2022 (2) TMI 160 - AT - Income Tax

TP Adjustment - comparable selection - Functional dissimilarity - HELD THAT - Kicons Limited - Once it is an admitted fact that this company is engaged in executing contracts relating to solar power projects and other civil activities which are entirely different from the activities and functions carried out by the assessee company. Apart from that, this company is also involved in various other activities like legal, accounting, book-keeping auditing activities, tax consultancy, market research and public opinion polling services, whereas the assessee company is engaged in business of providing various management and technological solutions in the sector of water waste management, infrastructure development, oil gas, transportation, energy, chemicals, master planning and environment services. Thus, on functional dissimilarity, this company cannot be held to be comparable for the purpose of benchmarking the PLI of the assessee, hence we hold that the ld. CIT (A) has rightly excluded the said company from the final set of comparables. Korus Engineering Solutions Limited - What has been referred to is the extract from the website of this company that the company is engaged in the development of steel industry. In absence of any annual report, these services cannot be held to be similar to the services in which assessee has been engaged into. What is available only the functional statement but nowhere management discussion, director's report, etc. were available, hence it is difficult to analyse the FAR of the said company. On this ground alone, this company has rightly been excluded by the ld. CIT (A). Mitcon Consultancy Engg. Services Ltd. - This company is engaged in providing multiple services, such as, banking financial solution services, securitisation financial restructuring services, MITCO e-School and other services which are in the field of textiles, market research, infra consulting, wind power generation, decentralised power generation, projects, energy and carbon consultancy service etc.. This company is deriving revenue from (i) consultancy fees; (ii) vocational training; (iii) IT courses; and (iv) income from laboratories. No doubt, the consultancy fees can considered to be similar to the services rendered by the assessee but in absence of any segmental details, it is difficult to see the profit margin under various streams of revenue. As per Note 41 of the segmental report of the company given in the financial statement, it has two segments viz., consultancy training and wind power generation. Neither wind power generation nor training segment can be said to be comparable to the services provided by the assessee. Accordingly, we are of the opinion that ld. CIT (A) has rightly excluded this company as comparable from the final set of comparables. - Decided against revenue.

Summary

Issues Involved:
1. Exclusion of specific comparables (Mitcon Consultancy & Engg. Services Ltd, Kicons Limited, and Korus Engineering Solution Pvt. Ltd.) in determining Arm's Length Price (ALP) for international transactions.

Detailed Analysis:

1. Exclusion of Mitcon Consultancy & Engg. Services Ltd:
The TPO included Mitcon Consultancy & Engg. Services Ltd as a comparable, asserting it provides technical and engineering consultancy services. However, the CIT (A) found the company engaged in diverse fields like textiles, banking & financial services, energy & carbon consultancy services, and lacked segmental accounts. The annual report revealed multiple revenue streams, including consultancy fees, vocational training, IT courses, and income from laboratories. Given the absence of segmental details and the company's involvement in non-comparable services like wind power generation and training, the CIT (A) rightly excluded it from the final set of comparables. The Tribunal upheld this exclusion, emphasizing the functional dissimilarity and the lack of segmental profit margin details.

2. Exclusion of Kicons Limited:
The TPO included Kicons Limited, considering it functionally comparable. However, the CIT (A) noted that Kicons Limited is involved in legal, accounting, book-keeping, auditing activities, tax consultancy, market research, public opinion polling, and execution of contracts for solar power projects and other civil activities. These activities differ significantly from the assessee's business of providing management and technological solutions in sectors like water & waste management, infrastructure development, oil & gas, transportation, energy, chemicals, master planning, and environmental services. The Tribunal agreed with the CIT (A) that Kicons Limited's functional dissimilarity warranted its exclusion from the comparables.

3. Exclusion of Korus Engineering Solution Pvt. Ltd:
The TPO included Korus Engineering Solution Pvt. Ltd, citing its involvement in technical consultancy and project engineering. However, the CIT (A) found that Korus Engineering is engaged in the development of the steel industry, and its annual report was not publicly available, making it difficult to analyze its functional profile comprehensively. The Tribunal upheld the CIT (A)'s decision, noting the absence of detailed reports like management discussion and director's report, which are crucial for a thorough FAR analysis.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s exclusion of Mitcon Consultancy & Engg. Services Ltd, Kicons Limited, and Korus Engineering Solution Pvt. Ltd from the final set of comparables. The decision was based on the functional dissimilarity of these companies to the assessee and the lack of necessary segmental details to accurately benchmark the Profit Level Indicator (PLI). The Tribunal's judgment emphasized the importance of ensuring comparability in transfer pricing assessments to determine the Arm's Length Price accurately.