2018 (12) TMI 689 - AT - Income Tax

Transfer Pricing adjustment u/s 92CA(3) - comparable selection - Held that - Assessee is engaged in the production and sale of alcoholic beverages in India thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Disallowance

Detailed Analysis:

1. Transfer Pricing Adjustment:

The primary issue revolves around the enhancement of the appellant's income by ?0.64 crores due to a Transfer Pricing (TP) adjustment under section 92CA(3) of the Income Tax Act. The appellant contends that the transactions with associated enterprises (AEs) adhered to the arm's length principle (ALP). The appellant raised several points:

1.1 Pass-Through Nature of Expenses: The appellant argued that payments to third-party vendors were pass-through expenses, fully recovered from the AEs, thus not bearing any risk of non-payment.

1.2 Non-Value Adding Activities: The appellant claimed these payments did not represent any value-adding activities and should not impact the operating profitability.

1.3 Rejection of ALP Documentation: The appellant criticized the rejection of the ALP determined in their TP documentation, which complied with section 92D of the Act and Rule 10D of the Income-tax Rules.

1.4 Use of Current Year Data: The appellant objected to the use of current year data for comparable companies, as this data was unavailable when preparing the TP documentation.

1.5 Selection of Comparables: The appellant disputed the rejection of their comparables and the selection of functionally dissimilar ones by the TPO.

1.6 Disregard of Judicial Pronouncements: The appellant noted that judicial pronouncements were disregarded in the TP adjustment.

Outcome:

The Tribunal examined the comparables used by the TPO and DRP. The following decisions were made:

- Exclusion of Apitco Limited: The Tribunal found Apitco Limited to be functionally dissimilar as it engaged in high-end technical services, unlike the appellant's marketing support services.

- Exclusion of Choksi Laboratories Ltd.: This company was excluded as it was involved in commercial testing and consultancy, differing significantly from the appellant's activities.

- Exclusion of WAPCOS Ltd. (Segment): WAPCOS was excluded due to its high-end consultancy services and government backing, making it incomparable to the appellant's routine support services.

- Exclusion of IDC India Limited: IDC India was excluded as it rendered market research and management consulting services in IT, telecommunications, and consumer technology, unlike the appellant's marketing support services.

- Inclusion of Rediff.com: The Tribunal rejected the inclusion of Rediff.com as a comparable, stating that its online advertising and fee-based services were not similar to the appellant's marketing support services, and there was no segmental bifurcation in its financials.

2. Corporate Tax Disallowance:

The appellant also contested a disallowance of ?0.21 crores, being 3% of "Customer Pull and Support Expenses," made on an ad-hoc basis by the AO and DRP. However, during the proceedings, the appellant did not press this ground, leading to its dismissal.

Conclusion:

The Tribunal partially allowed the appeal for statistical purposes, directing the TPO to exclude the identified functionally dissimilar comparables and rejecting the inclusion of Rediff.com. The corporate tax disallowance ground was dismissed as it was not pressed by the appellant. The order was pronounced in the open court on 11th December 2018.