2014 (12) TMI 1212 - AT - Income Tax

Transfer pricing adjustment - choice of comparable - Held that - M/s. Artefact Projects Ltd. company is having a very high percentage of related party transaction it cannot be considered as a comparable. We accept the contention of the Ld. Counsel and direct for the exclusion of this company from the final list of comparables. M/s.NTPC Electric Supply Ltd is a Government of India enterprise and is involved in enhancing and bringing sectoral reforms process and has been participating in various projects of distribution infrastructural development programmes under consultancy assignments. Considering all these facts this company is not functionally comparable. It is therefore directed to exclude this company from the final list of comparables. RITES Limited be excluded from the final list of comparables as it is in providing engineering services and to end to end solutions and therefore not functionally comparables with marketing support services. Water & Power Consultancy Services (India) Ltd. (Seg) be excluded from the final list of comparables as main fields of specialization of this company covered irrigation of drainage flood control and Land Reclamation River management dams Reservoir Engineering and Barrages Integrated Agriculture development Watershed management Hydropower and Thermal Power Generation Power Transmission and Distribution Rural Electrification Ground Water Exploration Minor irrigation etc

Issues Involved:
1. Inclusion and exclusion of comparables in Transfer Pricing analysis.
2. Functional comparability of selected companies.
3. High related party transactions.
4. Government-owned companies as comparables.
5. Tribunal's authority to allow exclusion of comparables chosen by the assessee.

Detailed Analysis:

1. Inclusion and Exclusion of Comparables in Transfer Pricing Analysis:
The assessee, a 100% Shell-owned company, filed an appeal against the assessment order regarding the computation of arm's length price (ALP) for international transactions. The Transfer Pricing Officer (TPO) included certain comparables which the assessee objected to, leading to a dispute over the final list of comparables.

2. Functional Comparability of Selected Companies:
The TPO rejected some comparables selected by the assessee and included others. The assessee objected to the inclusion of M/s. Artefact Projects Ltd., M/s. NTPC Electric Supply Ltd., M/s. RITES Ltd., and M/s. Water & Power Consultancy Services (India) Ltd., arguing that they were not functionally comparable.

3. High Related Party Transactions:
M/s. Artefact Projects Ltd. was excluded from the final list of comparables due to its high related party transactions, which constituted 84.97% of its total transactions. The Tribunal accepted the assessee's contention and directed the exclusion of this company.

4. Government-Owned Companies as Comparables:
M/s. NTPC Electric Supply Ltd. and M/s. RITES Ltd. were excluded because they are government-owned and involved in high-end services or diverse activities not comparable to the assessee's advisory and support services. The Tribunal noted that these companies provide end-to-end solutions and are engaged in sectors like infrastructure and rural electrification, making them functionally incomparable.

5. Tribunal's Authority to Allow Exclusion of Comparables Chosen by the Assessee:
The Tribunal supported the assessee's right to argue for the exclusion of comparables initially chosen by it. Citing previous decisions, the Tribunal emphasized that the purpose of income tax assessment is to determine the correct income, and the Revenue should not take advantage of the assessee's mistakes. The Tribunal referenced the case of Stream International Services Ltd., where it was held that the assessee could modify a wrong stand taken at the time of filing the return.

Specific Exclusions:

i) M/s. Artefact Projects Ltd.:
This company was excluded due to its high percentage of related party transactions, which made it unsuitable as a comparable.

ii) M/s. NTPC Electric Supply Ltd.:
Excluded for being a government-owned entity involved in diverse activities and high-end services, making it functionally incomparable.

iii) M/s. RITES Ltd.:
The Tribunal noted that this company provides high-end engineering consultancy services and is involved in significant infrastructure projects, making it unsuitable as a comparable.

iv) M/s. Water & Power Consultancy Services (India) Ltd.:
Excluded for similar reasons as RITES Ltd., being a government undertaking providing specialized engineering consultancy services.

Final List of Comparables:
After excluding the four companies, the remaining comparables were:
1. Educational Consultants India Ltd.
2. ICRA Management Consulting Services Ltd.
3. UDC (India) Ltd.
4. Indus Technical & Financial Consultants Ltd.
5. Technicom-Chemie (India) Ltd.

Conclusion:
The average margin of the remaining comparables was 8.68%, leading the Tribunal to conclude that the international transactions entered by the assessee were at arm's length. Consequently, the Tribunal directed the Assessing Officer to delete the Transfer Pricing Adjustments, allowing the appeal filed by the assessee along with the additional ground.

Order Pronounced:
The appeal was allowed, and the order was pronounced in the open court on 10th December, 2014.

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