2023 (10) TMI 251 - AT - Income Tax

TP Adjustment - Comparable selection - Functional dissimilarity - HELD THAT - Exclude Scarecrow Communications Ltd. from the list of comparables to determine the ALP of international transactions. Axience Consulting Pvt. Ltd. Company ought to be excluded as it is functionally not comparable to the Assessee. Dun Bradstreet Information Services India Pvt. Ltd.be excluded as Functionally dissimilar. Pressman Advertising Ltd. as stated that the company s business activity falls within a single business segment i.e. advertising, selling of space for advertisement in print media and public relations and hence no additional disclosure other than those made in the financial statements are required under indas 108 operating segments . Thus it is clear that under the advertising services, this company also earns revenue from selling of space for advertisement in print media and public relations for which no bifurcation has been provided. In any event, advertisement services provided by this company also cannot be compared to the services rendered by assessee to its AE under the marketing support services which is limited to presale support activities. Lintas India Pvt. Ltd. as Functionally dissimilar as providing advertising services and the principle business activity has been described in the annual report to be advertising and marketing communications. The revenue recognition by this company has been mentioned to be an advertising agency catering services to much number of clientele. Exclude this company M/s. Majestic Research Service Solutions Ltd. from the list of comparables on the basis of functionality and dissimilarity. Cheil India Pvt. Ltd. company is engaged in the business of advertising, communication, publicity and merchandising including undertaking market research, planning and providing consultancy services and training in the same field. There is no segmental details available and the entire revenue is disclosed as revenue from sale of services. We do not find this company to be functionally similar with that of assessee. Accordingly, we direct this comparable to be excluded. Kestone Integrated Marketing Services Pvt. Ltd. be rejected as not functionally comparable to the assessee and passes all filter applied by the assessee. Interest on delayed receivables - We direct the AO/TPO to apply LIBOR rate for credits beyond 60 days only.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Marketing and Sales Support Services (MSS)
2. Interest on Delayed Receivables
3. Comparability of Selected Companies
4. Working Capital and Risk Adjustments
5. Penalty Proceedings

Summary:

1. Transfer Pricing Adjustment for Marketing and Sales Support Services (MSS):
The primary issue was the Transfer Pricing (TP) adjustment of Rs. 40,65,217/- made by the Transfer Pricing Officer (TPO) towards the international transactions of MSS provided by the Assessee to its Associated Enterprises (AEs). The Assessee, a subsidiary of Arm Limited, UK, engaged in providing contract software development services (SWD services) and MSS to its AEs, had initially concluded that the international transactions were at arm's length in its TP study. However, the TPO determined a TP adjustment of Rs. 47,39,738/- for the MSS segment. The Dispute Resolution Panel (DRP) granted partial relief, reducing the TP adjustment for MSS to Rs. 40,65,217/-. The Tribunal reviewed the comparables selected by the TPO and DRP, and directed the exclusion of certain companies from the final list of comparables due to functional dissimilarities.

2. Interest on Delayed Receivables:
The TPO had also made an adjustment of Rs. 5,62,08,198/- towards notional interest on delayed receivables. The Assessee argued that the outstanding receivables were settled in the normal course of business and should not be treated as a separate international transaction. The Tribunal referred to previous decisions and directed that interest should be computed using LIBOR rates for credits beyond 60 days, remanding the issue to the AO/TPO for fresh consideration.

3. Comparability of Selected Companies:
The Assessee contested the inclusion of several companies in the final list of comparables, arguing that they were functionally dissimilar. The Tribunal reviewed the functional profiles of these companies and directed the exclusion of companies such as Scarecrow Communications Ltd., Axience Consulting Pvt. Ltd., Dun & Bradstreet Information Services India Pvt. Ltd., Pressman Advertising Ltd., Lintas India Pvt. Ltd., Majestic Research Service & Solutions Ltd., and Cheil India Pvt. Ltd. due to their dissimilar business activities. The Tribunal also remitted the inclusion of MCI Management India Pvt. Ltd. and Kestone Integrated Marketing Services Pvt. Ltd. to the AO/TPO for fresh consideration.

4. Working Capital and Risk Adjustments:
The Assessee's grounds related to working capital and risk adjustments were dismissed as not pressed. The Tribunal directed the AO/TPO to compute the correct operating margin as per the DRP's direction.

5. Penalty Proceedings:
The Assessee challenged the initiation of penalty proceedings under Section 274 read with Section 270A of the Act. The Tribunal found this ground preposterous and dismissed it accordingly.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider certain comparables and adjustments in light of the Tribunal's findings. The order was pronounced in the open court on 8th June, 2023.