2020 (6) TMI 311 - AT - Income Tax

TP Adjustment - comparable selection - functional similarity - HELD THAT - Assessee company is engaged in supply of spare parts and other equipment used by engine based power plants and oil and gas pumping system and also provide technical services in relation thereto. The assessee company also renders market support services and project management services to its overseas Associated Enterprises (AEs) , thus companies functionally dissimilar with that of assessee need to be deselected from final list. Mahindra Auto Mobile distributor - On verification of the Annual Report of the Company M/s Mahindra Auto Mobile distributor, which was made available during the course of hearing, we find that in profit and loss account of the payment of the excise duty is reported. We find that no further detail in respect of the excise duty paid by the company is available in the Annual Report. The excise duty is primarily payable on the manufacturing activity and in absence of any detail, the company cannot be treated as pure trader of products. In such circumstances, the company become functionally different from the trading segment of assessee. The functional difference itself is sufficient to exclude the company from the set of the comparables, and we are not examining other grounds like RPT filter etc for rejection of the company. Accordingly, we direct the learned TPO/AO to exclude the company from the set of the comparables and re-compute the average PLI of the comparables and if the PLI of the assessee is found to be more than the average PLI of the comparables, no adjustment would be required in the trading segment of the assessee. Exclusion of comparables selected in technical service segment as being functionally different. Transfer pricing addition made under the MAT provisions - HELD THAT - Transfer pricing addition is not included in the above list and, therefore, the Assessing Officer is not justified in considering the transfer pricing addition for the purpose of computation of the book profit under the provisions of section 115JB of the Act. Accordingly, we allow the ground of the assessee in this regard.

Issues Involved:

1. Transfer Pricing Adjustment in Trading Segment
2. Transfer Pricing Adjustment in Support Service Segment
3. Transfer Pricing Adjustment in Technical Service Segment
4. Transfer Pricing Addition under MAT Provisions

Detailed Analysis:

1. Transfer Pricing Adjustment in Trading Segment:

The primary contention was the rejection of the Resale Price Method (RPM) by the TPO, who instead applied the Transactional Net Margin Method (TNMM). The TPO's rejection was based on several reasons, including differences in the nature of goods, market conditions, and accounting treatments. The TPO also adjusted the profit level indicator (PLI) by treating goodwill amortization as an operating expense, which the assessee contested.

The Tribunal directed the exclusion of Mahindra Automobile Distributor Pvt. Ltd. from the set of comparables due to functional dissimilarity and excise duty implications, which made it incomparable to a pure trading company. The Tribunal noted that if Mahindra Automobile was excluded, the assessee's PLI would be at arm’s length, rendering other objections academic.

2. Transfer Pricing Adjustment in Support Service Segment:

The TPO changed the most appropriate method (MAM) from Cost Plus Method (CPM) to TNMM without providing cogent reasons, which the assessee contested. The Tribunal noted that the TPO must record reasons for rejecting the assessee's chosen method, referencing several judicial precedents.

The Tribunal also addressed the exclusion of certain comparables selected by the TPO. It found that companies like Aptico Ltd., Axis Integrated Systems Ltd., BVG India Ltd., Killick Agencies and Marketing Ltd., Marketing Consultant and Agencies, and Kestone Integrated Marketing Service Private Limited were functionally dissimilar to the assessee's support service segment. These companies were engaged in activities like consultancy, facility management, and media advertising, which were not comparable to the assessee's low-end, risk-free support services.

3. Transfer Pricing Adjustment in Technical Service Segment:

The TPO selected comparables like Holtec Counseling, MITCOIN, HSCC (India) Ltd., Acropetal Technologies, and Certification Engineering and International Ltd (CEIL), which the assessee contested. The Tribunal directed the exclusion of these companies due to functional dissimilarity. These companies were engaged in activities like engineering consultancy, project feasibility reports, healthcare consultancy, IT services, and certification services, which were not comparable to the assessee's technical services of operation and maintenance of plants.

4. Transfer Pricing Addition under MAT Provisions:

The assessee contested the addition of transfer pricing adjustments to the book profit under MAT provisions, arguing that section 115JB is a complete code in itself. The Tribunal agreed, noting that transfer pricing additions are not included in the list of adjustments under section 115JB. The Tribunal referenced the Supreme Court's decision in Apollo Tyres and other judicial precedents, concluding that the Assessing Officer was not justified in considering transfer pricing additions for MAT computation.

Conclusion:

The Tribunal's decision addressed the proper application of transfer pricing methods and the selection of appropriate comparables, emphasizing the need for functional similarity. It also clarified that transfer pricing adjustments should not impact MAT computations, aligning with established legal principles. The appeal was allowed for statistical purposes, with directions for re-computation based on the Tribunal's findings.

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