2014 (11) TMI 429 - AT - Income Tax

Determination of ALP Selection of comparables Held that - Assessee has rendered marketing, sales support and coordination services to the group companies for their sales in India - The main transactions of assessee are in the nature of marketing and various sales support services, offers and quotes received from groups customers in India, providing information to group companies on market opportunities, trends follow up for payments and deliveries, etc. - this transaction of assessee was considered to have not been entered at ALP - Since assessee s case does not fall within 5% range, an adjustment was made - Assessee approached to the DRP, who has excluded Basiz Fund Services Pvt. Ltd., Cameo Corporate Services Ltd., Cyber Media Research Ltd., ICRA Management Consulting Services Ltd. And Rockman Advertising & Marketing India Ltd. as comparables for determining ALP - The DRP also directed for exclusion of ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. since these were loss making companies. DRP has excluded these companies from comparables on the plea that these companies are functionally different from that of assessee company - In respect of ICRA Management and Rockman Advertising &Marketing (India) Ltd., the DRP found that since the two companies were loss making companies, hence, these two comparables were also excluded and DRP directed to recompute the appropriate adjustment and find out if the same is 5% margin - ICRA Management and Rockman Advertising & Marketing (India) Ltd., which were selected as comparables by assessee, was rejected by TPO - Since the DRP has confirmed the action of TPO, there is no reason for the exclusion there is no merit in the appeal of the Revenue Decided against revenue.

Issues Involved:

1. Exclusion of certain companies as comparables for determining Arm's Length Price (ALP).
2. Functional similarity of the assessee company and the selected comparables.
3. Maintainability of the appeal by the Revenue due to low tax effect.
4. Directions of the Dispute Resolution Panel (DRP) regarding the exclusion and inclusion of specific comparables.
5. Adjustment of ALP based on the DRP's directions.

Detailed Analysis:

1. Exclusion of Certain Companies as Comparables for Determining ALP:

The primary issue raised by the Revenue was whether the DRP was correct in directing the Transfer Pricing Officer (TPO) to exclude Basiz Fund Services Pvt. Ltd., Cameo Corporate Services Ltd., Cyber Media Research Ltd., ICRA Management Consulting Services Ltd., and Rockman Advertising & Marketing India Ltd. as comparables for determining ALP. The DRP observed that these companies were functionally different from the assessee, which provided marketing and sales support services. Specifically, Basiz Fund was engaged in financial reporting and investment accounting, Cameo Corporate in registry and medical transcription services, and Cyber Media in market research and management consultancy. The DRP concluded that these companies were not comparable to the assessee's business operations and directed their exclusion.

2. Functional Similarity of the Assessee Company and the Selected Comparables:

The DRP analyzed the functional profiles of the comparables and the assessee. It was noted that the assessee, part of the Rolls-Royce Group (Marine Division), was engaged in providing marketing and sales support, assembling services, and after-sales services. The DRP found that the comparables selected by the TPO, such as HCCA Business Services Pvt. Ltd. and TSR Darashaw Ltd., were involved in payroll processing and other administrative services, which were not functionally similar to the marketing activities of the assessee. Therefore, the DRP directed the exclusion of these companies from the list of comparables.

3. Maintainability of the Appeal by the Revenue Due to Low Tax Effect:

The assessee's representative contended that the tax effect in the Revenue's appeal was below Rs. 3 lakhs, making the appeal non-maintainable as per the Central Board of Direct Taxes (CBDT) Circular. The Tribunal considered this argument and found merit in it, leading to the dismissal of the Revenue's appeal on the grounds of low tax effect.

4. Directions of the DRP Regarding the Exclusion and Inclusion of Specific Comparables:

The DRP directed the exclusion of ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. on the basis that these companies were consistently loss-making. The DRP instructed the TPO to exclude these companies and recompute the ALP, ensuring that the assessee's margin fell within the permissible range of +5%. The Tribunal upheld the DRP's directions, noting that the DRP provided detailed reasons for the exclusion based on functional dissimilarity and consistent losses.

5. Adjustment of ALP Based on the DRP's Directions:

The Tribunal reviewed the adjustments made by the TPO and the DRP's directions. It was found that the TPO had initially rejected all 11 comparables proposed by the assessee and selected 5 of its own, resulting in an adjustment of Rs. 93,83,628/-. The DRP's directions led to the exclusion of certain companies and the inclusion of others, ultimately reducing the adjustment. The Tribunal noted that even if the Revenue's appeal was allowed, the arithmetic mean of the comparables' margins would fall within the permissible range, making the appeal academic. Consequently, the Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection.

Conclusion:

The Tribunal upheld the DRP's directions for the exclusion of certain comparables due to functional dissimilarity and consistent losses. The Revenue's appeal was dismissed on the grounds of low tax effect, and the assessee's cross-objection was rendered academic. The order emphasized the importance of functional comparability in determining ALP and the adherence to CBDT guidelines on tax effect for maintainability of appeals.

← Previous Next →