Rule 10B does not prescribe minimum number of companies for comparability

By | November 10, 2015

Rule 10B doesn’t prescribe minimum number of companies for comparability analysis and if an extraordinary event resulted in earning of high operating margin of company, it had to be excluded from the list of comparables in Transfer Pricing.

  [ITAT Hyderabad]

ADP (P.) Ltd. v. DCIT

ITA No. 471 of 2011

Date of decision: August 26, 2015

Facts of the case

The assessee is an Indian company, a subsidiary of ADP, Netherlands. It was a 100 per cent Exported Oriented Unit (EOU), basically engaged in the business of providing software development and related services. During relevant year, the assessee had entered into international transaction with its Associated Enterprise (AE) of providing services in two segments, i.e., software development segment and information technology enabled services (ITES) segment on a cost plus markup basis and had earned revenue from such international transactions. The Transfer Pricing Officer (TPO) opined that the method/process adopted by assessee in selecting comparable companies suffered from various defects which had resulted in selection of uncomparables as comparables whereas assessee had omitted companies which were functionally similar to assessee. He, therefore, rejected the TP document of the assessee. Moreover, while determining ALP of software development services segment, the TPO included reimbursement cost being cost of travel and stay of personnel to assessee. On appeal before the Appellate Tribunal, the assessee objected selection of 15 comparables out of 16 upheld by the Transfer Pricing Officer.

Decision of the Tribunal

The Tribunal held that where in case of one comparable selected by the Transfer Pricing Officer, there was amalgamation of another company, and the said extraordinary event resulted in earning of high operating margin of that company, it had to be excluded from the list of comparables. Software product development companies could not comparable in case of assessee, a captive ITES provider and had to be excluded. It was further held that Rule 10B does not prescribe that a particular number of companies have to be selected for comparability analysis and reimbursement costs should be excluded while working out operating costs as they do not involve any functions to be performed so as to consider it for profitability purposes.

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