Comparable company having calendar year not usable for assessee following financial year-ITAT

Comparable company following calendar year for maintaining accounts can not be used in contrast to assessee following financial year ending 31st March despite functional similarities – ITAT

Prelude:
Chapter X of the Income Tax Act, 1961 (the Act) contains Special provisions relating to avoidance of Tax. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm length price (ALP).

Section 92C of the Act contains several methods for computation of ALP and provides that ALP shall be determined by any of the prescribed methods which is being most appropriate having regard to the nature of the transaction. One of the prescribed method under the section is “comparable uncontrolled price method”.

Further, the CBDT has notified Rule 10B of the Income tax Rules, 1962 (the Rules) for providing the manner in which any of the methods prescribed in section 92C shall be applied.

Also, as per section 92CA, where any person enters into an international transaction, the Assessing Officer (AO) may after approval of the Commissioner, refer the computation of the arm’s length price to the Transfer Pricing Officer (TPO) and the AO shall compute the total income of the assessee as per ALP determined by the TPO.

ABCAUS Case Law Citation:
ABCAUS 2161 (2018) (01) ITAT

The Challenge/Grievance:
This income tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (ITD/Revenue) against the direction of the Dispute Resolution Panel (DRP) to include a company in the list of comparable overlooking the fact that it was having a different financial year ending.

Important Case Laws Cited/relied upon by the parties:
CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 176 (Bom)

Brief Facts of the Case:
The assessee was a private limited company engaged in provision of information technology (IT) enabled back office support services in the nature of customized business/financial research support to a group.

The assessee had an ITES agreement with the said group under which it provided the above referred services. The assessee reported an international transaction of ‘Provision of IT enabled back office support services’. In order to demonstrate that its international transaction was at arm’s length price (ALP), the assessee selected certain companies as comparable including the company under dispute. The TPO excluded the disputed company from the list on the ground that it  was having year ending on 31^st December and had different year ending visà-vis the assessee. However, the DRP directed to include this company by considering the functional profile matching with the assessee.

Contention made on behalf of the Appellant Revenue:
The case of the Revenue was that the DRP overlooked the fact that the TPO excluded it on the ground that the company under dispute was having a different financial year.

It was submitted that the data for the year ending of the disputed company was not similar to that of assessee company and hence the same ought to have been excluded rather than retaining it on the basis of functional similarities.

Observations made by the Tribunal:
The ITAT noted that the respondent assessee was having financial year ending on 31^st March. As against that, the annual report of the disputed company was having calendar year ending on 31^st December. The assessee had included this company in its list of comparables. However, the TPO eliminated the same on the ground that it was following different year ending, namely, 31st December and, hence, was not comparable.

The ITAT observed that a valid comparison can be made only if the comparable company also has the same financial year. It was noted that sub-rule (4) of Rule 10B provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into.

The ITAT opined that from the language of said sub-rule (4), it is obvious that the comparability of an uncontrolled transaction can be analyzed only with the “data relating to the financial year” in which the international transaction has been entered into. In other words, if the tested party has March year ending, then, the comparable must also have the data relating to the financial year ending 31st March itself. If such a data is not available, then, a company albeit functionally comparable, disqualifies.

The Tribunal noted that the Hon’ble Bombay High Court while answering a similar question held that the provisions of Section 10B(4) are clear and obliges that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. The Ho’ble High Court rejected the submission on behalf of the Revenue that the mandate of Rule 10B of the Rules can be ignored as the difference was only of three months.

Decision/ Conclusion/Held:
The Tribunal held that comparable having a calendar year ending, cannot be compared with the assessee having a financial year ending notwithstanding the functional similarity between the two.