Arm’s Length Price can’t be determined using only two Comparables: ITAT [Read Order]

In Motorola Solutions India Pvt. Ltd vs Deputy Commissioner of Income Tax, the Delhi Bench of Income Tax Appellate Tribunal (ITAT) confirming the decision of Commissioner of Income Tax (Appeals) (CIT(A)) held that a set of only two comparables was not appropriate to determine the Arm’s Length Price.

The Assessee, Motorola Solutions India Pvt. Ltd is a subsidiary company of Motorola Inc USA. It is a 100% captive design centre for Motorola Inc USA and provides designing services to its holding company. The business of the assessee company was organized under six different divisions and one of such divisions namely Semi-Conductor Product Centre, International Transactions of providing Chip design/software development services were entered into with associated enterprises aggregating to Rs. 22.9 Crores. A reference was made by the Assessing officer (A.O) to the Transfer Pricing Officer (TPO) in order to determine the arm’s length price inter alia in respect of these international transactions. The assessee company had maintained segmental financial details and in the transfer pricing study report, TNMM was adopted as the most appropriate method to determine the arm’s length price of the international transactions entered into with its AE of providing software development services. Five entities were taken as comparables and since their average OP / TC as worked out at 11.06% was within the permissible variance range of 5% as against the OP / TC shown by the assessee, at 5.81% the consideration received for software development services from AE was claimed to be as at arm’s length. The TPO for the reasons given in his order rejected the first three comparables selected by the assessee. He accordingly selected a set of two comparables arrived at by applying the strict norms of comparability on the set of comparables furnished by the assessee in the TP study report with their average OP / TC at 18.05%. However, the two entities were rejected from the final list of comparables. The appeal was preferred to the CIT(A).

The CIT(A) did not dispute the average profit margin of two entities finally taken as comparables by the TPO at 1.27% as worked out by the assessee on the basis of financial data for the relevant financial year, he held that a set of two comparables could not properly determine the arm’s length price. Relying on the various judicial pronouncements, he held that arm’s length price should be computed by using a broader set of comparables. Aggrieved the assessee appealed before ITAT.

The Counsel for the assessee relied on the decisions of Delhi Bench of Tribunal in the case of Howarth India Private Limited vs. DCIT and J.P Morgan Advisors India Private Limited vs. DCIT and contended that even one company could be selected as comparable for benchmarking a transaction.

The bench comprising of Judicial Member Beena A. Pillai and Accountant Member P.M Jagtap distinguished the cases relied by the Counsel for the assessee. According to the Bench in those two cases a sizable number of comparables was initially selected by the Transfer Pricing Officer and after the process of exclusion, only one comparable was left. Under such compelling circumstances, the Tribunal held that one comparable company could be taken for benchmarking the arm’s length price.

“The Tribunal, however, observed specifically in the case of J.P. Morgan India Private Limited (supra) that if there are more than one comparables then various comparability factors can be examined and it may lead to a proper examination of ALP because many factors and differences get weed out making benchmarking the margin of nearest comparables. It is pertinent to note here that in the present case, three different sets of comparables were selected by the TPO and since the first set of five comparables selected by him was finally left with only two comparables, we find no infirmity in the action of the learned CIT(A) to adopt the second set of comparables selected by the TPO for consideration as the same provided vide base for determining the appropriate arm’s length price by following the transactional net margin method.” said the bench.