Case Law Details
Adjustment can be made in the assessees own profit margin in TP case to make it comparable provided there should not be any extraordinary and abnormal differences
Brief of the case:
Assessee had reduced its operating expenses to calculate ratio of operating profit/Total cost which was the base to calculate the value of export of goods in transfer pricing on the basis that it was its first year of operation and the initial cost would be high which will not incur in the forthcoming years of operation. But The AO/TPO had not accepted the assessee’s decision on the basis that the adjustment can only be made in the profit margin of the comparable company not in calculating the profit margin of assessee. AO/TPO had removed 2 companies from the list of the comparable companies because one had suffered pushback from the change in the government policies because of which its profit margin reduced and other on the basis that the company had 3 working segments whose fixed assets could not be separated. ITAT was of the view that the adjustment had to made in the profit margin if without making adjustment the companies were not comparable. More over the company could not be removed just because of the reason that it had 3 working segments because the company shows its segmental results.
Facts of the case:
Assessee was wholly owned subsidiary of UK co.Assessee used operating cost/Total cost for international transaction of export of finished goods .The assessee had adjusted its profit level Indicator (PLI) to 10.79% as against the unadjusted OP/TC at(-) 45.23% because of its first year of operation and in its first year operating cost are very high. But AO/TPO refused the adjustment made by the assessee on the ground that the adjustment could only be made in the profit margin of the comparable company not in the profit margin of the assessee Moreover AO/TPO also removed 2 companies from the list of comparable companies because of the reason that the company had reduced its profit because of the change in the government policies and the other on the basis that it had 3 working segment with common fixed assets without giving effect that it declares it result segment wise.
Contention of the assessee:
Assessee had adjusted its PLI to 10.79% as against the unadjusted OP/TC at (-) 45.23% on the basis that it is in its first year of operation and the workmen were in the learning stage and other factors to calculate the value of international transaction of export of goods. Assessee was of the view that these were those costs which would not incur in the next year. More over assessee was also of the view that the AO/TPO erred in removing the 2 companies from the list of comparables .
Contention of the revenue :
Revenue was of the view that the assessee erred in adjusting the profit margin for calculating the value of international transaction of export of goods because as per the transfer pricing rules adjustment could only be made in the profit margin of comparable company not in the profit margin of assessee company. Secondly,revenue argued that the company with which assessee was comparing whose operating profit was also negative was not at all comparable because that negative OP is due to the change in the government policies and compensation given to the retrenched employees So that amount was abnormal but the reason given by the assessee that it was its first year of operation was not at all abnormal. The other company with which assessee was comparing was having different segments and having same fixed assets which was not separable ,so not comparable.
Held by respective court:
ITAT held that the comparison could be made between 2 companies only if they were same in all aspects of comparison, So if we compare the fresh company which was its first year of operation with the company who is old ,so that would not work at all so required adjustment had to be made in the profit margins of fresh company to make it comparable with the other company otherwise comparison would be wrong. Moreover revenue was right in removing the first company from the comparable list on the basis that there were abnormal costs in that company because of the change in the government policies and compensation paid to the retrenched employees and in the assessee company there were not an abnormal cost. High cost incurred in the first year of operations were not abnormal cost. Revenue was wrong in removing the 2nd company from the list of comparables on the basis that there were 3 working segments because that comparable company presents their results segment wise. ITAT set aside the order of AO/TPO and asked to make the comparison the basis of the above observations.
