2015 (4) TMI 752 - AT - Income Tax

Determination of Arm length Price (ALP) in International transactions - Rejection of comparables, resulting determination of higher operating profit - Comparable should be similar to the tested party's function - Held that - We have considered the rival submissions and have perused the record of the case. There is no gain saying that unless the comparable is functionally similar to the tested party s function, the same cannot be included in the list of comparables for computing ALP as per the provisions of Rule 10B(2)(b). Ld. DRP while considering the comparable Wapcos, inter alia, observed that neither the department nor the assessee has found any consultancy comparables in the tourism sector. Therefore, it becomes imperative that only those comparables should be taken into consideration which have close similarity with the functions carried out by tested party. Accordingly, in view of above discussion, we direct the AO to exclude the above three comparables from the list of comparables selected by him. Ld. counsel pointed out that after exclusion of above three comparables from the list of comparables, the PLI would come within ( )(-) 5% range and, therefore, this ground has become academic. - Relating to levy of penalty, is premature and stands rejected accordingly.he charging of interest u/s 234A/B/C is consequential. The AO shall recalculate the charging of interest, if any, while giving effect to appellate order. - Decided partly in favour of assessee.

Issues Involved:
1. Rejection of Transfer Pricing (TP) Documentation and addition of Rs. 92,82,443.
2. Classification of appellant's services as consultancy services.
3. Rejection of comparable companies selected by appellant.
4. Use of single year data for computing Arm's Length Price (ALP).
5. Determination of ALP using data not available in the public domain.
6. Adjustments on account of risk profile.
7. Limitation of adjustments to the lower end of 5% range.
8. Initiation of penalty proceedings under section 271(1)(c).
9. Levy of interest under section 234A/B/C.

Issue-wise Detailed Analysis:

1. Rejection of TP Documentation and Addition of Rs. 92,82,443:
The appellant contested the rejection of its TP documentation and the addition of Rs. 92,82,443 made by the AO due to differences in ALP determination. The AO had referred the matter to the TPO, who accepted only two out of twelve comparables selected by the appellant and added ten more, determining the PLI at 21.48%. The DRP later excluded three comparables, resulting in a final operating profit determination of 15.23%.

2. Classification of Services as Consultancy Services:
The appellant argued that its ground-level coordination and support services were erroneously considered as consultancy services by the AO and DRP. The appellant's services included logistical support, adherence to safety and branding guidelines, and handling passenger complaints, which were distinct from consultancy services.

3. Rejection of Comparable Companies:
The main dispute involved the selection of three comparables by the TPO: Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. The appellant contended that these companies were not functionally comparable due to their involvement in sophisticated engineering and technical consultancy, unlike the appellant's support services. The Tribunal agreed with the appellant, citing previous decisions that excluded such companies from comparables due to different functional, asset, and risk profiles.

4. Use of Single Year Data:
The appellant's ground relating to the use of single year data versus multiple year data for computing ALP was not pressed, and thus, it was rejected.

5. Determination of ALP Using Non-Public Data:
The appellant did not press the ground related to the AO's use of data obtained from third parties under section 133(6), which was not available in the public domain at the time of TP documentation compliance.

6. Adjustments on Account of Risk Profile:
The appellant argued for suitable adjustments based on its risk profile compared to the selected comparables. However, this ground became academic after the exclusion of the three disputed comparables, as the PLI fell within the acceptable range.

7. Limitation of Adjustments to Lower End of 5% Range:
The appellant's ground regarding the limitation of adjustments to the lower end of the 5% range was rendered academic due to the revised PLI falling within the acceptable range after excluding the disputed comparables.

8. Initiation of Penalty Proceedings:
The ground relating to the initiation of penalty proceedings under section 271(1)(c) was considered premature and thus rejected.

9. Levy of Interest:
The charging of interest under sections 234A/B/C was deemed consequential, and the AO was directed to recalculate interest, if any, while giving effect to the appellate order.

Conclusion:
The Tribunal directed the AO to exclude Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. from the list of comparables. Consequently, the appellant's appeal was partly allowed for statistical purposes. The order was pronounced in open court on 27-02-2015.

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