2015 (11) TMI 1562 - AT - Income Tax

Transfer pricing adjustment - selction of comparable - Held that - Holtec Consulting Private Limited engaged in providing engineering support services for bulk material handling and structural steel detailing etc. having plant and machinery as part of its fixed assets and inventory in its books, it has also large portion of cost as sub-contracting and profile of Holtec is diametrically opposed to the assessee company which is engaged in engineering design and drawing for various overseas AEs to support overseas offices turnkey project execution. The assessee company has neither any plant and machinery as part of its fixed assets and inventory in its books nor has large portion of its cost as sub-contracting cost. So, it cannot be taken as a comparable in any case. RITES Ltd is functionally distinctive having been engaged in the area of engineering consultancy, traffic studies, export of locomotives and maintenance of the locomotives, construction and project management for railway track, electrification together with traffic and software consultancy assignments as against, the appellant company which is engaged in engineering design and drawing for various overseas AEs to support overseas offices on turnkey project execution basis. Webcam Consultancy Service Indi Ltd - perusal of the P & L account statement for the year ended 31.03.2005, which has otherwise not been reproduced above, which has otherwise not been disputed by the TPO, which shows that income to the sales income is more than 75% i.e. 99.38%. So, apparently TPO ha arbitrarily rejected this comparable in transfer pricing. So, we are of the considered view that the matter is required to be restored to the TPO regarding this issue. Engineers India Ltd. is company is ordered to be excluded from the list of comparables as the Government companies cannot be taken as comparables for TP by following the law laid down by Hon ble Jurisdictional High Court in M/s. Avaya India Pvt. Ltd. 2011 (2) TMI 1294 - ITAT DELHI and M/s. Thyussen Krupp Industries India Pvt. Ltd. 2013 (11) TMI 930 - ITAT MUMBAI M/s. Steewards Lloyed India Ltd. - TPO has rejected the companies on the sole ground that these companies fall in service filter and has service income to sales income ratio of less than 75% whereas a bare perusal of the audited financial statement of the company for the year ending 31.03.2004 lying at page 48 of appeal set goes to prove that this company has service income to sale is more than 75% i.e. 93.82%; hence arbitrarily rejected by the TPO/ DRP. So, M/s. Steewards Lloyed India Ltd. qualifies for adoption as comparable for transfer pricing.

Issues Involved:
1. Rejection of comparables adopted by the appellant.
2. Inclusion of companies that are not functionally comparable.
3. Inclusion of companies with high/supernormal margins.
4. Inclusion of government-held enterprises as comparables.
5. Incorrect computation of operating margins of certain comparables.
6. Denial of economic adjustments for idle capacity and difference in risk profile.
7. Use of current year data for comparability despite incomplete data at the time of preparation of Transfer Pricing Documentation.
8. Enhancement of appellant's income beyond the original assessment.
9. Charging of interest under sections 234B, 234D, and 244A.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Rejection of Comparables Adopted by the Appellant:
The appellant contested the rejection of its selected comparables by the TPO/DRP, arguing that the additional/modified quantitative filters lacked valid and sufficient reasoning. The Tribunal noted that the TPO had excluded comparables based on criteria such as unavailability of data for the financial year 2004-05, revenue thresholds, and functional dissimilarity. The Tribunal found that the TPO had arbitrarily rejected certain comparables without a speaking order, necessitating a review.

2. Inclusion of Companies That Are Not Functionally Comparable:
The Tribunal examined the inclusion of companies like Holtec Consulting Pvt. Ltd. and RITES Ltd. as comparables. It was found that Holtec provided comprehensive services, including plant operations, which were functionally different from the appellant's engineering design and drawing services. Similarly, RITES Ltd. was engaged in diverse activities like engineering consultancy and traffic studies, unlike the appellant. The Tribunal ruled that these companies were not functionally comparable to the appellant.

3. Inclusion of Companies with High/Supernormal Margins:
The Tribunal addressed the inclusion of companies with high margins, such as Holtec Consulting Pvt. Ltd., which had significant sub-contracting costs and different asset profiles. The Tribunal concluded that such companies should not be included as comparables due to their distinct operational characteristics.

4. Inclusion of Government-Held Enterprises as Comparables:
The appellant argued against the inclusion of government-held enterprises like Engineers India Ltd., citing that profit motive is not a relevant consideration for such entities. The Tribunal agreed, referring to precedents where government companies were excluded from comparables due to their social objectives and potential for operating at a loss.

5. Incorrect Computation of Operating Margins of Certain Comparables:
The Tribunal found that the TPO had incorrectly computed the operating margins by not considering economic adjustments and treating foreign exchange fluctuations as non-operating expenses. This necessitated a review and correction of the computations.

6. Denial of Economic Adjustments for Idle Capacity and Difference in Risk Profile:
The Tribunal noted that the DRP had denied economic adjustments for idle capacity and risk profile differences without proper consideration of the appellant's submissions. The appellant had demonstrated that it operated as an independent entity and should be compensated for non-utilization of capital. The Tribunal ruled that these adjustments should be reconsidered.

7. Use of Current Year Data for Comparability Despite Incomplete Data:
The Tribunal observed that the TPO had used current year data for comparability, despite the appellant's contention that complete data for the financial year 2004-05 was not available at the time of preparing Transfer Pricing Documentation. The Tribunal directed a review of this approach.

8. Enhancement of Appellant's Income Beyond the Original Assessment:
The appellant contended that its income should not be enhanced beyond the original assessment as a consequence of the Tribunal's directions. The Tribunal agreed, ruling that any enhancement should be within the limits of the original assessment.

9. Charging of Interest Under Sections 234B, 234D, and 244A:
The Tribunal did not specifically address the issue of charging interest under sections 234B, 234D, and 244A, as it was deemed of academic nature and not requiring adjudication.

10. Initiation of Penalty Proceedings Under Section 271(1)(c):
Similarly, the Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c), as it was also considered of academic nature.

Conclusion:
The Tribunal allowed the appeal for statistical purposes and ordered the file to be restored to the TPO for passing a fresh order after providing an opportunity of being heard to the parties. The Tribunal emphasized the need for a detailed and reasoned approach in selecting and rejecting comparables, considering economic adjustments, and ensuring functional comparability. The order was pronounced in the open court on 20th November 2015.

← Previous Next →