stringent penalty implication in case of noncompliance. The preliminary onus of proving the arm's length price of the transaction lies with the taxpayer, The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprises is the less or least complex entity and requisite information is available about the tested party and comparables." Thus, the Indian Transfer Pricing does not reject the concept of foreign comparables, if the tested party is foreign AE. The blanket assumption by the TPO and DRP that foreign comparables cannot be accepted at all, is not correct. Similarly, US TP Regulations for the purpose of Bench marking under comparable method has laid down the following criterion for selection of test ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. For this reason, 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has also raised the following as additional grounds: "6. Without prejudice to the all other grounds, the Hon'ble DRP should have directed fresh comparability analysis to select Indian comparables which are functionally comparable to appellant, as comparables chosen by the AO/TPO to benchmark the transition are functionally different;. 7. Without prejudice to the all other grounds , the ld. TPO/AO has erred in not considering the correct operating margin of the appellant i.e. 27.61% (i.e. OP/OC), while computing the arms-length price of appellants international transactions and instead of considering 9.28% as operating margin of the appellant" 20. In the assessment year 2009-10 also the assessee has raised exactly similar ground. However, In view of the decision given in respect of ground No.1, the additional grounds have become purely academic and the same is dismissed as infructuous. ITA No.1698/Mum/2014 (AY-2009-10) 22. The sole issue raised in this appeal by the appellant is that the AO has erred in making addition on account of transfer pricing adjustment of Rs. 5,38,24,761/- by selecting the Indian companies as comparables, instead of foreign companies for be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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