18. Transfer Pricing – Once comparable companies have been found functionally non comparable – then the same should be excluded – the same cannot be include merely on the basis of assessee’s inclusion in the transfer pricing study report – There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee

Commissioner of Income Tax vs. M/s. Tata Power Solar
Systems Ltd. [ Income tax Appeal no 1120 of 2014 dt : 16/12/2016 (Bombay High
Court)].

[M/s. Tata Power Solar Systems Ltd v Dy. CIT. [ ITA NO.
6657/MUM/2012;  Bench : K ; dated
15/01/2014 ; A Y: 2008-09. Mum.  ITAT ]

The Assessee is engaged in design, development and
manufacture and sale of Solar Modules and Systems. During the year, the
Assessee had reported International Transaction with its Associated Enterprises
(AE). In the Transfer Pricing Study submitted by the Assessee to the Revenue,
it had included M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. in the list
of two comparables for the purpose of arriving at Arms Length price (ALP) in
respect of its transactions entered into with its AE. However, before the Transfer
Pricing Officer (TPO) itself, the Assessee sought to withdraw the two companies
from the list of comparables. This, inter alia on the ground of
functional differences. However, the same was not permitted by the TPO and was
taken into consideration while determining the ALP. This resulted in a draft
Assessment Order based on ALP arrived at on a comparability study inclusive
of  the two companies.  The Draft Resolution Panel (DRP) on an
application made to it by the Assessee did not disturb the said inclusion  among the list of comparables to determine
the ALP as reflected in the draft Assessment Order. This was essentially on the
ground that the Assessee had itself relied upon the two companies as
comparables. Therefore, it was not permissible for the Assessee now to withdraw
the two companies from comparability analysis. 

The Tribunal allowed the Assessee’s appeal. The Tribunal
found that the ultimate aim of the transfer pricing provisions is to determine
the appropriate ALP, which can be done only by bench marking with the proper
comparables based on FAR analysis and under the prescribed methods. If in the
course of the proceedings, it is found that certain comparables do not stand
the test of functional analysis or for some reason, then the same should be
excluded and  they should not continue to
be included simply because the assessee had included the same initially. If the
cogent reasons have been given by the assessee for excluding the same, the same
should be considered. The initial onus or duty is cast upon the assessee to
carry out the selection of proper comparables based on FAR analysis and by
adopting suitable transfer pricing method and then analyse its transaction to
show the correct arm’s length result. Thereafter, it is axiomatic that the
taxing authorities / TPO, should scrutinise the assessee’s report on arm’s
length result and the entire process of arriving at the ALP, whether they are
based on transfer pricing principles and statutory provisions or not. If he
himself finds some irregularity or mistake in any of the process or the steps
undertaken, then he is bound to correct in accordance with the settled
principles and law.

If the assessee points out some mistake or any irregularity
in the arm’s length result, then it is incumbent upon the TPO to examine and
consider the same and if the assessee’s contentions are found to be correct or
tenable, then he has to accept the same. There cannot be estoppel against
correct procedure of law and principles solely on account of acquiescence or mistake
of the assessee. The TPO is required under law to analyze every comparableand
then only determine the correct ALP based on proper comparability analysis.
Thus, there is no  merit in the
contention of the Revenue that simply because the assessee has included these
two companies then the assessee is debarred from objecting to the same, if
there are strong and cogent reasons.

It was observed  that
the  two companies Indo Wind Energy Ltd.
and B.F. Utilities Ltd. are engaged in the business of generation of Wind
Energy Ltd., whereas the assessee is Tata Power Solar Systems Ltd. engaged in
the business of manufacture and sale of solar cells, photo voltaic modules and
systems which are used for solar energy. The assessee is not into generation of
energy. These two functions are 
different. The assessee before the TPO / DRP has placed the key
difference between the functions carried out by the assessee and the functions
required for generation of wind energy. These have not been rebutted either by
the TPO or by the DRP but have been rejected mainly on the ground that the
assessee has included the same initially in its transfer pricing study report.
It is also seen from the record that in the subsequent year, the TPO has
specifically issued a show cause notice for inclusion of these two companies,
however, on the assessee’s objection based on functional difference, the TPO
has excluded these two companies.

Thus, accordingly, Indo Wind Energy Ltd. and B.F. Utilities
Ltd., were to be excluded from the list of final comparables.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the Transfer Pricing Mechanism
requires comparability analysis to be done between like companies and
controlled and uncontrolled transactions.