2023 (7) TMI 79 - AT - Income Tax

TP Adjustment - taking the comparable of Acropetal Technologies Limited ( Acropetal ) - HELD THAT - From the SEBI report, it is clear there are irregularities committed in the financials of the company by way of committing a fraud in utilization of funds raised in IPO and diverted majority of funds to non-business purposes which has a significant bearing on the operating margins. This is a very good reason for not accepting the Acropetal Technologies Ltd., as comparable and hence, we direct the TPO to exclude the same while computing operating margins of the assessee. In term of the above, we direct the TPO / AO accordingly. Accuspeed Engineering Ltd., and Kirloskar Consultants Ltd. - We noted that since the assessee now before us has filed financials of Accuspeed Engineering Ltd., and Kirloskar Consultants Ltd., and this is the finding of the DRP that these financials are not available either before the TPO or DRP, we feel that in the interest of natural justice, we remit back the issue of these two comparables to the file of the AO for carrying out necessary enquiry and verification and then TPO will decide whether to consider the same as comparables or not. Harita Techserv Ltd - TPO has simply rejected the comparable on the reason that it has a negative PLI whereas DRP has only considered that it is not financially similar whereas assessee now before us filed complete details that Harita Techserv Ltd., is also engaged in engineering design services and financially similar. This needs to be considered. We feel that let the matter be restored back to the file of the TPO in regard to this comparable and TPO will consider whether assessee is financially similar to Harita Techserv Ltd., or not. In term of the above, we set aside this issue to the file of the TPO and allow for statistical purposes. TDS u/s 195 - Non deduction of TDS u/s 40(a)(ia) - Ocean Freight charges paid - HELD THAT - The assessee has paid ocean freight charges to its Korean counterpart M/s. Doosan Corporation Korea for hiring of ships. From the invoices clearly produced before us, the invoice clearly says that the M/s. Doosan Corporation Korea has been paid freight by Doosan Power Systems Pvt. Ltd., the assessee company for hiring of ship. Whether these ocean freight charges will fall within the scope of fee for technical services or royalty u/s. 9(1)(vi) or Article 12.3 of the DTAA? - The relevant consideration paid by assessee is for hiring of ships i.e., rental or ocean freight paid for ships. The assessee s case is covered by Article 8 of DTAA of India-Korea and therefore the rentals of ship are in the nature of profit from the operation of ship or aircraft in international traffic carried on by an enterprise of a contracting state. The amount can be taxable only in contracting state and not taxable in India. Hence, the assessee is not liable to deduct TDS and therefore, no disallowance by invoking the provisions of section 40(a)(i) - we reverse the order of DRP and that of the AO and allow the appeal of the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment involving Acropetal Technologies Limited.
2. Exclusion of three comparables: Accuspeed Engineering Ltd., Harita Techserv Ltd., and Kirloskar Consultants Ltd.
3. Disallowance of Ocean Freight Charges for non-deduction of TDS.

Summary:

1. Transfer Pricing Adjustment involving Acropetal Technologies Limited:

The assessee contested the inclusion of Acropetal Technologies Limited as a comparable for transfer pricing adjustments, arguing that it violated Rule 10B(2) due to differences in functions, assets, and risks. The TPO had included Acropetal Technologies Ltd., which showed a margin of 61.11%, significantly higher than the assessee's margin of 10.48%. The Tribunal agreed with the assessee, noting that the financials of Acropetal Technologies Ltd. were based on fraudulent activities as per SEBI's findings. Consequently, the Tribunal directed the TPO to exclude Acropetal Technologies Ltd. while computing the operating margins of the assessee.

2. Exclusion of three comparables: Accuspeed Engineering Ltd., Harita Techserv Ltd., and Kirloskar Consultants Ltd.:

The assessee sought the exclusion of Accuspeed Engineering Ltd., Harita Techserv Ltd., and Kirloskar Consultants Ltd. The TPO had rejected Accuspeed and Kirloskar due to 'no sales' and Harita due to a negative PLI. The Tribunal remitted the issue of Accuspeed and Kirloskar back to the TPO for verification, as the financials were now available. Regarding Harita, the Tribunal noted contradictions in the TPO and DRP's reasoning and remitted the matter back to the TPO for reconsideration, allowing for statistical purposes.

3. Disallowance of Ocean Freight Charges for non-deduction of TDS:

The assessee challenged the disallowance of ocean freight charges paid to Doosan Corporation Korea for non-deduction of TDS. The DRP had treated the payment as royalty under section 9(1)(vi) and Article 12 of the India-Korea DTAA. The Tribunal, however, held that the payments were for the rental of ships used in international traffic, covered under Article 8 of the DTAA, and thus taxable only in Korea. Consequently, the Tribunal reversed the DRP's decision, ruling that the assessee was not liable to deduct TDS, and allowed the appeal.

Conclusion:

The appeals were partly allowed for statistical purposes, with specific directions to the TPO for reconsideration and verification of certain comparables and exclusion of Acropetal Technologies Ltd. Additionally, the disallowance of ocean freight charges was reversed, allowing the assessee's appeal.