2018 (5) TMI 1739 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that -. The assessee is engaged in the distribution of academic books, electronic products and software published by Cengage Group entities and reprint of books and publications through a third party vendor, by obtaining rights from the Associated Enterprises ( AEs ) and distributing the same in the Indian market. thus companies functionally dissimilar with that of assessee need to be deselected from final list. The agreement entered into by the assessee with AE clearly provides cope of activities of the assessee which includes reprinting of books received by the assessee from AE in E format. In our considered opinion, reprinting of books needs deployment of assets, employment of employees and risk involved in publishing and selling and therefore, the parameters as required for resale method are not applicable as other value addition and application of technology and assets were made by the assessee for the purpose of reprinting, publishing etc. As we have allowed and directed to exclude various comparables in the ITS and Marketing segment, we deem it fit to direct the TPO to recomputed the ALP on all three segments after giving due adjustments to the working capital as determined by the ld. CIT(A) with respect to the comparables remaining after excluding comparables indicated hereinabove.

Issues Involved:
1. Non-adjudication of specific grounds by the DRP.
2. Transfer Pricing Adjustments for IT Enabled Services (ITES).
3. Transfer Pricing Adjustments for Marketing Support Services (MSS).
4. Selection of the Most Appropriate Method (MAM) for Distribution Activity.

Detailed Analysis:

1. Non-adjudication of Specific Grounds by the DRP:

The assessee contended that the Dispute Resolution Panel (DRP) did not adjudicate specific grounds raised before it and failed to pass a reasoned speaking order. The Tribunal noted that it is the duty of the DRP to decide the issues raised by the assessee, dealing with all the contentions. Consequently, the matter for A.Y 2006-07 was remanded to the DRP to pass a reasoned and speaking order, ensuring reasonable opportunity of being heard to the assessee. The grounds of appeal were allowed for statistical purposes.

2. Transfer Pricing Adjustments for IT Enabled Services (ITES):

The assessee, engaged in the distribution of academic books and related services, undertook international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) proposed adjustments, rejecting the assessee’s filters and imposing additional ones. The CIT(A) directed the exclusion of certain companies from the list of comparables due to different functional profiles, unreliable financial statements, and other reasons. The Tribunal upheld these exclusions, citing precedents and noting that the selected comparables were not functionally similar to the assessee’s ITES segment. The Tribunal directed the exclusion of companies like Flextronics Software Systems Ltd, HCL Comnet Systems & Services Ltd, Infosys BPO Ltd, Wipro Ltd, and Bodhtree Consulting Ltd, among others, from the set of comparables.

3. Transfer Pricing Adjustments for Marketing Support Services (MSS):

The assessee contended that the TPO’s selection of certain comparables for MSS was inappropriate. Specifically, the inclusion of Reliance Communications Infrastructure Ltd was challenged due to its diversified services and significant related party transactions. The Tribunal agreed, noting the absence of segmental data and high related party transactions, and directed the exclusion of this company from the list of comparables.

4. Selection of the Most Appropriate Method (MAM) for Distribution Activity:

The assessee argued that the Resale Price Method (RPM) was the most appropriate method for its distribution activities, while the TPO and CIT(A) applied the Transactional Net Margin Method (TNMM). The Tribunal noted that the agreement involved reprinting and distributing books, which required assets, employees, and risk management, making RPM unsuitable. The Tribunal upheld the use of TNMM, rejecting the assessee’s contention.

The Tribunal directed the TPO to recompute the Arm’s Length Price (ALP) for all three segments (ITES, MSS, and Distribution) after making the necessary adjustments and excluding the indicated comparables. The appeal was partly allowed.

The order was pronounced in the open court on 11.05.2018.

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