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2018 (5) TMI 851 - AT - Income TaxAddition on account of transfer pricing adjustment - international transaction of Provision of marketing support services - comparability analysis - Held that - Assessee s services encompass Liaison activities, Market information activities and Sales support to the existing customers in India. Under the Liaison activities, it has been stated that the market in India for alcoholic beverages, being the product which is sold by the Head office in India, is a regulated market and falls in the State List of the Constitution, implying that each State of the country has its own individual policies and regulations. The assessee as a branch office is in rationalization of policies in respect of selling and distribution of alcoholic beverages. Under the head Market information activities, it has been mentioned that the assessee is engaged in providing information of Indian markets and assists its head office in creating market for them. Under the last category, the assessee is extending support to the existing customers in India. Thus companies functionally dissimilar with that of assessee need to be deselected from final list. Matter remanded back to the file of AO/TPO for a fresh determination of the ALP of the international transaction of Provision of Marketing support services in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
Issues Involved:
1. Transfer pricing adjustment for the assessment years 2007-08 and 2008-09. 2. Selection of comparables for determining the Arm’s Length Price (ALP). 3. Exclusion of specific companies from the list of comparables. 4. Inclusion of specific companies in the list of comparables. 5. Working capital adjustment. Detailed Analysis: Assessment Year 2007-08: 1. Transfer Pricing Adjustment: - The assessee contested the addition of ?1,06,56,851/- as a transfer pricing adjustment for the international transaction of ‘Provision of marketing support services’. - The assessee, an Indian branch of Brown Forman Worldwide LLC, provided marketing support services to its head office. - The transaction value was ?6,43,25,676/-. The assessee used the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). - The Transfer Pricing Officer (TPO) rejected the comparables chosen by the assessee and selected 14 new comparables, leading to a proposed adjustment of ?1,05,83,368/-. - The Dispute Resolution Panel (DRP) directed the exclusion of two comparables, resulting in a final adjustment of ?1,06,56,851/-. 2. Selection of Comparables: - The controversy centered on the selection and exclusion of certain comparables. - The assessee challenged the inclusion of eight comparables and the exclusion of three comparables. 3. Exclusion of Specific Companies: - Priya International Ltd. (Seg.): Excluded due to differences in business models (commission-based vs. cost-plus basis). - Hightemp Techmat Pvt. Ltd.: Excluded as it was engaged in manufacturing and trade, not services. - ICRA Management Consulting Services: Excluded due to functional dissimilarity. - IDC (India) Ltd.: Excluded as it was engaged in research and survey services, which included product sales. - IL & FS Ecosmart Ltd.: Excluded due to diverse nature of services (waste management, resource conservation, etc.). - Inmacs Management Services Ltd.: Excluded due to lack of clarity on functional profile. - RITES Ltd.: Excluded due to diverse services including consultancy, construction management, and export sales. - Tecnicom-Chemie (India) Pvt. Ltd.: Excluded as it included commission income, differing from the assessee's business model. 4. Inclusion of Specific Companies: - Shree Raj Travels and Tours Ltd. and Trade Wings Ltd.: Excluded as they were engaged in commission business. - Spencer’s Travel Services Ltd.: Excluded as it was involved in sales, unlike the assessee. 5. Working Capital Adjustment: - The assessee raised an additional ground for working capital adjustment. - The Tribunal agreed in principle but found insufficient material on record to compute the adjustment. - The matter was remitted to the AO/TPO for computation of the working capital adjustment as per law. Assessment Year 2008-09: 1. Transfer Pricing Adjustment: - The assessee contested the addition of ?55,68,219/- for the international transaction of ‘Marketing support services’. - The transaction value was ?6,40,37,573/-. The TPO selected 10 new comparables, leading to a proposed adjustment of ?77,82,089/-. - The DRP excluded three companies, resulting in the final adjustment. 2. Selection of Comparables: - The assessee challenged the inclusion of Choksi Lab Ltd. and WAPCOS Ltd. (Seg.). 3. Exclusion of Specific Companies: - Choksi Lab Ltd.: Excluded as it was engaged in testing services, functionally different from the assessee. - WAPCOS Ltd. (Seg.): Excluded due to its involvement in infrastructure development projects, differing from the assessee's marketing support services. 4. Inclusion of Specific Companies: - Interads Ltd.: Excluded as it earned income from exhibition revenue, not comparable to marketing support services. - PL Worldways Ltd.: Excluded as it was engaged in commission-based business, differing from the assessee's cost-plus basis. Conclusion: - The Tribunal set aside the orders on the issue of transfer pricing adjustment for both assessment years and remitted the matter to the AO/TPO for fresh determination of the ALP, following the directions provided. - The appeals were partly allowed for statistical purposes.
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