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2018 (9) TMI 1320 - HC - Income TaxTPA - exclusion of Media Research Users Council ( MRUC ) from the list of comparables for making transfer pricing adjustment - Held that - The reasons recorded for excluding MRUC from the list of comparables are multiple and not confined and restricted to the fact that MRUC was a not-for-profit organization. Reference to not for profit , motive was to show that major source of income earned by MRUC was in form of membership and subscription fee for Indian Readership Survey (IRS) and Indian Outdoor Survey (IOS) reports. The element of quid pro quo or payment of consideration commensurate with the service given was missing and absent. The surveys undertaken by MRUC were on behalf of members of MRUC, consisting of advertisers, publishers, advertising agencies and broadcast and other media, totaling 249 in number. In a way, the MRUC was rendering services and working for its members. The MRUC was also outsourcing most of its activities to a third party research agency. The working pattern and model adopted by MRUC was unlike a commercial organization and completely different. The dissimilarities are too striking and apparent to be ignored. The Transfer Pricing Officer had also contradicted himself as recorded in paragraph 19 of the impugned order. Tribunal, in our opinion, was justified in excluding the MRUC from the list of comparables.
Issues:
1. Exclusion of Media Research Users Council (MRUC) from the list of comparables for transfer pricing adjustment. Analysis: The judgment pertains to an appeal by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) regarding the exclusion of MRUC from the list of comparables for transfer pricing adjustment for the assessment year 2011-2012. The ITAT's reasoning for excluding MRUC was based on functional dissimilarity, as MRUC is a not-for-profit organization serving the interests of its members without assuming any risks. The Tribunal found that MRUC's operational model, revenue sources, and profit distribution differed significantly from a profit-making entity, making it unsuitable for comparison under Rule 10B(2) of the Income-tax Rules, 1962. Additionally, MRUC's turnover and outsourcing practices further supported its exclusion from comparables. The Tribunal emphasized the importance of functional similarity and profit motive in determining comparability for transfer pricing analysis. The Revenue contended that MRUC being a not-for-profit organization was inconsequential and argued that its profit margin would be lower than that of a profit-making enterprise. However, the Tribunal upheld the exclusion of MRUC from comparables based on multiple reasons beyond its not-for-profit status. The Tribunal highlighted the absence of quid pro quo in MRUC's income generation, its service provision for members, and extensive outsourcing practices as key factors justifying its exclusion. The Tribunal found the dissimilarities between MRUC and commercial organizations too significant to overlook, supporting its decision to exclude MRUC from comparables. In conclusion, the High Court dismissed the Revenue's appeal and upheld the Tribunal's decision to exclude MRUC from the list of comparables for transfer pricing adjustment. The Court found the Tribunal's reasoning regarding MRUC's functional dissimilarity, revenue sources, and operational model to be valid and justified, leading to the rejection of the Revenue's contentions. The judgment underscores the importance of functional similarity and profit motive in determining comparability for transfer pricing analysis, emphasizing the need for a thorough assessment of relevant factors beyond mere organizational structure.
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