2016 (8) TMI 1471 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Comparable functionally dissimilar with that of assessee a company incorporated in Korea and has project offices (PO) in India for carrying out on-site work in relation to specified licensing coordination and other activities. During the year under consideration assessee had 3 project offices in India being Rotem RS 1 Rotem RS 3 and BRCL. The role of the Rotem RS1 project office is to overview the replacement/modification job being undertaken by outsourcing companies and lace with the MRC personnel in relation to maritime and troubleshooting in relation to rolling stock supplied under contract Rotem RS 3 undertakes the supply of components to BEML and is not involved in on-site activities need to be deselected from selected from final list.

Issues Involved:
1. Jurisdictional error in reference to Transfer Pricing Officer (TPO).
2. Rejection of benchmarking approach and Transfer Pricing (TP) documentation.
3. Non-compliance with Article 7(5) of the India-Korea tax treaty.
4. Misunderstanding of the business model and functional profile.
5. Rejection of economic analysis and determination of Arm's Length Price (ALP).
6. Disregard for functional comparability.
7. Inconsistent approach in selection of comparable companies.
8. Incorrect filters used for comparability analysis.
9. Treatment of foreign exchange gain/loss.
10. Use of single-year data versus multiple-year data.
11. Reliance on non-public financial data.
12. Lack of adjustments for differences in risk profiles.
13. Non-application of the Proviso to section 92C of the Act.
14. Failure to use segmental results for benchmarking.
15. Comparison with companies having different operational scales and economic circumstances.
16. Charging of interest under section 234B.
17. Improper consideration of evidence and material on record.

Issue-wise Detailed Analysis:

1. Jurisdictional Error:
The assessee contended that the AO did not record any reason in the draft assessment order to justify the reference to the TPO for computing the ALP, as required under section 92CA(1) of the Income-tax Act, 1961. The tribunal did not find merit in this contention, as the procedural aspects were deemed to have been followed correctly.

2. Rejection of Benchmarking Approach and TP Documentation:
The assessee argued that the functional profile and nature of international transactions remained unchanged from previous years, where the same benchmarking approach and TP documentation were accepted. The tribunal observed that the TPO had applied various filters and rejected the comparables selected by the assessee, leading to a new set of comparables with a higher average OP/TC. The tribunal directed the TPO to maintain consistency unless there is a material change in facts.

3. Non-compliance with Article 7(5) of the India-Korea Tax Treaty:
The assessee claimed that the AO/DRP/TPO did not take cognizance of Article 7(5) of the India-Korea tax treaty. The tribunal did not specifically address this issue, implying that it did not find any significant deviation from the treaty provisions.

4. Misunderstanding of Business Model and Functional Profile:
The assessee argued that the AO/DRP/TPO failed to understand its business model and functional profile, leading to inappropriate comparisons. The tribunal acknowledged this concern, particularly in the context of the selected comparables, and directed the TPO to exclude certain companies that were functionally dissimilar.

5. Rejection of Economic Analysis and Determination of ALP:
The assessee contended that the AO/DRP/TPO did not accept its economic analysis and modified it to determine the ALP, holding that the international transactions were not at arm's length. The tribunal found that the TPO had not provided sufficient justification for rejecting the assessee's comparables and directed the inclusion/exclusion of specific companies based on consistency with previous and subsequent years.

6. Disregard for Functional Comparability:
The tribunal noted that the TPO had disregarded the functional comparability of the companies considered comparable by the assessee. It directed the inclusion of Educational Consultants (I) Ltd. and ICRA Management Consultants Ltd., which were accepted in previous and subsequent years, and the exclusion of Global Procurement Consultants Ltd., HCCA Business Services Ltd., and TSR Darshaw Ltd., which were rejected in those years.

7. Inconsistent Approach in Selection of Comparable Companies:
The assessee argued that the AO/DRP/TPO followed an inconsistent approach in selecting comparable companies. The tribunal upheld this argument and directed the TPO to follow a consistent approach unless there is a material change in facts.

8. Incorrect Filters Used for Comparability Analysis:
The tribunal did not specifically address the issue of incorrect filters but implied that the TPO's selection of comparables should be revisited to ensure functional similarity and consistency.

9. Treatment of Foreign Exchange Gain/Loss:
The tribunal did not specifically address the treatment of foreign exchange gain/loss, indicating that it was not a significant factor in the determination of ALP.

10. Use of Single-Year Data Versus Multiple-Year Data:
The assessee argued for the use of multiple-year data, while the TPO used single-year data. The tribunal did not specifically rule on this issue but emphasized the need for consistency in the selection of comparables.

11. Reliance on Non-Public Financial Data:
The tribunal did not specifically address the issue of reliance on non-public financial data, suggesting that it was not a significant factor in the case.

12. Lack of Adjustments for Differences in Risk Profiles:
The tribunal did not specifically address the issue of adjustments for differences in risk profiles but implied that the TPO should ensure functional comparability and consistency.

13. Non-application of the Proviso to Section 92C of the Act:
The tribunal did not specifically address the application of the Proviso to section 92C but emphasized the need for consistency in the determination of ALP.

14. Failure to Use Segmental Results for Benchmarking:
The tribunal did not specifically address the use of segmental results but implied that the TPO should ensure functional comparability and consistency.

15. Comparison with Companies Having Different Operational Scales and Economic Circumstances:
The tribunal directed the exclusion of companies that were functionally dissimilar and had different operational scales, such as Global Procurement Consultants Ltd., HCCA Business Services Ltd., and TSR Darshaw Ltd.

16. Charging of Interest Under Section 234B:
The tribunal did not specifically address the issue of charging interest under section 234B, indicating that it was not a significant factor in the case.

17. Improper Consideration of Evidence and Material on Record:
The assessee argued that the evidence and material on record were not properly considered. The tribunal emphasized the need for consistency and directed the TPO to follow a consistent approach in the selection of comparables.

Conclusion:
The tribunal partly allowed the assessee's appeal, directing the TPO to exclude Global Procurement Consultants Ltd., HCCA Business Services Ltd., and TSR Darshaw Ltd. from the list of comparables and to include Educational Consultants (I) Ltd. and ICRA Management Consultants Ltd., following the principle of consistency with previous and subsequent years. The tribunal emphasized the need for functional comparability and consistency in the determination of ALP.

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