2021 (9) TMI 1322 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - We find that while Just Dial is a search engine for multifarious activities and is a search engine using different platforms, dealing with multiple products whereas the assessee is a captive liason and marketing service provider for its AE. Hence, we hold that Just Dial cannot held to be a right comparable. Working Capital Adjustment - With regard to capital adjustment, we find that the ld. DRP allowed the working capital adjustment, however the AO failed to take the cognizance of the same while giving effect to the ld. DRP directions. Hence, the AO is directed to rectify the or der to that extent. Risk Adjustment - TPO denied risk adjustment on the grounds that the assessee has not clearly shown that the comparables had actually undertaken risks - whether the risk of having a single customer is equivalent to the marketing and technical risks attached to the comparable? - HELD THAT - In the instant case, it can be seen that the assessee has not encountered the risk of having a single customer, whereas the same cannot be said as regards the comparables. The comparables were dealing in open market and therefore, they were prone to the marketing and technical risks. They would invariably incur certain expenditure on marketing services and also to safeguard the technical inputs used by them. In such a case, the risk encountered by the assessee cannot be said to be the equivalent risks attached to the comparables. The risk attributed to the assessee by the TPO is an anticipated risk whereas the risk attributed by the assessee to the comparables is an existing risk. In such situation, we direct that the risk adjustment be accorded to the net margin of the comparables for bringing them on par with the assessee company. Administrative Support Services - whether in fact the services were rendered and availed by the assessee and if so, whether the mark-up of 5% can be considered as comparable with the market averages? - Culling from the details filed and arguments of both the parties, we find that there is no dispute about availing of the services. The evidences include the e-mails, invoices, agreements submitted - The assessee has also provided details of cost allocation - Hence, it cannot be said that the services have not been provided to the assessee. With regard to the mark-up of 5% paid by the assessee, we find that the economical analysis submitted by the assessee is acceptable at the same time, the comparable namely, Pay Cheques. Inc. showing the OP/OC of 56.12% is being excluded owing to the extraordinary profits. Taking into consideration, the remaining comparables, we find that the arithmetic mean is more than the 5% mark-up charged from the company. Hence, we hold that no adjustment is called for while determining the ALP on account of payment for Intra Group Services.

Issues Involved:
1. Adjustment of loss by the AO.
2. Adjustment on account of difference in arm’s length price of international transactions.
3. Inclusion of "Just Dial Ltd." as a comparable.
4. Rejection of comparables selected by the assessee.
5. Working capital adjustment.
6. Risk adjustment.
7. Adjustment on account of arm’s length price of administrative support services.

Issue-wise Analysis:

1. Adjustment of Loss by the AO:
The AO completed the assessment under section 144C read with section 143(3) of the Income-tax Act, 1961, determining a loss of ?3,29,43,540 against the loss of ?6,79,40,379 returned by the appellant.

2. Adjustment on Account of Difference in Arm’s Length Price of International Transactions:
The AO made an adjustment of ?3,49,96,839 based on the order passed under section 92CA(3) by the Transfer Pricing Officer (TPO).

3. Inclusion of "Just Dial Ltd." as a Comparable:
The assessee objected to the inclusion of "Just Dial Ltd." as a comparable. The TPO and the ld. DRP held it as functionally comparable. However, the Tribunal found that "Just Dial" operates as a search engine for multifarious activities and deals with multiple products, whereas the assessee is a captive liaison and marketing service provider for its AE. Hence, "Just Dial" was not considered a right comparable.

4. Rejection of Comparables Selected by the Assessee:
The AO/TPO rejected the comparables considered by the assessee, such as Indian Tourism Development Corporation Ltd., Cyber Media Research Ltd., EDCIL (India) Ltd., and In-house Productions Ltd. The Tribunal did not provide a detailed ruling on this rejection but focused on the inclusion of "Just Dial Ltd." and other adjustments.

5. Working Capital Adjustment:
The ld. DRP allowed the working capital adjustment, but the AO failed to take cognizance of it while giving effect to the directions. The AO was directed to rectify the order to include the working capital adjustment.

6. Risk Adjustment:
The TPO denied risk adjustment, stating that the assessee had not shown that the comparables had undertaken risks. The Tribunal held that the risk of having a single customer is an anticipated risk and not equivalent to the marketing and technical risks faced by the comparables. The Tribunal directed that risk adjustment be accorded to the net margin of the comparables to bring them on par with the assessee company.

7. Adjustment on Account of Arm’s Length Price of Administrative Support Services:
The AO/TPO made an adjustment of ?3,15,29,495, determining the arm’s length price of administrative support services at NIL. The Tribunal found that the services were indeed rendered and availed by the assessee, supported by evidence such as emails, invoices, and agreements. The Tribunal accepted the 5% markup as reasonable and held that no adjustment was called for in determining the ALP for intra-group services.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to rectify the order to include the working capital adjustment and accord risk adjustment to the net margin of the comparables. The Tribunal also held that no adjustment was necessary for the payment of intra-group services, accepting the 5% markup as reasonable. The appeal was pronounced in the Open Court on 17/09/2021.

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