2020 (2) TMI 114 - AT - Income Tax

Transfer pricing adjustment in respect of marketing support services - Comparable selection - HELD THAT - Inclusion of Quadrant Communications - in our opinion when the data is not available in public domain, for comparability of business support system segment be that of said company does not arise at all. Therefore, we reverse the direction of DRP to include the same as comparable resulting into the adjustment made by the AO is therefore deleted. Therefore, we hold that the Quadrant Communications cannot be compared. Asian Business Exhibition Conference Ltd - Tribunal examined the profit and loss accounts of the said company and held the direct income of said company is from exhibition and events. Therefore, agreement between Renishaw plc and RMSPL is an internal affiliate agreement of the said two companies to co-ordinate and exchange the communication and correspondence between them relating to the clients based in India. We note that the financial statements for the period ended on 31-03-2010 placed at page No. 19 wherein the sales and services income of ₹ 45,02,00,743/- out of which the marketing support services is only ₹ 5,14,37,962/-. Therefore, bifurcation of sales and service income the income earned from marketing support services is only to meager, therefore, which cannot be compared with Asian Business Exhibition Conference Ltd. Transfer pricing adjustment in respect of management services - HELD THAT - We reverse the order of DRP and direct the AO to accept the value of managerial services as claimed by the assessee at Nil. Thus, ground No. 3 raised by the assessee is allowed. Transfer pricing adjustment as directed by the DRP on account of payment of royalty - HELD THAT - The new and improved technology helps the RMSPL in minimizing its risk of producing sub-standard products and maintaining the highest manufacturing quality. The assessee does not incur any expenses on the research and development and no expenditure was debited to profit and loss accounts as on 31-03-2010. It is observed from the pages Nos. 587 and 589 of the paper book that the research and development which reveals that the Renishaw it incurred huge cost for updation of the technology which supports the view of assessee paying royalty on the export sales effected to its Renishaw affiliates, a third party. Payment of royalty has been accepted by the respondent-revenue from 2006 onwards the details of which filed and the TPO did not accept contentions of the assessee for the year under consideration. The TPO accepted the arm s length price on manufacturing activity but however treated the transactions on account of royalty at Nil without applying any method. In view of the discussion made here-in above, we direct the AO to accept arm s length price adopted by the assessee in international transactions on export of sales on account of royalty. Therefore, transfer pricing adjustment made by the AO in pursuance of directions of DRP is deleted. Thus, ground No. 4 by the assessee is allowed.

Issues Involved:
1. Transfer pricing adjustment for marketing support services.
2. Inclusion of ICRA Management Consulting Services Ltd. as a comparable.
3. Inclusion of Quadrant Communications as a comparable.
4. Inclusion of Asian Business Exhibition & Conference Ltd. as a comparable.
5. Transfer pricing adjustment for management services.
6. Transfer pricing adjustment for royalty payment.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment for Marketing Support Services:
The primary issue revolves around the transfer pricing adjustment amounting to ?68,58,514/- for marketing support services. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to include certain companies as comparables, which the assessee contested.

2. Inclusion of ICRA Management Consulting Services Ltd. as a Comparable:
The AO included ICRA Management Consulting Services Ltd. as a comparable without recording any reason. The DRP directed the Transfer Pricing Officer (TPO) to verify the comparability based on the company's annual report for the financial year 2009-10. The Tribunal upheld the DRP's directions, instructing the AO to get a report from the TPO and decide on the comparability.

3. Inclusion of Quadrant Communications as a Comparable:
The assessee objected to the inclusion of Quadrant Communications, arguing it was not functionally comparable and lacked the required data. The TPO and DRP upheld its inclusion, stating it was engaged in advertising and marketing communications solutions. However, the Tribunal noted the absence of relevant activities in Quadrant Communications' annual report and the non-availability of data in the public domain. Consequently, the Tribunal reversed the DRP's direction, excluding Quadrant Communications as a comparable and deleting the adjustment made by the AO.

4. Inclusion of Asian Business Exhibition & Conference Ltd. as a Comparable:
The assessee argued that Asian Business Exhibition & Conference Ltd. was functionally different, being involved in organizing exhibitions and trade fairs. The TPO and DRP included it as a comparable. However, the Tribunal referenced a previous order excluding this company from comparables due to its distinct business activities. The Tribunal found that the income from marketing support services was minimal compared to the total income, thus excluding Asian Business Exhibition & Conference Ltd. from the comparables.

5. Transfer Pricing Adjustment for Management Services:
The assessee challenged the DRP's confirmation of a transfer pricing adjustment of ?1,27,37,577/- for management services. The Tribunal referenced its previous decision for the assessment year 2009-10, where it found the TPO had ignored the evidence provided by the assessee. The Tribunal reiterated that the TPO or AO cannot question the business decision to avail services and make payments. The Tribunal reversed the DRP's order and directed the AO to accept the value of managerial services as claimed by the assessee.

6. Transfer Pricing Adjustment for Royalty Payment:
The assessee contested the adjustment of ?27,32,494/- for royalty payments. The TPO treated the royalty at Nil, considering the assessee a contract manufacturer. The DRP upheld this view. The Tribunal examined the technical collaboration agreement and noted that the assessee availed technical know-how, patents, and trademarks from its associated enterprise. The Tribunal found that the royalty payment was justified and directed the AO to accept the arm's length price adopted by the assessee, deleting the transfer pricing adjustment.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee's challenge to the initiation of penalty proceedings under section 271(1)(c) was deemed premature and dismissed without adjudication.

Conclusion:
The Tribunal allowed the appeal partly, providing relief to the assessee on several grounds. The inclusion of certain companies as comparables was reversed, and the transfer pricing adjustments for management services and royalty payments were deleted. The initiation of penalty proceedings was dismissed as premature. The order was pronounced on 29th January 2020.

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