2021 (6) TMI 1125 - AT - Income Tax

TP Adjustment - correct functional profile of the assessee - HELD THAT - TPO, in the year under consideration has not properly appreciated the functional profile of the assessee. From the facts on record, it is discernible that the assessee is mainly providing passengers and baggage handling services to its AE and is not providing other specialized airport services as alleged by the TPO. For rendering such services, the assessee has a Net Gross Asset Base of Rs 31,22,65,835/- which comprises of Know How/ Royalty, Temporary Structures, Office equipment, safety equipment's, air-conditioners, data processing equipment, electrical equipment, furniture and fittings, Motor Car, and Plant and Machinery. In the year under consideration, the assessee has incurred total expenditure of Rs 34,73,49,275/- out of which Personnel Expenditure incurred is Rs 20,16,09,112/- which is 60% of the total expense. Therefore, clearly the assessee is a service oriented company deriving its sole stream of income from providing passengers and baggage handling services at the airport. Comparable selection - Companies M/s Container Corpn. Of India Ltd and M/s Sanco Trans Ltd cannot be selected as comparable being functionally dissimilar with that of assessee. TPO had computed the PLI of companies selected by him by presuming that FBT expense is a non-operating item - We have perused the material on record and it is seen that there is no adjudication by the Ld DRP on this issue. We, therefore, direct the TPO to adopt a uniform policy. Once FBT expense is taken as non-operating while computing the PLI of comparable companies, a similar effect should also be given while computing PLI of the tested party. We, therefore, direct the TPO to re-compute the PLI of assessee excluding FBT expense.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Functional Profile of the Assessee
3. Selection of Comparable Companies
4. Computation of Profit Level Indicator (PLI)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The sole issue in dispute is the Transfer Pricing Adjustment of Rs 3,53,24,242/- proposed by the Transfer Pricing Officer (TPO) and sustained by the Disputes Resolution Panel (DRP). The assessee, an Indian company providing Ground and Passenger Handling services to airlines, had entered into an international transaction of Rs 32,26,71,057/- with its Associated Enterprise (AE). The TPO conducted a fresh search for comparable companies and selected four companies with an Operating Profit/Total Cost (OP/TC) of 27.99%, leading to a proposed adjustment of Rs 5,15,82,135/-. The DRP partly allowed the objections raised by the assessee by excluding Cochin International Airport Ltd as a comparable but upheld the selection of other comparables, resulting in a final adjustment of Rs 3,53,24,242/-.

2. Functional Profile of the Assessee:
The TPO doubted the functional profile of the assessee, claiming it provided various specialized services not acknowledged in its Transfer Pricing Study. The assessee contended that it rendered only a few facets of Ground Handling Services to its AE, as analyzed in a previous Tribunal order for AY 2007-08. The Tribunal noted that the TPO misinterpreted the assessee's functions, which mainly involved passengers and baggage handling services. The Tribunal held that the TPO did not properly appreciate the functional profile of the assessee, which is a service-oriented company with a significant portion of its expenses (60%) being personnel expenditure.

3. Selection of Comparable Companies:
The Tribunal examined whether the lower authorities were correct in selecting M/s Container Corporation Of India Ltd. and M/s Sanco Trans Ltd as comparables. It was found that:
- M/s Container Corporation Of India Ltd: This is a government company with significant fixed assets and a turnover of over Rs 3,300 crores. It operates in virtual monopoly conditions and is not service-oriented, with an employee cost ratio of only 1.65%. The Tribunal directed its exclusion as a comparable due to the absence of segmental data and significant functional dissimilarities.
- M/s Sanco Trans Ltd: This company earns a substantial portion of its revenue from passive income (hire and warehouse charges), with an employee cost ratio of 11.91%. The Tribunal found it functionally dissimilar to the assessee and directed its exclusion as a comparable.

4. Computation of Profit Level Indicator (PLI):
The TPO computed the PLI of comparable companies by excluding Fringe Benefit Tax (FBT) as a non-operating item. The assessee contested this, arguing that its PLI was computed by considering FBT as an operating item. The Tribunal directed the TPO to adopt a uniform policy and re-compute the PLI of the assessee by excluding FBT expense, ensuring consistency with the treatment of comparable companies.

Conclusion:
The appeal was allowed with directions to exclude M/s Container Corporation Of India Ltd. and M/s Sanco Trans Ltd as comparables and to re-compute the PLI of the assessee by excluding FBT expense. The Tribunal emphasized the importance of accurately understanding the functional profile of the assessee and ensuring consistency in the computation of PLI.