2019 (8) TMI 1725 - AT - Income Tax

TP Adjustment - comparable selection - functional similarity - HELD THAT - R. Systems International Ltd comparable has been rejected only on the ground that it follows different accounting period and learned DRP has observed that such comparable has to be excluded as the result cannot be compared with degree of accuracy as quarterly audited results are not available. Now it is the contention of learned counsel that the details required in this case pertaining to 1.4.2013 to 31.3.2014 are now available and these data can be used and result can be extrapolated. The case laws referred by learned counsel in this regard also support the proposition that this comparable can be accepted as comparable on the facts of this case - we accede to the request of learned counsel to remand back the issue to the TPO to include R. Systems International Ltd. in the final list of comparables and consider in the light of now available quarterly results from 1.4.2013 to 31.3.2014. Excel Infoways Ltd - We find ourselves in agreement with the submission of learned Counsel of the assessee. As evident from the submissions the said comparable has hugely fluctuating margin also. Its revenue is declining in to a great extent. Furthermore assessee s plea is that the comparable has unreliable employees cost. That there is no separate segment for ITeS. That the company has diversified into new areas such as construction and development of property. These distinguishing features show that this entity is not a good comparable in the present case. This proposition is also supported by the case laws referred by learned counsel as above. As regards the issue of corporate support services we accede to the request of the learned Counsel of the assessee and direct that R. Systems International Ltd. be included as comparable in terms of our direction as above and Excel Infoways Ltd. should be rejected. Transfer pricing adjustment in respect of research and development of the assessee has confined the argument that the assessee s grievance will be addressed by excluding selection of Syngene International Ltd. as comparable. It is the claim of the assessee that Syngene International Ltd. is engaged in different business activity. That it is engaged in contract research and manufacturing services. That its segmental information is not available. Hence results of research and manufacturing activities cannot be separately identified and compared. Learned counsel has also placed reliance upon the case laws where it has been agreed that in the absence of segmental analysis this is not a good comparable. Accordingly we accept the contention of learned counsel and direct that Syngene International Ltd. should be taken out of comparable. The TPO shall make computation afresh accordingly after giving the assessee proper opportunity of being heard.

Summary

Issues Involved:
1. Transfer pricing adjustment in respect of provision for corporate support services to Associated Enterprises (AEs) amounting to ?1,07,31,614/-.
2. Transfer pricing adjustment in respect of research and development services to AEs amounting to ?32,14,036/-.

Detailed Analysis:

1. Transfer Pricing Adjustment for Corporate Support Services:

Facts and Comparables:
The assessee, engaged in the business of specialty chemicals, benchmarked its corporate support services transactions using seven comparables with an OP/OC profit level indicator. The TPO rejected these comparables and selected four others, resulting in a higher average margin of 25.59% compared to the assessee's 15%. This led to an adjustment of ?1,01,26,028/-.

Assessee's Argument:
The assessee argued for the inclusion of R Systems International Ltd. as a comparable, which had been excluded due to its different accounting period. The assessee presented case laws supporting the inclusion of R Systems International Ltd. and provided quarterly results to address the TPO's concerns. Additionally, the assessee sought the exclusion of Excel Infoways Ltd. due to its fluctuating margins and declining revenues, supported by various case laws.

Tribunal's Decision:
The Tribunal agreed with the assessee's arguments, noting that R Systems International Ltd. could be included as a comparable based on the now available quarterly results. The Tribunal also found Excel Infoways Ltd. unsuitable due to its fluctuating margins and diversified business activities. Consequently, the Tribunal directed the TPO to include R Systems International Ltd. and exclude Excel Infoways Ltd. in the final list of comparables, and to recompute the adjustment accordingly.

2. Transfer Pricing Adjustment for Research and Development Services:

Facts and Comparables:
The assessee provided a list of comparables for its R&D services, with an average margin of 12.97%. The TPO accepted some comparables and computed an average margin of 20.14%, which was upheld by the DRP.

Assessee's Argument:
The assessee contended that Syngene International Ltd. should be excluded as a comparable because it engaged in different business activities (contract research and manufacturing services) and lacked segmental information. The assessee cited several case laws where Syngene International Ltd. was excluded for similar reasons.

Tribunal's Decision:
The Tribunal accepted the assessee's argument, noting that Syngene International Ltd. was not a suitable comparable due to its different business activities and lack of segmental information. The Tribunal directed the TPO to exclude Syngene International Ltd. from the comparables and to recompute the adjustment accordingly.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the TPO to recompute the transfer pricing adjustments for both corporate support services and R&D services after including and excluding the specified comparables. The order was pronounced on 2.8.2019.