2016 (9) TMI 1484 - AT - Income Tax

TPA - comparable selection - functinal similarity - Held that - Assessee is a global business provider, in the assessment year under consideration, was providing design engineering, management consultancy services across the built and nature environment worldwide. The company provided services to transform the built environment and restore the natural environment and its expertise ranged from environmental remediation to urban planning from engineering iconic buildings to designing sustainable transport networks and from developing the energy sources of the future to enabling new ways to extracting essential resources.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Use of multiple year/prior years' data for transfer pricing.
3. Computation of operating profit margins.
4. Rejection of comparability analysis and selection of comparables.
5. Inclusion of certain companies as comparables.
6. Segmental margin vs. entity-level margin.
7. Exclusion of non-operating items.
8. Allowance of risk adjustment.
9. Computation of interest.
10. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The assessee company, a subsidiary of WSP GR Cyprus Holding Ltd., engaged in providing design engineering and consultancy services, justified the ALP of its international transactions using the Transactional Net Margin Method (TNMM). The TPO proposed comparables and determined an ALP adjustment, which was partially upheld by the DRP.

2. Use of Multiple Year/Prior Years' Data for Transfer Pricing:
The assessee argued against the use of current year data alone, citing the doctrine of impossibility of performance under Section 92D. However, the TPO and DRP did not accept this contention, adhering to the provisions of Section 92C and Rule 10B.

3. Computation of Operating Profit Margins:
The TPO rejected the assessee's segmental profitability analysis due to the lack of audit verification and considered the entire entity's margin. The DRP provided relief by limiting the adjustment to the percentage of revenue from AEs (47%).

4. Rejection of Comparability Analysis and Selection of Comparables:
The TPO rejected the comparables selected by the assessee and proposed new ones. The DRP upheld this approach but directed the exclusion and inclusion of certain companies.

5. Inclusion of Certain Companies as Comparables:
The TPO included companies like Ashok Leyland Project Services Ltd., Global Procurement Consultants Ltd., Kitco Ltd., Mahindra Consulting Engineers Ltd., Mitcon Consultancy & Engineering Services Ltd., TCE Consulting Engineers Ltd., and IBI Chematur (Engineering & Consultancy) Ltd. The assessee contested their inclusion based on functional dissimilarities and peculiar economic circumstances.

6. Segmental Margin vs. Entity-Level Margin:
The assessee contended that the segmental margin should be considered instead of the entity-level margin. The TPO and DRP rejected this due to the lack of audit verification, but the Tribunal admitted additional evidence and restored the matter to the TPO for reconsideration.

7. Exclusion of Non-Operating Items:
The TPO considered finance charges and provisions for losses written back as non-operating items, which the assessee contested. The Tribunal directed the TPO to re-examine these items in light of the additional evidence.

8. Allowance of Risk Adjustment:
The assessee sought a risk adjustment under Rule 10B(1)(e) due to differences in risk profiles between the assessee and comparables. The Tribunal did not provide a specific ruling on this issue but directed a re-examination of the overall computation.

9. Computation of Interest:
The assessee contested the computation of interest by the AO. The Tribunal did not specifically address this issue but implied that the re-examination of the ALP computation might affect the interest calculation.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee argued against the initiation of penalty proceedings, claiming that the facts and provisions of the law did not warrant such action. The Tribunal did not provide a specific ruling on this issue.

Conclusion:
The Tribunal admitted additional evidence and restored the matter to the TPO for reconsideration, particularly focusing on the exclusion of non-AE costs and the proper computation of operating costs attributable to AE transactions. The Tribunal also directed the TPO to re-examine the selection of comparables and the computation of ALP in light of the additional evidence. The appeal was partly allowed for statistical purposes.

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