ITAT Delhi rejects Assessing Officer’s approach of cherry picking the comparables and proposing an arbitrary Transfer Pricing adjustment

Court : Delhi bench of the Income-tax Appellate Tribunal

Citation :ACIT Vs M/s Toshiba India Private Limited (2010-TII-14-ITAT-DEL-TP)

Brief :Recently, the Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of ACIT Vs M/s Toshiba India Private Limited (2010-TII-14-ITAT-DEL-TP) has rejected the Assessing Officer’s approach of cherry picking the com parables and proposing an arbitrary Transfer Pricing adjustment.

Facts of the case

• · representative and marketing services to its associated enterprises (AEs). The Company had bench marked its international transactions under the Transactional Net Margin Method (TNMM).
• · The Assessing Officer (AO) rejected the bench marking approach followed by the taxpayer on the basis that out of eight companies selected as com parables, three companies (all Public Sector Units) had margins higher than that of the taxpayer while one company (M/s Kitco Ltd) had negative margin.
• · The AO then proceeded to identify four com parables out of companies which were rejected by the taxpayer in its Transfer Pricing Documentation. The taxpayers’ justification for not selecting these companies as com parables was not considered by the AO.
• · The AO further observed that these four companies had earned margins greater than that of the taxpayer. Based thereon, the AO made an ad-hoc adjustment of 5 percent to the taxable income of the taxpayer.

CIT(A)’s Observations

• The Commissioner of Income-tax (Appeals) [CIT(A)] noted that the AO had, while rejecting the operating margins declared by the taxpayer, not utilized the full data and had considered only few companies which showed better results as com parables.
• Further, the CIT(A) observed that the adjustment of 5 percent to the operating margin was arbitrary in nature and was accordingly rejected.
• Aggrieved by the order of CIT(A), the Revenue filed an appeal before the Tribunal.

Tribunal’s Ruling

The Tribunal, after considering the rival submissions and perusing the material on record, affirmed the deletion of TP adjustment by the CIT(A) with the following observations:

• The approach of the AO in cherry picking the com parables is not justified; and
• The AO has erroneously proposed an ad-hoc adjustment of 5 percent to the operating profit margin of the taxpayer without allowing the benefit of +/- 5 percent range as provided in the provision to section 92C(2) of the Income-tax Act, 1961.

Our Views:-The judgment re-affirms the view that the arm’s length price must be determined by a systematic approach and cherry-picking of com parables is not acceptable. Further, the judgement upholds that in case the AO makes any changes to the set of comparable companies identified by the taxpayer, he must provide cogent reasons for the same.

NF