2019 (3) TMI 144 - AT - Income Tax

TP Adjustment - selection of comparable - functional similarity - Importance of Brand value in selection of comparable - good comparable - HELD THAT - With respect to Kerala Travels Interserve Ltd., we have carefully perused its financial statements and we find the main revenue is from different activities and not from the tour operations. Therefore, Kerala Travels Interserve Ltd., cannot be held to be the good comparable and we accordingly direct the AO/TPO to exclude this company from the list of comparables. With regard to Cox & Kings it is involved in different activities besides tour operation and has its own brand value. Therefore, it cannot be held to be a good comparable for determination of the ALP for the international transactions. We accordingly direct the AO/TPO to exclude this company from the list of comparables while determining the ALP for international transactions. Accordingly, we direct the AO/TPO to exclude these two comparables and recompute the ALP in terms indicated above after setting aside the assessment order in this regard.

Summary

Issues:
1. Challenge to the order of lower authorities on grounds of natural justice.
2. Transfer pricing issues raised by the appellant.
3. Dispute over the inclusion of comparables in determining arm's length price.

Issue 1:
The appellant challenged the lower authorities' order, alleging violations of natural justice. They argued that the order was bad in law and failed to adhere to principles of natural justice. The appellant specifically raised concerns regarding the Transfer Pricing Officer's reference and the subsequent confirmation by the Dispute Resolution Panel. The appellant contended that there was no evidence of tax evasion motive, questioning the validity of the additions made under Chapter X.

Issue 2:
The appellant contested the transfer pricing analysis conducted by the authorities. They argued that the rejection of their analysis was unjustified and that the comparables chosen were not suitable. Specifically, the appellant objected to the inclusion of Cox & Kings Ltd. as a comparable, citing its brand value and diverse activities. The appellant also highlighted the need for adjustments to account for differences in risk exposure and the benefit of the +/-5% range under section 92C(2).

Issue 3:
The primary dispute revolved around the inclusion of two comparables, Kerala Travels Interserve Ltd. and Cox & Kings Ltd., in determining the arm's length price for international transactions. The appellant contended that Kerala Travels Interserve Ltd. was not a suitable comparable due to its revenue sources being significantly different from the appellant's business. The Tribunal agreed, directing the exclusion of Kerala Travels Interserve Ltd. from the list of comparables. Similarly, the Tribunal ruled in favor of the appellant regarding Cox & Kings Ltd., noting its brand value and diverse revenue streams, which made it unsuitable as a comparable for the appellant's business.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing the exclusion of the disputed comparables and the recomputation of the arm's length price for international transactions. The judgment emphasized the importance of considering brand value and business activities in selecting comparables for transfer pricing analysis, in line with relevant legal precedents.