Genisys Integrating System (India) Pvt. Ltd. Vs DCIT
Decided by- ITAT Bangalore
Decided on- 5th Aug 2011
Appeal No. -IT 1231/BANG-2010
Summary and relevant extract from of the above case law-
All the com parables have to be compared on similar standards and the assessee cannot be put in a dis-advantageous position, when in the case of other companies adjustments for under utilisation of manpower is given. The assessee should also be given adjustment for under utilisation of its infrastructure. The AO shall consider this fact also while determining the ALP and make the TP adjustments.
Section 92B of the IT Act gives the meaning of ‘international transactions’ to mean” a transaction between two or more associated enterprises either or both of whom are non-resident “.
Chapter X of IT Act relates to special provisions relating to avoidance of tax and s. 92 therein relates to computation of income from international transactions having regard to ALP. Thus, it can be seen that only international transactions between the associated enterprises either or both of whom are non-resident are to be computed having regard to ALP. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactions of the AE only by adopting the operating revenue and operating costs of these transaction only.
The TPO himself has rejected the companies which are making losses as com parables. This shows that there is a limit for the lower end for identifying the com parables in such situation; we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various bench of the Tribunal, when companies which are loss making are excluded from com parables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filler is very important and the companies having a turnover of Rs.1.00 core to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.
The file is remand back to TPO with the following directions;
a) The operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered;
b) The com parables having the turnover of more than 1.00 crore but less than 200.00 crores only shall be taken into consideration;
c| All the information relating to com parables which are sought to be used against the assessee shall be furnished to the assessee;
d) The assessee shall be given an opportunity of cross examining the parties whose replies are sought to be used against the assessee if the assessee so desires;
e) To consider the objections of the assessee that relate to additional com parables sought to be adopted by the TPO and pass a detailed order and
f) To give the standard deduction of 5% under the proviso to s. 92C(2) of the Act.