Case Law Details
Brief of the Case
ITAT Delhi held in the case American Express (India) Private Limited vs. DCIT that even though the assessee in its TP study has included the turnover filter of less than Rs.1 crore, the assessee has given reasons for inclusion of these two companies in the list of comparables, primarily for the reason that these are not start-up companies and functional data for these companies are reliable. Also the Tribunal in the case of Techbook International Pvt. Ltd. ITA No.240 /Del/2015 order dated 06.07.2015 has held that low turnover per se cannot be reason to exclude a company from the comparable test. Hence the CIT (A) is not justified in excluding companies from the list of comparables purely on account of its low turnover. However, the issue needs to be examined by the AO/ TPO whether these companies are otherwise functionally similar to that of the assessee irrespective of having low turnover.
Facts of the Case
ITA NO.1700/Del./2010 (ASSESSEE’S APPEAL)
The assessee is a private limited company. It is a wholly owned subsidiary of America Express International Inc., USA. It is engaged in provided IT Enabled Services to its group companies i.e. transaction processing, data management, information analysis and control. For the work which assessee undertakes with its Associated Enterprises, assessee was remunerated at cost plus method.
The assessee in its transfer pricing study had taken 16 comparable companies and arrived at their margin at 14.62% and assessee’s margin was calculated at 11%. Thus, the assessee sought to justify its arm’s length price with regard to international transactions it had undertaken with its Associated Enterprises. The TPO, however, rejected the transfer pricing study of the assessee. The TPO was of the view that multiple year data is not to be taken. The TPO held that single year data only needs to be considered. Further, the TPO excluded Max Healthscribe Limited and Weal Infotech Limited from the list of comparables on account of insufficient data for the current year. The TPO also excluded F I Sofex Limited and Tulsyan Technologies Limited from the list of comparables on account of his reasoning that these were start-up companies having turnover of less than Rs.1 crore. The TPO also rejected the assessee’s plea that Datamatics Technologies Limited and Hinduja TMT Limited are to be excluded from the comparable list of companies on account of high related party transactions. The TPO arrived at the adjusted operating profits of the comparables at 23.90% and made arm’s length price adjustment of Rs.36,89,34,440/-.
Contention of the Assessee
Exclusion on basis of lower turnover
The ld counsel of the assessee submitted that companies were not in the start-up phase and were in existence since FY 1998-99 and FY 2000-01. Further, these companies are listed or part of listed group and, therefore, there is clear distinction between profits and salaries. Further, he relied on the judgment of Techbooks International Pvt. Ltd. vs. DCIT in ITA No.240 /Del/2015 order dated 06.07.2015 in which it was held that the quantum of turnover can be no reason for the exclusion of a company which is otherwise comparable i.e. a company cannot be excluded from the list of comparables on the ground of its low turnover.
Held by CIT (A)
Exclusion on basis of lower turnover
The CIT (A) rejected the contentions raised by the assessee and upheld the deletion of companies by the TPO. It was held that such companies should be rejected as these companies are generally in the set-up phase of business and are also not big enough to establish distinction in profits and salaries of the key managerial personnel thereby significantly reducing the reliability of the financial data. The sale basket is narrow whereas the fixed cost and establishment cost of newly established companies are large. Therefore the TPO action is correct in rejecting companies having sales turnover less than Rs. 1 Crore.
Held by ITAT
Exclusion on basis of lower turnover
ITAT held that even though the assessee in its TP study has included the turnover filter of less than Rs.1 crore, the assessee has given reasons for inclusion of these two companies in the list of comparables, primarily for the reason that these are not start-up companies and functional data for these companies are reliable. The Tribunal in the case of Techbook International Pvt. Ltd. ITA No.240 /Del/2015 order dated 06.07.2015 has held that low turnover per se cannot be reason to exclude a company from the comparable test.
In view of the reasons given in the aforesaid order of Tribunal in case of Techbook International Pvt. Ltd., we hold that the CIT (A) is not justified in excluding companies from the list of comparables purely on account of its low turnover. The issue needs to be examined by the AO/ TPO whether these two companies are otherwise functionally similar to that of the assessee irrespective of having low turnover.
Accordingly appeal of the assessee partly allowed.
