2023 (1) TMI 1069 - AT - Income Tax

TP Adjustment - transfer pricing adjustment suggested by the Transfer Pricing Officer (TPO) on the arm s length price (ALP) of the international transaction with the overseas Associated Enterprises (AEs) - Comparable selection - HELD THAT - It is a fact on record that the assessee operates in two segments. While, in one of the segment assessee undertakes international transactions relating to provision of agency support services to AEs, in the other segment, the assessee is engaged in trading of goods to customers in India. Thus, while the provision of agency support services is purely with related parties, the trading in goods domestically is exclusively with unrelated parties. While, rejecting assessee s benchmarking of international transactions with AEs, undisputedly, the TPO had aggregated transactions in both the segments at entity level and determined the ALP of the transactions with the AEs. This approach of the TPO is fundamentally wrong and against the statutory provisions. While benchmarking international transactions with AEs, the transactions relating to unrelated parties cannot be clubbed. Therefore, the benchmarking done by the TPO is flawed, hence, unacceptable. The tinkering of PLI by substituting the denominator with total cost is unacceptable considering that the TPO has included the cost of traded goods with unrelated parties in the total cost. Therefore, we do not find any infirmity in the decision of learned DRP in directing the TPO to recompute the ALP by strictly restricting himself to the international transaction with the AEs. Inclusion of Besant Raj International as a comparable, it is observed that only reason on which the TPO excluded this company is because it is a persistent loss making company. As per settled legal principles, a company can be considered as a persistent loss making company if it has shown loss in the current year as well as two preceding assessment years. Factually, the assessee has established that Besant Raj International Ltd. has shown profit in assessment year 2004-05. In fact, while giving effect to the directions of learned DRP, the TPO has accepted this fact. Therefore, Besant Raj International Ltd., being otherwise functionally similar to the assessee, has to be treated as comparable. Revenue appeal dismissed.

Summary

Issues:
1. Challenge to the directions of the learned Dispute Resolution Panel (DRP) for the assessment year 2006-07.
2. Interpretation of the transfer pricing adjustment suggested by the Transfer Pricing Officer (TPO) on the arm's length price (ALP) of the international transaction with overseas Associated Enterprises (AEs).
3. Inclusion of Besant Raj International Ltd. in the comparable set.

Issue 1: Challenge to DRP Directions
The Revenue challenged the directions of the DRP regarding the assessment year 2006-07. The grounds raised questioned the rejection of the primacy of functions carried out by the assessee and the basis for decision-making related to minimal risks. The challenge also questioned the correctness of directing the TPO to recompute the segmental margin for indenting and trading activities based on total indirect costs, without a basis in TP guidelines or judicial pronouncements. Additionally, the challenge raised concerns about including Besant Raj International Ltd. in the comparable set despite its turnover being less than Rs. 1 Cr. in FY 05-06.

Issue 2: Interpretation of Transfer Pricing Adjustment
The assessee, a resident corporate entity, engaged in providing agency support and trading services. The TPO recomputed the ALP of international transactions with AEs, proposing adjustments based on unique intangibles developed by the assessee and significant risks assumed. The TPO disagreed with the benchmarking approach of the assessee, leading to a proposed adjustment to the ALP. The DRP directed the TPO to reevaluate the segmental margin, emphasizing the need for accurate cost allocation between AE and non-AE segments. The DRP provided detailed guidelines for this reevaluation, focusing on revenue identification, cost allocation, and margin analysis. The DRP also addressed the exclusion of Besant Raj International Ltd. from the comparable set, highlighting the company's profitability in FY 03-04 and dismissing objections raised by the assessee.

Issue 3: Inclusion of Besant Raj International Ltd.
The DRP's decision to include Besant Raj International Ltd. in the comparable set was based on the company's profit in FY 03-04, contradicting the TPO's exclusion due to being a persistent loss-making company. The Tribunal upheld the inclusion of Besant Raj International Ltd. as a comparable, emphasizing the legal principle that persistent loss-making status requires losses in the current year and two preceding years. The Tribunal found no deficiency in the DRP's directions, dismissing the grounds raised by the Revenue and upholding the decision to include Besant Raj International Ltd. as a comparable.

This detailed analysis of the judgment provides insights into the challenges faced by the Revenue, the transfer pricing adjustments, and the inclusion of Besant Raj International Ltd. in the comparable set, offering a comprehensive understanding of the legal issues addressed in the case.