2019 (4) TMI 1117 - AT - Income Tax

Transfer pricing adjustment to the International transaction of marketing support services - comparable selection - HELD THAT - M/s Global Procurement Consultant Ltd - there is no dispute on the activity of consultancy of procurement services carried out by the company. In our opinion, the consultancy related to procurement services and project review etc cannot be compared with the marketing support services carried out by the assessee. The company cannot be compared only on the ground that it is in the business of providing services. The company being functionally dissimilar, we direct the learned AO/TPO to exclude from the final set of the comparables. M/s TSR Darashaw Ltd - Perusal of the schedule forming part of the financial statement for year ending 31/03/2009, filed by the assessee, we find that income has been shown from share registry and transfer services, depository services, record management payroll and provided fund management, corporate and fixed deposit management etc. The services rendered by the company are entirely different nature as compared to the services of marketing support rendered by the assessee to its AE. In our opinion, the company is functionally dissimilar to the assessee, accordingly we direct the Ld. AO/TPO to exclude the company from the final set of the comparables. M/s Excellent Insurance Broking Services Ltd. - We find from the order of the learned DRP that no express direction has been given to retain or include this comparable in the final set of the comparable. Accordingly, we accept the contention of the Ld. Counsel that learned TPO was not justified in including the company in the final set of comparables, without any specific direction of the learned DRP. We are of the opinion that all the 19 companies selected by the assessee, including the company M/s Excellent Insurance Broking Service Ltd. should be considered afresh by the learned TPO along with 5 comparables which have been retained by the Tribunal in the case of the assessee for assessment year 2008-09, in the light of the filters applied by the TPO. We further direct that, in case, no companies found to be comparable out of the 19 companies and 5 companies are mentioned respectively above, the learned TPO may carry out a fresh search on the database applying the filters already upheld by the learned DRP. Appeal of the assessee are accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the order passed by the Deputy Director of Income Tax.
2. Re-computation of the arm’s length price (ALP) of the appellant’s international transaction.
3. Errors in the transfer pricing adjustment process.
4. Non-granting of relief under proviso to section 92C (2) of the Act.
5. Proposal to charge interest under section 234B of the Income Tax Act.
6. Validity of initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of the Order:
The appellant contended that the order passed by the Deputy Director of Income Tax, Circle 3(2), International Taxation, New Delhi, was "bad in law and void ab-initio." The Tribunal did not provide a separate discussion on this issue, implying that the primary focus was on the transfer pricing adjustments.

2. Re-computation of the Arm’s Length Price (ALP):
The appellant challenged the re-computation of the ALP of its international transaction at ?91,360,882 against ?79,280,797 determined by the appellant, resulting in an addition of ?12,080,085 to the appellant’s income. The appellant used the Transactional Net Margin Method (TNMM) and Operating Profit/Operating Cost (OP/OC) as the profit level indicator, selecting 19 comparable companies with an average margin of 5.32%. The TPO, however, accepted only one comparable from the appellant’s list and added three new comparables, resulting in an average margin of 36.51% and an adjustment of ?1,91,30,582.

3. Errors in the Transfer Pricing Adjustment Process:
The appellant argued that the TPO erred by:
- Rejecting the transfer pricing documentation and performing a fresh search without cogent reasons.
- Rejecting all comparable companies except one.
- Selecting functionally dissimilar companies as comparables.
- Cherry-picking comparables and subsequently rejecting them.
- Rejecting additional comparables proposed by the appellant.

The DRP upheld the TPO’s use of current year data and various filters but directed the exclusion of Basiz Fund Services Pvt. Ltd. and included M/s Excellent Insurance Broking Services Ltd. The Tribunal found that the comparables chosen by the TPO were functionally dissimilar to the appellant’s marketing support services and directed their exclusion.

4. Non-granting of Relief under Proviso to Section 92C (2):
The appellant claimed that the AO/TPO erred in not granting relief under the proviso to section 92C (2) of the Act. The Tribunal did not specifically address this issue, focusing instead on the comparability analysis.

5. Proposal to Charge Interest under Section 234B:
The appellant contended that the AO erred in proposing to charge interest under section 234B of the Income Tax Act. The Tribunal did not provide a detailed discussion on this issue, implying it was secondary to the main transfer pricing dispute.

6. Validity of Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant argued that the DRP erred in not examining the validity of the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not specifically address this issue, focusing on the transfer pricing adjustments.

Conclusion:
The Tribunal concluded that all three companies selected for comparison in the final assessment order were to be excluded, leaving no comparables. It directed a fresh search for comparables, considering the 19 companies initially selected by the appellant and the five comparables retained by the Tribunal in the previous assessment year. The appeal was allowed for statistical purposes, and the order was pronounced in the open court on 12th April 2019.