2018 (7) TMI 1475 - AT - Income Tax

Transfer pricing addition - Marketing and after-sales support services characterized by the assessee as Service fee received - determination of comparable companies - Held that - The assessee rendered marketing support services for its AE in connection with sale of tobacco products in India, Nepal, Bangladesh and Afghanisthan,thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance u/s 40(a)(i) - Held that - Adverting to the facts of the instant case, we find that the DRP has not considered the assessee s claim for non-deduction of tax at source in the light of the respective Double Taxation Avoidance Agreements (DTAA). It is further observed that the assessee did not adduce necessary Agreements with the payees before the Assessing Officer. Since the orders of the authorities below are silent on these vital aspects having bearing on the application of section 40(a), respectfully following the precedent, we set aside the impugned order and remit the matter to the file of AO for deciding it afresh as per law, after allowing a reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Transfer pricing addition for marketing and after-sales support services.
2. Disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Detailed Analysis:

1. Transfer Pricing Addition for Marketing and After-Sales Support Services:

Background:
- The assessee, an Indian branch of a Swiss company, provided market support services and reported international transactions in Form No. 3CEB.
- The transaction in question involved a 'Service fee received' with a transacted value of ?22,81,92,227/-.
- The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC), computing its own ALP at 10%.
- The Transfer Pricing Officer (TPO) did not approve the comparables chosen by the assessee and selected nine companies with an average PLI of 24.80%, resulting in a recommended transfer pricing adjustment of ?1,52,78,270/-.
- The Dispute Resolution Panel (DRP) corrected the margins but retained the final set of comparables, reducing the addition to ?86,70,078/-.

Comparables Analysis:
- Apitco Limited: The assessee argued against its inclusion due to functional dissimilarity. The Tribunal found that Apitco's diverse services (e.g., Micro Enterprises Development, Skill Development) did not match the assessee’s market support services, ordering its exclusion.
- Global Procurement Consultants Limited: This company provided consultancy and procurement services, which were deemed fundamentally different from the assessee’s market support services. The Tribunal ordered its exclusion.
- TSR Darashaw Limited: Engaged in Registrar and Transfer Agent activities, Records management, and Payroll services, which were found to be functionally disparate from the assessee’s services. The Tribunal ordered its exclusion.
- Quippo Valuers: Engaged in asset management services, including auction and valuation of industrial assets, which were not comparable to the assessee’s market support services. The Tribunal ordered its exclusion.

Conclusion:
- The Tribunal set aside the impugned order regarding the transfer pricing addition and remitted the matter to the AO/TPO for fresh determination of ALP, directing the exclusion of the four companies from the comparables list.

2. Disallowance under Section 40(a)(i) of the Income-tax Act, 1961:

Background:
- The assessee incurred expenses in foreign currency without deducting tax at source, leading to a disallowance of ?1,97,09,254/- by the Assessing Officer.
- The AO categorized these payments as managerial, consultancy, or technical services, and in some cases, as 'Royalty'.
- The DRP sustained the disallowance except for ?8,65,254/- claimed as reimbursement of expenses.

Tribunal’s Analysis:
- The Tribunal noted that similar disallowance was made in the preceding assessment year and was remitted back for fresh consideration.
- The Tribunal observed that the DRP did not consider the assessee’s claims under the respective Double Taxation Avoidance Agreements (DTAA).
- The assessee failed to provide necessary agreements with the payees to the AO.

Conclusion:
- The Tribunal set aside the impugned order and remitted the matter to the AO for fresh adjudication, allowing the assessee to present necessary evidence and agreements.

Final Judgment:
- The appeal was allowed for statistical purposes, with directions for fresh determination of ALP and reconsideration of the disallowance under section 40(a)(i).