2016 (11) TMI 1575 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is engaged in providing engineering and allied services, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Selection and Rejection of Comparables
3. Idle Capacity Adjustment

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the appeal was the Transfer Pricing adjustment of ?7,11,50,235 for the relevant assessment year. The assessee, an engineering services provider, had selected the Transactional Net Margin Method (TNMM) as the most appropriate method for its transfer pricing study. The assessee's Profit Level Indicator (PLI) was calculated at 13.14%, which was higher than the arithmetic mean of -0.92% of the comparables it selected. The Transfer Pricing Officer (TPO) rejected one of the comparables selected by the assessee, M/s. Stewarts & Lloyds Ltd, and included two new comparables, M/s. Mahindra Consulting Engineers Ltd and M/s. Kirloskar Consultants Ltd, in addition to the remaining comparables from the assessee's list. The TPO's final selection of comparables resulted in an average PLI of 11.32%, leading to an upward adjustment of ?8,34,73,835.

2. Selection and Rejection of Comparables:
The TPO rejected M/s. Stewarts & Lloyds Ltd as a comparable, citing its significant material costs and different activity type. The TPO included M/s. Mahindra Consulting Engineers Ltd and M/s. Kirloskar Consultants Ltd as comparables. The assessee objected, arguing that M/s. Mahindra Consulting Engineers Ltd was not functionally comparable due to its diversified consultancy services in infrastructure, which differed from the assessee's focus on oil and gas engineering services. The assessee also suggested two additional comparables, M/s. Desein Private Limited and M/s. Blue Star Design & Engineering Ltd, which the TPO rejected due to lack of evidence of functional similarity. The Dispute Resolution Panel (DRP) upheld the TPO's selections and rejections, noting the assessee's failure to provide necessary documentation for the additional comparables.

3. Idle Capacity Adjustment:
The assessee did not press grounds related to the rejection of idle capacity adjustment, leading to the dismissal of these grounds as not pressed.

Judgment and Analysis:
The Tribunal analyzed the functional profiles of the assessee and the selected comparables. It found that M/s. Mahindra Consulting Engineers Ltd was functionally similar to the assessee despite its diversified consultancy services, as both were engaged in engineering consultancy. The Tribunal upheld the inclusion of M/s. Mahindra Consulting Engineers Ltd as a comparable.

Regarding M/s. Stewarts & Lloyds Ltd, the Tribunal noted that the TPO had accepted it as a comparable in previous assessment years. The Tribunal found that the material cost incurred by M/s. Stewarts & Lloyds Ltd was not significant enough to warrant its rejection as a comparable. Therefore, the Tribunal directed the TPO to include M/s. Stewarts & Lloyds Ltd in the list of comparables.

The Tribunal also upheld the rejection of M/s. Desein Private Limited and M/s. Blue Star Design & Engineering Ltd due to the assessee's failure to provide annual reports demonstrating functional comparability.

Conclusion:
The Tribunal directed the TPO to rework the PLI of the final list of comparables, which included M/s. Mahindra Consulting Engineers Ltd, M.N. Dastur & Company (P) Ltd, Toyo Engineering India Ltd, Kirloskar Consultants Ltd, and M/s. Stewarts & Lloyds Ltd, and to recompute the Arm's Length Price adjustment if necessary. The appeal of the assessee was partly allowed for statistical purposes.