2015 (9) TMI 801 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - British Metal Corpn. Indian Pvt. Ltd. company is engaged in providing agency services in non-ferrous metals, fertilizers and cooking coal etc. In our considered opinion, the nature of services rendered by this company is entirely different and cannot be considered as a comparable. Moreover, the appellant received fixed fee from its AE. Therefore, we direct that this company be omitted from the list of comparables for the period under consideration for the purpose of determining arm s length price of the international transaction in question. Priya International company is engaged in the provision of commissioning agency and trading of chemicals. This function is totally different from marketing services for the equipment of minerals and therefore, this company should be excluded for the purposes of comparison while determine the arm s length price of the international transaction in question. PL Worldways Ltd. company earns commission from air ticket sold and also transactional fees from its customer for sale of holiday packages. This function is totally different from the functions carried out by the appellant and therefore, this company should be excluded for the purposes of comparison while determine the arm s length price of the international transaction in question. Publicity Society of India Ltd. company engaged in the business of publication of news papers and publications should be excluded for the purposes of comparison while determine the arm s length price of the international transaction in question. Addition under Section 40A(2)(a) - disallowance of 50% of profession paid to M/s Metso Minerals (Mumbai) Pvt. Ltd. - Held that - Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed. This opinion has to be formed by the Assessing Officer based on the material evidence available on the record. The Assessing Officer is duty bound to bring on record the comparable fair market value of the services rendered to say that the value paid by the assessee is excessive or unreasonable. We find no evidence on record to notice that the Assessing Officer made efforts in this direction. He simply made disallowance based on the surmises and conjectures. See Commissioner of Income-Tax, West Bengal Versus Edward Keventer Private Limited. 1971 (6) TMI 7 - CALCUTTA High Court affirmed by SC 1978 (8) TMI 1 - SUPREME Court - Thus 50% of professional charges paid to M/s Metso Minerals (Mumbai) Private Limited cannot be disallowed - Decided in favour of assessee. Disallowance of unexplained expenditure made against credit card bills - Held that - The assessing officer while passing the final order did not followed the direction of the DRP and did not re-verified the AIR of the Citi Bank and upheld the adjustment by holding that there was paucity of time so as to verify the AIR of Citi Bank. We are of the considered opinion that the interest of justice would be met, if the matter is restored to the file of the Assessing Officer for fresh adjudication in accordance with law. Accordingly, this ground of appeal is restored to the file of the Assessing Officer.- Decided in favour of assessee for statistical purposes. Comparable Killick Agencies Marketing Ltd. and Cox and Kings (India) Ltd. deleted by DRP - Held that - Since the comparables in the question are having more than 15% related party transactions, we hold that the Hon ble DRP is justified in rejecting these two comparables. Hence the grounds of appeals filed by the Revenue are dismissed.

Summary

Issues Involved:
1. Determination of income under Section 143(3) read with Section 144C of the Income-tax Act, 1961.
2. Adjustment to income on account of the alleged difference in the arm's length price of international transactions.
3. Disallowance of professional fees under Section 40A(2)(a) of the Act.
4. Disallowance of unexplained expenditure based on credit card bills.
5. Levying interest under Section 234B and Section 234C of the Act.

Detailed Analysis:

1. Determination of Income under Section 143(3) read with Section 144C:
The assessing officer determined the income of the appellant at Rs. 15,90,82,198 against the returned income of Rs. 10,73,56,150. The appellant challenged this determination, arguing that the assessing officer erred on facts and in law.

2. Adjustment to Income on Account of Alleged Difference in Arm's Length Price:
The assessing officer made an adjustment of Rs. 4,85,04,301 to the income of the appellant due to the alleged difference in the arm's length price for marketing support services provided to associated enterprises (AEs). The appellant contended that the assessing officer/DRP misinterpreted the clauses of the agreement and recharacterized the transaction as commission agent services. The appellant argued that the scope of services was limited to promoting AE's products in India and providing information on business opportunities. The appellant also contested the fresh search of comparable companies by the assessing officer and the inclusion of companies with abnormally high profit margins.

The tribunal found merit in the appellant's arguments and directed the Transfer Pricing Officer (TPO) to exclude certain companies from the list of comparables, as they were functionally dissimilar. This included British Metal Corpn. India Pvt. Ltd., Priya International, PL Worldways Ltd., and Publicity Society of India Ltd. The tribunal concluded that after excluding these comparables, the appellant's profit margin would fall within the acceptable range, thus satisfying the arm's length test.

3. Disallowance of Professional Fees under Section 40A(2)(a):
The assessing officer disallowed 50% of the professional fees paid to Metso Minerals (Mumbai) Pvt. Ltd., amounting to Rs. 30,14,610, citing a lack of justification for the payment rate and details of the work done. The appellant argued that the services were necessary for timely delivery of projects and maintaining confidentiality. The tribunal found that the assessing officer did not provide evidence to prove that the payment was excessive or unreasonable. The tribunal referred to several legal precedents and held that the disallowance was unjustified, directing its deletion.

4. Disallowance of Unexplained Expenditure Based on Credit Card Bills:
The assessing officer disallowed Rs. 2,07,137 based on information furnished by AIR, alleging it as unexplained expenditure. The appellant contended that the details were not provided by the assessing officer or Citi Bank, and the transaction was not recorded in the appellant's books. The tribunal noted that the assessing officer did not follow the DRP's direction to provide details to the appellant and re-verify the AIR information. The tribunal restored this issue to the assessing officer for fresh adjudication.

5. Levying Interest under Section 234B and Section 234C:
The tribunal did not specifically address the issue of levying interest under Section 234B and Section 234C, as it was contingent on the final determination of the appellant's income.

Conclusion:
The tribunal partly allowed the appeal filed by the assessee for statistical purposes and dismissed the appeal filed by the Revenue. The tribunal directed the TPO to recompute the arm's length price after excluding certain comparables and deleted the disallowance of professional fees. The issue of unexplained expenditure was remanded back to the assessing officer for fresh adjudication.