2021 (12) TMI 936 - AT - Income Tax

TP Adjustment - ALP of international transactions with its AE - reclassification of the assessee s business profile from contract marketing service provider to a full-fledged technical/business support service provider - HELD THAT - The entire international transaction of the assessee was based on the agreement dated 8.8.1994 with its AE i.e. Parametric Holdings Inc. Parametric India is engaged in marketing and support services in India on behalf of its AE. On this basis, the international transactions have taken place - TPO in the impugned assessment order observed that the services provided by the taxpayer to the AE are in the nature of marketing support services. However, while making the TP adjustment, he changed the business profile of the assessee recorded of the TP order. Contrary to this, he reclassified the assessee s business profile from contract marketing service provider to a full-fledged technical/business support service provider only on the reason that the assessee has not furnished proper bifurcation of employees involved in the two activities. In our opinion, this cannot be a reason to reclassify the business profile of the assessee. The engineers could have been appointed to carry out some work in the field of marketing services. There is no prohibition on this count. The assessee is not disentitled to appoint engineers for carrying out the marketing services with regard to international transactions to its AE. Since judicial discipline requires consistency in its proceedings from year to year, the business profile of the assessee cannot be changed from year to year wherein the all the international transactions of the assessee are based on the same agreement dated 8.8.1994 with its AE. Being so, in our opinion, it is appropriate to vacate the findings of the revenue authorities on this count and allow the grounds taken by the assessee. Accordingly this ground is allowed.

Summary

Issues Involved:
1. Legality of the Assessing Officer's (AO) order.
2. Transfer Pricing Adjustment.
3. Re-characterization of the business profile.
4. Segmentation of revenue/costs.
5. Use of data for Transfer Pricing assessment.
6. Application of multiple year/prior year data.
7. Rejection of Transfer Pricing documentation.
8. Selection of comparables.
9. Non-compliance with Dispute Resolution Panel (DRP) directions.
10. Risk adjustments for limited-risk nature of services.

Detailed Analysis:

1. Legality of the AO's Order:
The assessee challenged the order of the Deputy Commissioner of Income Tax (DCIT), Circle 12(2), Bangalore, claiming it was "bad in law, contrary to the facts and circumstances of the case and liable to be quashed."

2. Transfer Pricing Adjustment:
The AO and the Dispute Resolution Panel (DRP) upheld the Transfer Pricing Officer's (TPO) adjustment of INR 3,45,45,100 to the transfer price concerning the assessee's contract marketing support services provided to its Associated Enterprises (AEs).

3. Re-characterization of the Business Profile:
The TPO re-characterized the assessee’s business profile from a contract marketing service provider to a full-fledged technical/business support service provider. The Tribunal found this re-characterization inappropriate, noting that the assessee had consistently been treated as a marketing services provider in previous years, and there was no substantial evidence to justify the change. The Tribunal vacated the findings of the revenue authorities on this count, directing the TPO to treat the assessee as a full-fledged marketing service provider and re-conduct the Transfer Pricing study.

4. Segmentation of Revenue/Costs:
The TPO segmented the total revenue/costs based on employee costs incurred for marketing-related and technical-related personnel, which was upheld by the DRP. The Tribunal found this segmentation arbitrary and directed a fresh TP study.

5. Use of Data for Transfer Pricing Assessment:
The TPO used data available at the time of the Transfer Pricing assessment proceedings, which was not available to the assessee when preparing the TP documentation. The Tribunal did not specifically adjudicate on this issue due to the remand for a fresh TP study.

6. Application of Multiple Year/Prior Year Data:
The TPO disregarded the application of multiple year/prior year data used by the assessee, insisting on using current year data for comparable companies. This issue was also remanded for reconsideration in the fresh TP study.

7. Rejection of Transfer Pricing Documentation:
The TPO rejected the TP documentation and comparability analysis undertaken by the assessee, conducting an arbitrary comparability analysis. The Tribunal directed the TPO to re-evaluate this in the fresh TP study.

8. Selection of Comparables:
The TPO included/excluded various companies as comparables based on functional similarity, which was contested by the assessee. The Tribunal directed a fresh TP study, requiring the TPO to reconsider the selection of comparables appropriately.

9. Non-compliance with DRP Directions:
The AO did not give effect to certain directions of the DRP, including the correct computation of operating markup on cost and granting working capital adjustment. This issue was also remanded for reconsideration.

10. Risk Adjustments for Limited-Risk Nature of Services:
The AO and DRP ignored the limited-risk nature of the marketing and sales support services provided by the assessee, failing to provide appropriate adjustments for differences in working capital and risks. This was directed to be reconsidered in the fresh TP study.

Conclusion:
The Tribunal allowed the assessee’s appeal partly for statistical purposes, directing the TPO to carry out a fresh TP study treating the assessee as a full-fledged marketing service provider and to reconsider all related issues accordingly. The judgment emphasized the need for consistency in the assessee’s business profile across different assessment years.