2023 (3) TMI 1412 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies under SWD ITeS segment are directed to be excluded for failing turnover filter. Comparability analysis under MSS segment - Axience Consulting Pvt. Ltd. - All the revenue earned by this company from consultancy and advisory charges in the field of market research business administration and finance are clubbed together. The assessee before us is only providing marketing services to its AEs in respect of the presales activities as per the functions reproduced hereinabove which has not been disputed by the Ld.TPO as observed - DRP included this comparable by observing that assessee also undertakes similar services in advertising marketing consulting in creating awareness of the product and therefore is functionally similar with the company. This observation of the DRP is contrary to the functions described as carried out by assessee under the marketing support service segment. We therefore hold this comparable to be not functionally similar with that of assessee. Dun Bradstreet Information Services India Pvt. Ltd. - As description of the project or services provided by this company is mentioned to be credit reporting services - we note that this company is engaged primarily in the business of providing risk management and sales and marketing solutions. The background of the company also describes to be providing learning and economic insight services. The company offers a wide suite of information solutions and its services are used extensively by banks financial institutions multi nationals corporate entities public sector undertaking exporters and importers. It also describes itself to be in the field of market analysis locate prospects and incurs revenue from new and existing customers. The sales and marketing solutions offered by this company also include sale of data and related services. In our considered opinion these functions cannot be compared with the limited services rendered by assessee to its AEs. Pressman Advertising Ltd. - As the company s business activity falls within a single business segment i.e. advertising selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 operating segments . Thus it is clear that under the advertising services this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities. Lintas India Pvt. Ltd. company is providing advertising services and the principle business activity has been described at page 4868 of the paper book in the annual report to be advertising and marketing communications. The revenue recognition by this company has been mentioned to be an advertising agency catering services to much number of clientele. We therefore do not find this comparable to be functionally similar with that of assessee who is a captive service provider. Majestic Research Services Solutions Ltd. company is engaged in digital marketing research - this company deliver critical media and marketing information analytics. Further it is noted that this company is also doing significant investments in resource and associates all over India supported by strength of Majestic MRSS. In the notes forming part to financial statements under the head corporate information this company is said to be first Indian market research company to be listed on BSE on SME platform and is engaged in providing market research services offering a wide range of qualitative and quantitative research services. The only segment under which the revenue is revealed is under sale of services in note 17 at page 5409 of the paper book. In our view this company cannot be held to be functionally similar with that of assessee. Cheil India Pvt. Ltd. company is described to be a full-fledged advertising service company. It is only the entire revenue earned by this company is from advertising services as observed at page 5485. The general information provided at page 5582 of the paper book reveals that this company is engaged in the business of advertising communication publicity and merchandising including undertaking market research planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. In light of the above we do not find this company to be functionally similar with that of assessee Interest on receivables - HELD THAT - We deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Ld.AO/TPO for deciding it in conformity with the above referred judgment. We also direct the Ld.TPO that in the event the WCA subsumes the outstanding receivables no separate characterisation is to be made. However for those receivables that fall out of the WCA pertaining to year under consideration then the rate of interest to be charged must be LIBOR 300 basis points which is in accordance with the principles laid down by Hon ble Delhi High Court in case of CIT vs. Cotton Naturals (I) Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT by considering a credit of 90 days.

Summary

Issues Involved:
1. Validity of Assessment Order and Reference to Transfer Pricing Officer.
2. Rejection of Transfer Pricing Documentation.
3. Comparability Analysis and Determination of Arm's Length Price.
4. Comparability Analysis in SWD Segment.
5. Comparability Analysis in ITeS/TSS Segment.
6. Comparability Analysis in MSS Segment.
7. Non-Allowance of Appropriate Adjustments to Comparable Companies.
8. Treatment of Forex as Operating in Nature.
9. Interest on Outstanding Receivables.
10. Levy of Interest under Sections 234B and 234D.
11. Initiation of Penalty Proceedings.

Summary of Judgment:

1. Validity of Assessment Order and Reference to Transfer Pricing Officer:
The assessee challenged the assessment order dated 20.07.2022, arguing it was bad in law due to improper reference to the Transfer Pricing Officer (TPO) and lack of jurisdiction by the Assistant Commissioner of Income Tax. The Tribunal found the reference and assessment order to be procedurally correct.

2. Rejection of Transfer Pricing Documentation:
The assessee contended that the TPO erred in rejecting the transfer pricing documentation maintained under section 92D. The Tribunal upheld the TPO's rejection, noting that the appellant did not apply appropriate filters, rendering the data unreliable.

3. Comparability Analysis and Determination of Arm's Length Price:
The Tribunal addressed the TPO's approach in determining the arm's length price for SWD, ITeS, and MSS segments, noting the application of arbitrary filters. The Tribunal directed the exclusion of certain high-turnover companies from the comparables list, adhering to the turnover filter principle.

4. Comparability Analysis in SWD Segment:
The Tribunal considered the inclusion and exclusion of various companies in the SWD segment, directing the exclusion of companies like Exilant Technologies Pvt. Ltd., Tech Mahindra Ltd., and others for failing the turnover filter. It upheld the inclusion of companies functionally similar to the assessee.

5. Comparability Analysis in ITeS/TSS Segment:
The Tribunal excluded companies such as Microland Ltd., Datamatics Business Solutions Ltd., and others for failing the turnover filter. It upheld the inclusion of companies that were functionally comparable to the assessee.

6. Comparability Analysis in MSS Segment:
The Tribunal directed the exclusion of companies like Axience Consulting Pvt. Ltd., Dun & Bradstreet Information Services India Pvt. Ltd., and others due to functional dissimilarity. It remanded the inclusion of Honeycomb Relationship Management Services Pvt. Ltd. and Kestone Integrated Marketing Services Pvt. Ltd. to the TPO for re-evaluation.

7. Non-Allowance of Appropriate Adjustments to Comparable Companies:
The Tribunal directed the TPO to provide working capital adjustments for determining the arm's length price, considering the limited risk nature of the services provided by the assessee.

8. Treatment of Forex as Operating in Nature:
The Tribunal upheld the TPO's treatment of foreign currency fluctuation gains/losses as operating in nature for the computation of operating mark-up on cost.

9. Interest on Outstanding Receivables:
The Tribunal remitted the issue of interest on outstanding receivables to the TPO for re-evaluation, directing that if working capital adjustment subsumes the outstanding receivables, no separate characterization is needed. Otherwise, interest should be charged based on LIBOR + 300 basis points.

10. Levy of Interest under Sections 234B and 234D:
The Tribunal upheld the levy of interest under sections 234B and 234D, finding no error in the computation by the Assessing Officer.

11. Initiation of Penalty Proceedings:
The Tribunal noted that the initiation of penalty proceedings under section 270A was procedural and did not require adjudication at this stage.

Conclusion:
The appeal filed by the assessee was partly allowed, with directions for re-evaluation on specific grounds and adherence to judicial precedents on turnover filters and interest on receivables. The Tribunal emphasized the need for functional comparability and appropriate adjustments in transfer pricing analysis.