Transfer Pricing: The contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP, unless it is proved otherwise

Non-operating income and expenditure should be excluded while computing the profits of the comparable companies.

For arriving at the net margin of operating income, only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration.

The assessee, a courier company, paid Rs. 43.46 crores to its holding company in Netherlands towards the reimbursement of cost in the transport of consignments. For arriving at the Arm’s Length Price (ALP), the assessee has adopted the Transactional Net Margin Method (TNMM), with operating profit/sale as Profit Level Indicator (PLI), as the most appropriate method. The assessee has identified four courier company as comparable and the arithmetical mean of their PLI comes to 3% where as the taxpayer’s PLI comes to 1% which lies within the 5% margin. The data used pertains to 2000–2001 and 2001–2002. Since the transaction was an international transaction and involved transfer pricing, a reference was made under s 92CA to the Transfer Pricing Officer (TPO). The TPO and CIT(A) adopted the TNMM and claimed that as the operating profit/operating income of the comparables was higher than that earned by the assessee, an adjustment had to be made. It was also claimed that the assessee was not entitled to rely on the data of earlier years. Being aggrieved, the assessee has filed the present appeal.

The issue is whether the international transaction of the assessee was at arm’s length and that multiple year data should have been considered for determining the ALP and that the CIT(A) and the TPO have erred in including non-operating income and expenses in computing the profits of the comparable companies, and whether the contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless it is proved otherwise.

The relevant financial year is 2001–2002, while the assessee has used the data pertaining to AYs 1999–2000 and 2000–2001. The assessee’s argument that at the time of the TP study, it did not have the data relating to relevant comparable, ie for the FY 2001–2002, is acceptable. However, as held by the CIT(A), the assessee has to adopt the data available for the TP study at the time of filing of income-tax returns. It is not the case of the assessee that by the time of filing of income-tax returns, the data relevant to FY 2001–2002, was not available. Further, the prior year’s data is relevant only if the assessee is able to prove that the pricing pattern of the assessee for the relevant financial year has been influenced by the market conditions/business cycle/product life cycle of the earlier years. The assessee being in the business of courier services, the fluctuation caused by business/economic/product life cycle would not in any way affect the pricing pattern of the services of the relevant financial year. In the absence of any cogent and reasonable reasons given by the assessee for justification of the use of multiple year data, except placing reliance upon the OECD guidelines and also the proviso to Rule 10B(4) of the Income-tax Act, this Court does not see any reason to interfere with the order of the CIT(A). The OECD guidelines are not of a binding nature and even the provisions to Rule 10B(4) only provides that any subsequent year’s data cannot be considered. The CIT(A) rightly held that the contemporaneous data of the relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless it is proved otherwise.

The argument that the assessee has not been given an opportunity for the inclusion of a new company for determining the ALP is not acceptable because the CIT(A) has clearly observed that M/s Gati Ltd., which is the comparable taken by the CIT(A), was the comparable taken in the subsequent financial year and the assessee had raised no objection to the same, when the nature of services are the same and the risk involved are also the same.

For arriving at the net margin of operating income, only operating income and operating expenses for the relevant business activity of the assessee are to be taken into consideration. The other incomes, such as dividend income, profit on sale of assets, donations as well as non-operating expenses which are included in the operating incomes of other comparable companies should be excluded as it effects the net margin of the operating profits of the comparables. The comparison has to be between the likes and on the equitable grounds of the indicators of the comparison, and therefore only the income derived from the operation of the said activity are to be considered. Similarly, the working capital adjustments also have to be considered while arriving at the operating net margins. Thus, this issue is remanded to the file of the AO/TPO to re-work out the operating margins of the comparables of the assessee and to make the adjustments of the transfer pricing accordingly.

The ALP shall be arrived at after giving the standard deduction of 5% of the arithmetical mean arrived at by the TPO/AO as provided under proviso to s 92C (2), before making adjustments of the transfer price. The AO is directed to adopt the arm’s length price accordingly.