Avoidance of tax-Transfer pricing-Arms’ length price-Selection of comparables.

S.92C: Avoidance of tax-Transfer pricing-Arms’ length price-Selection of comparables.

 

Assessee was an indirect subsidiary of Rhodia S.A. France. Assessee-company, incorporated in India,

was primarily involved in canvassing of Rhodia Products from and around the world to the various

customer of India. AO referred the matter to TPO. TPO rejected most of the assessee's comparable

companies on the ground that assessee has taken the criteria of filtration, the ratio of sales in trading

upon gross sales which are less than 90 percent, whereas, it should have been less than 75 percent.

Second filtration criteria which was used by the assessee for selection of comparable cases were the

companies which were having export turnover of 20 percent out of gross sales, as per TPO this should

have been Nil, as assessee's exports were negligible. TPO also rejected company, Oregon

Commercials Ltd., a comparable company short listed by the assessee. Average gross profit margin

was taken at 14.60 percent ALP was determined at Rs.1,88,37,650, and enhancement was made at Rs.

81,78,650. Subsequently, in rectification proceedings u/s 154, enhancement on account of arm's

length price was reduced, after taking the gross profit margin of 10.94 percent. CIT(A) deleted

addition. The Tribunal held that assessee's sales on account of trading, accounts for 77 per cent of its

gross sales which is almost very near to the 75% which is the filtration criteria adopted by the TPO.

Criterion adopted by the TPO for selection of comparable companies is absolutely correct. As regard

to the companies having export sales being less than 20 per cent of the total sales, it is seen that

assessee's exports are around 13 per cent, therefore, the selection criteria of 20 per cent of the export

does not seem to be correct one. TPO's rejection of this criteria is also not correct that it should be

taken as "Nil" or zero percentage. Criteria for selection of comparable companies should be the

companies having export sales of in and around 13 percent. Reasoning given by the TPO for

elimination of company Oregon Commercials Ltd. from comparables is not correct, should be taken

into consideration after adopting the above two selection criteria. The impugned order passed by the

Commissioner (Appeals) is set aside and restore the matter to the file of the TPO and direct him to

compute the assessee's average gross profit margin in determining the ALP (A.Y.2003 – 04)

ACIT v. Rhoida Chemicals India (P) Ltd. (2013) 81 DTR 29 (Mum.)(Trib.)