2024 (8) TMI 922 - AT - Income Tax

TP Adjustment - Comparable selection - IPM segment - HELD THAT - UB Engineering Ltd. had operating margin of (-) 46.58%. AR submitted that profitability is not a criteria and FAR should be taken into consideration and the TPO has used the data relating to the future years also and the same comparable has been accepted for the A.Y. 2013-14. DRP held that the assessee has incurred abnormal losses only in the current financial year compared to the earlier years. Hence, it cannot be included. Holtec Consulting Pvt. Ltd. - Entire income of the comparable Holtec Consulting Pvt. Ltd. is by way of consultancy and hence cannot be compared with an EPC company. The revenue argued that the distinction is devoid of merit as the assessee is also fundamentally a service organization to facilitate execution. We do not find any strength in the argument of the revenue as the functionality of the comparable has not been met with that of assessee. Neil Soft Ltd. - AR submitted that the company is functionally not comparable as Neil Soft Ltd. is engaged in software engineering services and selling software products. The revenue argued that the distinction is devoid of merit as the assessee is also fundamentally a service organization to facilitate execution. We do not find any strength in the argument of the revenue as the functionality of the comparable has not been met with that of assessee. Market Support Service - Info Edge India Ltd. is a online search portal such as naukari.com and revenue is primarily from subscription based services and the turnover is 322 times than that of the assessee and the FAR is not comparable. The ld. DRP held that the comparable is also providing business market support system and it passes all the filters. We hold that the primary test of FAR have not been passed through and hence cannot be taken as a right comparable. Appeal of the assessee is partly allowed.

Issues:
1. Adjustment in the arm's length price of international transactions related to marketing support services and purchase of chemicals.
2. Validity of the final order passed by the Assessing Officer.
3. Rejection of economic analysis undertaken by the Appellant.
4. Adjustment in the Integrated Project Management (IPM) segment.
5. Rejection of alternate benchmarking approach.
6. Adjustment in the marketing support service segment.
7. Initiation of penalty proceedings under Section 271(1)(c) read with Section 274 of the Act.

Analysis:

1. The appeal was filed against the order passed by the Assessing Officer regarding the adjustment in the arm's length price of international transactions related to marketing support services and purchase of chemicals. The Appellant contended that the assessment was not in accordance with law and objected to the economic analysis conducted by the authorities. Specific adjustments were challenged, including those in the IPM segment and marketing support service segment.

2. The validity of the final order passed by the Assessing Officer was questioned by the Appellant, claiming that it was void ab initio as it did not conform to the law. This issue raised concerns about the procedural compliance and legality of the assessment process.

3. The rejection of the economic analysis undertaken by the Appellant was a crucial issue in the appeal. The Appellant argued that the authorities erred in not accepting the Appellant's economic analysis conducted in accordance with the Act and Rules. Disputes arose regarding the determination of the arm's length price of the international transactions, highlighting disagreements on the methodology used.

4. The adjustment in the Integrated Project Management (IPM) segment was contested by the Appellant. Specific objections were raised against the inclusion and exclusion of comparable companies by the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP). Issues related to abnormal losses, functional comparability, and financial data were discussed in detail.

5. The rejection of the alternate benchmarking approach submitted by the Appellant was another issue raised in the appeal. The Appellant argued that the TPO and DRP did not provide sufficient reasons for rejecting the alternate approach, leading to a lack of clarity and justification for the decision.

6. The adjustment in the marketing support service segment was also challenged by the Appellant. Various grounds were raised, including the adoption of inappropriate selection criteria, rejection of comparable companies, misinterpretation of segments, and failure to account for differences in risks assumed by the Appellant compared to comparable companies. Issues related to supernormal profits and benchmarking methodologies were extensively discussed.

7. Lastly, the initiation of penalty proceedings under Section 271(1)(c) read with Section 274 of the Act against the Appellant was a common ground of contention. The Appellant argued against the imposition of penalties, raising concerns about the compliance and applicability of penalty provisions in the given circumstances.

In conclusion, the Tribunal partly allowed the appeal, indicating that certain adjustments and decisions made by the authorities were not upheld. The detailed analysis of each issue highlighted the complexities involved in transfer pricing assessments and the challenges faced by taxpayers in defending their positions against tax authorities' determinations.

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