2015 (7) TMI 600 - AT - Income Tax

Transfer pricing adjustment - determination of the assessee s profit margin from the international transaction of Provision of marketing support services - Held that - We find from the asessee s Profit & Loss Account that the amount of Revenue received from AEs stands at ₹ 28,89,60,870/-. As against that, the assessee calculated its margin at 17.90% by considering operating revenue at ₹ 28,99,33,453/-. It is self evident that the gross revenue received by the assessee from its AE from this international transaction is actually ₹ 28,89,60.870/-, which the assessee erroneously took as ₹ 28,99,33,453/-, thereby increasing the revenue and the resultant operating profit margin from the international transaction to this extent. The ld. AR was fair enough to concede that the revenue should be correctly taken at ₹ 28,89,60,870/- instead of the inflated figure given in its TP study report. It is observed that the TPO also followed the suit by erroneously taking such an inflated figure of the revenue. We, ergo, set aside the impugned order to this extent and direct the TPO to adopt the correct figure of operating revenue at ₹ 28,89,60,870/-. Selection of comparable - inclusion of three comparables in the final set of comparables viz., Engineers India Ltd., RITES Ltd., and WAPCOS Ltd - Held that - It has been brought to our notice that the matter of the preceding year is still pending before the TPO and no final decision has so far been taken on the comparability or otherwise of these three companies. Under such circumstances and respectfully following the precedent, we also set aside the impugned order and remit the matter to the file of TPO/AO for deciding the comparability or otherwise of the above referred three companies in line with his decision pursuant to the tribunal order for the AY 2005-06. Apart from considering the question of inclusion or exclusion of these three companies in the final set of comparables, the TPO will also go into the issue of working capital adjustment as has been directed by the Tribunal in its aforequoted order. Transfer pricing adjustment is against not allowing any risk adjustment - Held that - Adverting to the facts of the instant case, we find that there is no material worth the name justifying the claim of risk adjustment by comparatively showing particular risks undertaken or not undertaken by the assessee vis -vis the comparables. A generalized submission about the assessee assuming low/no risk vis- -vis its comparables, cannot be countenanced. The assessee has to expressly exhibit that the specific risks undertaken by the comparables were absent in its case and vice versa. In the absence of any such working available either before the authorities below or us, we are disinclined to direct the granting of any risk adjustment. This contention of the ld. AR, therefore, fails - Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Determination of the assessee's profit margin.
2. Selection of comparable companies.
3. Risk adjustment.

Detailed Analysis:

1. Determination of the Assessee's Profit Margin:
The primary dispute in this appeal concerns the addition of Rs. 4,21,48,306/- by the Assessing Officer (AO) due to a transfer pricing adjustment. The assessee, a subsidiary of Huawei Tech Investment Company Ltd., reported an international transaction of 'Provision of Marketing support services' valued at Rs. 28,89,60,870/-. The assessee applied the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC), calculating its OP/TC at 17.90%. The Transfer Pricing Officer (TPO) did not dispute the application of TNMM or the PLI but recalculated the operating revenue by excluding non-operating expenses, resulting in a different profit margin. The TPO's recalculated operating revenue was Rs. 26,31,19,523/-, leading to a transfer pricing adjustment.

2. Selection of Comparable Companies:
The assessee selected 11 comparable companies, while the TPO shortlisted four companies, resulting in an arithmetic mean OP/TC of 25.31%. The Dispute Resolution Panel (DRP) included two more companies in the comparables list. The tribunal noted that the TPO relied on the preceding year's proceedings for selecting comparables and that the tribunal had restored the matter for the preceding year to the AO for re-examination. Consequently, the tribunal set aside the order and remitted the matter to the TPO/AO for a fresh determination of comparability, including the three disputed companies: Engineers India Ltd., RITES Ltd., and WAPCOS Ltd.

3. Risk Adjustment:
The assessee claimed risk adjustment, arguing it was a captive service provider with lower risk. The TPO denied this adjustment, stating that the assessee did not provide a computation of risk adjustment and was not a risk-free entity. The tribunal upheld the TPO's decision, noting that the initial onus for claiming risk adjustment lies with the assessee, which failed to provide specific evidence of risk differences between itself and the comparables.

Conclusion:
The tribunal directed the AO/TPO to re-determine the ALP of the international transaction of 'Provision of marketing support services' by considering the correct figure of operating revenue at Rs. 28,89,60,870/-, re-examining the comparability of the disputed companies, and addressing the issue of working capital adjustment. The tribunal did not grant the risk adjustment due to the lack of specific evidence from the assessee. The appeal was allowed for statistical purposes, and the assessee was granted a reasonable opportunity to present its case.