2020 (4) TMI 608 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Referring to market support services provided by the assessee, companies functionally different with that of assessee need to deselected from the final list of comparable. No merit in applying employee cost filter of 25%. Treatment of certain items as non-operating while computing margins of comparables which are foreign exchange gain/ loss, bank charges and provision for doubtful debts - HELD THAT - Forex gain/loss arise in normal course of business due to realization of export proceeds, settlement of import payables or adjustment of customer advances at a different rate than the rate at which it was booked, and should be considered as operating while computing operating margins of comparables. Bank charges are levied by banks for maintenance of bank accounts and various other facilities intrinsically linked to business operations of an assessee and hence should be considered as operating while computing operating margins of comparables. Provision for doubtful debt is an estimated percentage of debtors that are not expected to pay during the year and hence directly relate to business operations of assessee and should be considered as operating while computing operating margins of comparables. Risk adjustment -There is no quarrel that the assessee has a cost plus business model operating in a low risk or almost risk mitigated environment as compared to the comparable companies who are independent service providers and bear significant risks.

Summary

Issues Involved:
1. TP adjustment by including and excluding some comparables objected to by the assessee.
2. Treating some items as non-operating while computing margins of comparables.
3. Denial of risk adjustment.

Issue-wise Detailed Analysis:

1. TP Adjustment by Including and Excluding Some Comparables Objected to by the Assessee:

The appellant, Lockheed Martin India Pvt Limited (LMIPL), primarily provides marketing support services to its parent entity. The Transfer Pricing Officer (TPO) rejected six out of eight comparables selected by the assessee and included new comparables. The key points of contention were:

- APTICO LIMITED: The assessee argued that Aptico Ltd provides technical and engineering services, which are not comparable to the marketing support services provided by the assessee. The Tribunal agreed, noting that Aptico Ltd engages in diverse activities, including turnkey projects and public sector undertakings, making it an unsuitable comparable. The Tribunal directed the TPO to exclude Aptico Ltd from the final set of comparables.

- Global Procurement Consultants Ltd (GPCL): The assessee contended that GPCL provides high-end technical consultancy in international funding regulations, unlike the marketing support services provided by the assessee. The Tribunal found GPCL's services to be more akin to consultancy for large-scale infrastructure projects and directed its exclusion from the final set of comparables.

- HCCA Business Services Pvt Ltd: The assessee argued that HCCA provides payroll processing and HR services, which are different from the marketing support services provided by the assessee. The Tribunal agreed, citing previous judicial decisions and directed the exclusion of HCCA from the final set of comparables.

- TSR Darashaw Ltd: The Tribunal found that TSR Darashaw Ltd operates in three different segments with no segmental data available, making it an unsuitable comparable. The Tribunal directed the TPO to exclude TSR Darashaw Ltd from the final set of comparables.

- Inhouse Productions Ltd and India Tourism Development Corporation Ltd: The Tribunal directed the TPO to reconsider the inclusion of these companies based on segmental data and their comparability to the assessee's services.

2. Treating Some Items as Non-Operating While Computing Margins of Comparables:

The Tribunal addressed the treatment of certain items as non-operating while computing margins of comparables:

- Forex Gain/Loss: The Tribunal held that forex gain/loss arises in the normal course of business and should be considered as operating while computing operating margins of comparables.

- Bank Charges: The Tribunal determined that bank charges are intrinsically linked to business operations and should be considered as operating while computing operating margins of comparables.

- Provision for Doubtful Debts: The Tribunal opined that provision for doubtful debts directly relates to business operations and should be considered as operating while computing operating margins of comparables.

3. Denial of Risk Adjustment:

The Tribunal acknowledged that the assessee operates in a low-risk environment with a cost-plus business model, unlike the independent service providers who bear significant risks. The Tribunal concluded that the assessee is entitled to risk adjustment accordingly.

Conclusion:

The Tribunal allowed the appeal of the assessee in part for statistical purposes, directing the exclusion of certain comparables, reconsideration of others based on segmental data, and appropriate treatment of forex gain/loss, bank charges, and provision for doubtful debts as operating items. Additionally, the Tribunal affirmed the assessee's entitlement to risk adjustment. The order was pronounced in the open court on 07.02.2020.