INCOME TAX ACT, 1961

Section 92C

Transfer pricing - Computation of ALP - Selection of comparables - Functional dissimilarity

Assessee-company was engaged in business of manufacturing and sale of machine made woven carpets and spun yarn. AO noticed that the assessee rendered carpet designing services to its AEs and thus, he made reference to TPO for determining ALP of such international transactions. TPO selected company 'I' as comparable, however, the assessee objected to the same by submitting that it was functionally different and also a big brand. TPO rejected the assessee's contentions and included the same in the final list of comparables. Further, the assessee remained unsuccessful before the DRP as well. Held: It was found that 'I' had segments of rendering services in financial sector, manufacturing sector, telecom sector, retail sector and others. Further, the assessee's design services were meant only for manufacturing of carpets as against the 'I', which was engaged in rendering ITeS services not only for manufacturing but also for financial, telecom, retail and other sectors. Operating profit rates of such segments, as per segmental information, varied from approximately 16% to approximately 35% of the sectors in which 'I' rendered ITeS services. Thus, the TPO selected 'I' on entity level as comparable, which was obviously not correct. Not only that, the quantum of transactions carried out by 'I' was streets ahead of the assessee as the assessee earned total revenue of Rs. 5.54 crores from that segment and 'I' earned revenue of Rs. 1129.11 crores. Hence, the company 'I' was excluded from the final set of comparables.

REFERRED : CIT v. Pentair Water India Pvt. Ltd. (2016) 381 ITR 216 (Bom) : 2015 TaxPub(DT) 5492 (Bom-HC)

FAVOUR : In assessee's favour

A.Y. : 2011-12

INCOME TAX ACT, 1961

Section 92C

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