2021 (1) TMI 52 - AT - Income Tax

TP adjustment - business facilitation service provided to AE by the assessee - Comparable selection - assessee had selected itself as the tested party for benchmarking the international transaction of provision of business facilitation services - assessee in its transfer pricing study report applied Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking the business facilitation services transaction with its AE - AR submitted before us that if Icra Onine Ltd alone is included in the final list of comparables chosen by the ld. TPO, the assessee would be well within /- 5% tolerance range permitted in the statute and hence no adjustment would be required to be made to international transaction of the assessee - HELD THAT - We find that this Tribunal in assessee s own case for A.Y.2011-12 2018 (12) TMI 1853 - ITAT MUMBAI had directed the ld. TPO to include Icra Online Ltd., in the final list of comparables, among others. Respectfully following the aforesaid judicial precedents in assessee s own case and considering the argument of the assessee that it would be well within the /-5% tolerance range after inclusion of Icra Online Ltd., in the final list of comparables, we direct the ld. TPO to include the same in the final list of comparables and in view of this decision, the adjudication of other grounds would become academic and infructuous. Hence, no opinion is given hereunder in respect of other grounds raised by the assessee and they are left open. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Validity of the order passed by the Transfer Pricing Officer (TPO) and Assessing Officer (AO) under sections 92CA(3) and 143(3) read with section 144C(13) of the Income Tax Act.
2. Upward transfer pricing adjustment of ?1,12,40,803/- in respect of business facilitation services provided to Associated Enterprises (AEs).
3. Exclusion and inclusion of certain companies as comparables for benchmarking the international transaction.
4. Consideration of infrastructure cost reimbursement as "Operating Revenue."
5. Non-allowance of working capital adjustment.
6. Non-allowance of comparability adjustment for material differences in risk and functional profile.
7. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of the Order:
The assessee challenged the validity of the order passed by the TPO and AO, claiming it was "bad in law and void ab initio" due to a violation of the principle of natural justice. The TPO did not serve any written show cause notice as mandated by sections 92C(3) and 92CA(3) of the Act.

2. Upward Transfer Pricing Adjustment:
The AO/TPO made an upward transfer pricing adjustment of ?1,12,40,803/- for the business facilitation services provided by the assessee to its AEs. The assessee had selected itself as the tested party and applied the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking. The TPO, however, adjusted the Operating Profit/Operating Cost (OP/OC) margin from 15.27% to 11.67% by excluding infrastructure cost reimbursement from the operating revenue.

3. Exclusion and Inclusion of Comparables:
The TPO excluded certain companies selected by the assessee as comparables and included others, leading to an average Profit Level Indicator (PLI) of 18.61%. The assessee argued for the inclusion of ICRA Online Ltd., which had a PLI of 1.87%, asserting that its inclusion would bring the assessee's margin within the permissible +/- 5% range. The Tribunal directed the TPO to include ICRA Online Ltd. in the final list of comparables, following the precedent set in the assessee's own case for A.Y. 2011-12.

4. Infrastructure Cost Reimbursement:
The TPO excluded the reimbursement of infrastructure costs from the operating revenue, reducing the OP/OC margin from 15.27% to 11.67%. The assessee contended that these reimbursements should be considered as operating revenue.

5. Working Capital Adjustment:
The TPO did not allow a working capital adjustment, which the assessee argued was necessary to eliminate material differences in working capital deployed by the assessee vis-a-vis comparables.

6. Comparability Adjustment for Risk and Functional Profile:
The assessee argued for comparability adjustments due to material differences in risk and functional profiles between the assessee and the comparables. The Tribunal found merit in this argument, particularly in light of the inclusion of ICRA Online Ltd.

7. Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c) of the Act, which the assessee contested.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the TPO to include ICRA Online Ltd. in the final list of comparables. This inclusion would bring the assessee's margin within the permissible range, making other grounds academic and infructuous. The Tribunal did not provide an opinion on other grounds and left them open. The appeal was allowed, and the order was pronounced on 30/12/2020.