| 2017-TII-INSTANT-ALL-473 | 29 July 2017 |
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Pr.CIT Vs MITSUI & CO INDIA PVT LTD : SUPREME COURT OF INDIA (Dated: July 24, 2017) Income tax - Sections 14A, 37(1), 92CA & 143(3) Keywords - ALP - business profits - berry ratio - offshore supplies - PE - prior period expenditure - sales support services - service fee - RPT & TNMM The Revenue Department preferred the present SLP challenging the judgment, whereby the TP adjustment was deleted by the High Court after holding that the Tribunal's decision from previous AY would be binding on the assessee when such order was based on the jurisdictional High Court's decision and the issue involved was identical. Having heard the parties, the Supreme Court condoned the delay and granted leave to the Revenue Department to defend their case on the issue of TP Adjustment. Leave granted
HUAWEI TECHNOLOGIES INDIA PVT LTD Vs ITO : BANGALORE ITAT (Dated: May 31, 2017) Income tax - ALP - software development services - functional comparability - turnover filter - high profit margin The Assessee is wholly owned subsidiary of Huawei Tech Investment Company Ltd, Hong Kong, which was in turn a subsidiary of Huawei Technologies Company Ltd. The assessee provided software development services to its AE at Hong Kong as well as China under the Master Services Agreement entered into with these two companies. To bench mark its international transaction, the assessee selected 16 companies in its TP study analysis having mean margin at 12%. Therefore, the assessee claimed its international transactions at arms length being within the tolerance range of +5% of the comparable price. The TPO rejected the TP study analysis and after carrying out a fresh search, he selected 20 companies in the final set of comparables having mean margin of 23.65% and after allowing working capital adjustment of 1.87%, the adjusted mean margin was arrived at 21.78%. Accordingly, the TPO proposed an adjustment u/s. 92CA of Rs. 19,03,88,454/-. On appeal, the CIT(A) applied turnover filter of Rs. 1 crore to 200 crores and thereby excluded 7 companies from the set of comparables selected by the TPO. The CIT(A) has also excluded one company on the ground of high profit margin apart from 2 companies were found as functionally not comparable and directed to be excluded. Thus the CIT(A) rejected the 10 companies from the set of 20 selected by the TPO. On appeal, the ITAT held that, Whether only an extraordinary event resulting in abnormal high profit, can be a criteria for exclusion of a particular company from the set of comparables - YES: ITAT Whether mere high profit /loss is no sole criteria for selection of any entity as a comparable - YES: ITAT + as regards the turnover filter of Rs. 1 crore to 200 crores applied by the CIT(A), we find that the Tribunal has taken a consistent view that applying a turnover filter of a slab Rs. 1 to 200 crores is not proper as it gives unacceptable results. Therefore the Tribunal has considered a tolerance range of turnover as ten times of turnover of the tested party on both sides higher as well as low. As regards the high profit margin as a ground for exclusion of a comparable company it is well settled proposition that high profit margin or loss cannot be a ground or criteria for exclusion or inclusion of a company in the set of comparable though an abnormal or an extraordinary event resulting in abnormal high profit can be a criteria for exclusion of a particular company from the set of comparables. Therefore abnormal circumstances or extraordinary event can be a reason for exclusion and not the high profit margin alone; + the assessee is seeking exclusion of 12 companies from the set of comparables selected by the TPO whereas the revenue is seeking restoration of the companies which were rejected by the CIT(A) and particularly by applying the turnover filter and high profit margin. Therefore except two companies the CIT(A) did not examine the functional comparability of 8 companies rejected by it. Hence in the facts and circumstances of the case we set aside the entire issue of determination of arms length price and consequential transfer pricing adjustment to the record of the CIT(A) for deciding the functional comparability of all the companies objected by the assessee. Case remanded |
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