Income Tax Act, 1961

--Transfer pricing--Computation of ALP Selection of comparables-- As regards issue as to whether GDJL would be treated as comparable or not, assessee contended that GDJL did not report segmental results in annual accounts, the said company was earning its major revenue from trading activities, whereas assessee was a manufacture. Further, GDJL was a SEZ unit and getting various benefits like customs, octroi duty, concessional municipal/property taxes, cheaper finance at lower rates of interest, rebate of duty on electricity charges, easy availability of labour, lower sales promotion expenses, etc. Further more, it was not clear from records whether diamond unit or gold jewellery unit or both were SEZ units and TPO as well as DRP have not addressed this specific objection raised by assessee. As regards effect of exceptional results, unless and until there are specific reasons and factors, as provided in rule 10B, an entity cannot be excluded or eliminated from List of Comparables solely on such basis. Held: Acceptable. Issue of inclusion of GDJL in comparable cases is set aside to assessing officer/TPO in order to verify aforesaid aspects and then decide issue as per law.

The first objection of the assessee against GDJL is that the said company has not reported the segmental financial and therefore, when more than 80 per cent of the revenue of the said company is from the trading activity, the same cannot be compared with the assessee, who is in the business of manufacturing of diamonds. Undisputedly, the data available on record do not give segmental results of GDJL. The TPO has considered the segmental data and source of which is stated to be Capitaline. Since the bifurcation of revenue and expenses is not based as per the accounts reported by the company, therefore, the authenticity of such bifurcated data is not free from doubt. Further, there is no dispute that the GDJL has a SEZ unit which is having benefit of concessional levy, duty, taxes etc. Though it is not clear from the records whether the diamond unit or gold jewellery unit or both are SEZ unit however, these are crucial and important aspects for considering the company as comparable. The TPO as well as DRP have not addressed this specific objection raised by the assessee. When substantial revenue of the said company is from trading activity and segmental results are not available on record and further the said company is having a SEZ unit, therefore, in the facts and circumstances, these aspects require a proper verification and examination. Accordingly, this issue is set aside to the record of the assessing officer/TPO to verify these aspects as observed in this order and then decide this issue as per law. [Para 7] As regards the exceptional result, this issue is now settled by various decisions of this Tribunal that the factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under rule 10B(2). Therefore, unless and until there are specific reasons and factors as provided under rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit-making or loss-making entity because no such factor finds place either in rule 10B(2) or 10B(3) of IT Rules. [Para 7.1] Even as per OECD Transfer Pricing Guidelines, the extreme results m might consist of lesses or unusually high profits itself cannot be a factor for potential comparables, but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such extreme results, then only the case may be excluded from the proposed comparables. [Para 7.2] As regards the objection regarding acquisition of the Russian entity, Tribunal note from the record that the said entity was acquired on 10-3-2008, therefore, for the year under consideration, there cannot be any • influence on the results of the comparable GDJL due to such acquisition at the fag end of the financial year. [Para 7.4]