Monday, March 11, 2013

No embargo on TPO to search for any number of comparables as longs as he selects only relevant one

The provisions of Transfer Pricing do not fix any upper limit on no. of comparables that can be selected by TPO. Further there are no restrictions on the powers of TPO in carrying out fresh search for the relevant comparables 

In the instant case, the assessee was providing Information Technology Enabled Services (ITES) to the Associated Enterprises. TPO accepted 8 out of the 11 comparables of assessee. However, he felt that the number of comparables were insufficient. Consequently, he conducted a fresh search and added 22 comparables to the list of 8 and made TP adjustment. Assessee contended that TPO having accepted 8 comparables selected by assessee, he cannot search for fresh comparables.

On appeal, the Tribunal held as under:

1) Under the TP regulations, there is no embargo on the powers of the TPO in carrying out fresh search for gathering more relevant information, documents etc., while determining the ALP in relation to international transactions;

2) Assessee’s contention that TPO can not search for fresh comparables can’t be accepted as the sufficient number of comparables depends upon the facts and circumstances of the each case .There cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP;

3) To get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction;

4) Under the Transfer Pricing Regulations, the number of comparables may be one or more than one, but there is no upper limit prescribed under section 92C of the IT Act;

5) However, the first proviso to section 92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under TP Regulations provided under the IT Act; and

6) Where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade etc., to which the comparables and international transactions belong – Willis Processing Services (I) (P.) Ltd. v. Dy.CIT [2013] 30 350 (Mumbai - Trib.)

In addition to the issue as discussed above, the Tribunal has dealt with following issues as well:

a) Whether merger and demerger of entities can be a ground for their exclusions from the comparables?

b) What should be the tolerable limit of related party transactions in comparables?

c) Whether loss making and high-profit making entities to be excluded from comparables?

d) Whether turnover criteria is relevant for exclusion of comparables?