Transfer Pricing

Arm’s Length Principle — Loss making companies are to be excluded in choosing comparable despite FAR matching if other aspects are not considered — as held by DelTrib in Yum! Restaurants (India) Pvt Ltd v Addl CIT & Others ; ITA Nos. 3796/Del/2006, 142/Del/2007 and 5122/Del/2010 : Assessment Year: 2002–2003, 2003–2004, 2006–2007

Merely because a company is showing losses would not cause it to loose its status of comparable if other criteria depicted status of comparables. A declaration of loss is an incidental of business which is at par with the profit. The assessee has considered these companies on the basis of their FAR Analysis, ie (function performed, assets employed and risk assumed). TPO observed that FAR of a company indicates the avowed objective of the company and the tools that it seeks to employ to achieve that objective. It is the financial result which will decide whether that company has been successful in achieving the objective or not. According to the TPO, if the assessee’s contention based on FAR analysis only is accepted then the process of choosing a comparable will not proceed beyond the matching of FAR. All types of other tests, ie data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Further, the assessee itself applied a filter of persistent operative losses and companies on that basis, what was the basis for inclusion of the loss making companies. The TPO has pointed out that their comparablity has been taken into consideration by the assessee on the basis of FAR analysis and other aspects have not been considered. TPO looked into other aspects also.

In favour of: The Revenue

Provision made by the assessee keeping in view past experience and the possibility of certain expenses cannot be disallowed merely because the provision was not utilised by the assessee in the next assessment year.

AO cannot classify a particular liability as “liability no longer required”. It is the assessee who has to proceed after taking into account the requirement of its business for writing off such liability. If the assessee is willing to pay the amount, then it would not be construed as liability no longer required.

Interest under s 234D cannot be leviable prior to the AY 2004–2005 because the operation of this section would be perspective in nature.

Service income earned by the assessee from M/s Yum! Restaurants (India) Ltd, Singapore is assessable as “business income” and not “income from other sources”.

In favour of: The Assessee

Revenue receipt — The amount received by assessee from one of the franchise towards its contribution for advertising, media and promotional activities which is to be transferred to another subsidiary YRMPL is revenue receipt in the hands of the assessee.

Expenditure incurred on recreational meeting at off-site organised for the welfare of employees cannot be allowed unless it is proved that they were incurred wholly and exclusively for the purpose of the business.

Interest Income — Interest income earned by the assessee not linked with its business activity and has simply deposited surplus fund in the bank is assessable as income from other source.

In favour of: The Revenue

Business expenditure — Expenditure incurred by assessee for food tasting and trials are not capital in nature.

In favour of: The Assessee

Decided on: 31 May 2011