2014 (12) TMI 212 - AT - Income Tax

Selection of comparables CRISIL Ltd. Held that - CRISIL Limited was proposed by the assessee itself in its transfer pricing document after considering functional, assets, risk and economic analysis of the comparable company it has already been held that in case of comparables having different year ending, the same should be ignored the matter is remitted back for reconsideration of CRISIL Limited as comparable after considering assessee s contention regarding different year ending being followed by the assessee vis- -vis CRISIL Limited. ICRA Online Limited Held that - The information services segment was used for computation of margin in the transfer pricing study - The assessee itself has used it as a comparable in its transfer pricing study/comparables - Since functionally it is comparable with that of assessee, therefore, assessee s contention for exclusion of ICRA Online Limited has no merit. In House Productions Limited Benefit of economic data adjustment and 5% variation - Held that - Keeping in view the computation of margin and also the activities in which In House Productions Limited is engaged which is stated to be basically healthcare services, not comparable to the assessee, the matter is remitted back to the AO/TPO/DRP for fresh consideration - also, after re-computation, assessee should be considered for benefit of 5% range from the transfer price, if the same falls within 5% as per the proviso to Section 92C(2). Adhoc disallowance of 25% of foreign travelling expenses Held that - The disallowance has been made merely on the plea that evidence has been filed by the assessee on sample basis after considering the detailed information furnished in the form of statement giving details and purpose of foreign travelling expenses, place of foreign travelling, purpose of visit, name of person visited, amount incurred on travelling, boarding and lodging etc. the observation of the lower authorities were that some of the airways bills were not in the name of assessee company - Keeping in view the nature of assessee s business vis- -vis necessity of journey undertaken which was essentially for the purpose of business, the AO is directed to restrict the disallowance to the extent of 10% of the expenditure so incurred in place of 25% made by the lower authorities Decided partly in favour of assessee

Summary

Issues Involved:
1. Transfer pricing adjustment on provision of marketing support services and R&D support services.
2. Rejection of comparable companies by TPO and selection of comparables for benchmarking international transactions.
3. Disallowance of foreign travel expenses.
4. Working capital adjustment.
5. Economic and risk adjustments.
6. Benefit of 5 percent range under Section 92C(2) of the Income Tax Act.
7. Charging of interest under sections 234B, 234C, and 234D of the Act.

Issue 1: Transfer pricing adjustment on provision of marketing support services and R&D support services:
The appeal challenges the addition to the total income of the assessee based on the directions of the DRP regarding transfer pricing adjustments and disallowance of foreign travel expenses. The TPO made an adjustment to the international transactions related to R&D support services, leading to a corporate tax addition. The appeal contests these additions and disallowances.

Issue 2: Rejection of comparable companies and selection of comparables for benchmarking:
The TPO rejected some comparable companies selected by the assessee and accepted others for benchmarking international transactions. The TPO's selection of comparables and determination of arm's length margin are disputed. The DRP upheld the TPO's approach and enhanced the adjustment, selecting specific comparables.

Issue 3: Disallowance of foreign travel expenses:
The disallowance of 25% of foreign travel expenses is contested by the assessee, arguing that detailed information was provided to justify the expenses. The lower authorities based the disallowance on incomplete evidence, leading to a plea for a reduced disallowance of 10% instead of 25%.

Issue 4: Working capital adjustment, economic and risk adjustments:
The appeal challenges the TPO's failure to allow working capital adjustments and economic and risk adjustments in the transfer pricing analysis. The benefit of the 5% range under Section 92C(2) of the Act is also sought.

Judgment Summary:
The Tribunal considered the contentions regarding the selection of comparable companies and adjustments made by the TPO and DRP. It directed a reconsideration of certain comparables based on functional comparability and year-end differences. The matter was remanded for fresh consideration, including the benefit of the 5% range. The disallowance of foreign travel expenses was reduced to 10% due to the business necessity of the trips. The appeal was allowed in part, providing relief to the assessee on various issues raised.

This comprehensive analysis covers the key issues raised in the legal judgment, detailing the arguments presented, the Tribunal's considerations, and the final decision rendered on each issue.