2021 (7) TMI 495 - AT - Income Tax

TP Adjustment - Comparability selection - functional profile - HELD THAT - M/s. Container Corpn. of India Ltd - From perusal of the annual accounts of this company, we also find that Container Corporation of India is a Giant Company with turnover of more than ₹ 3,300/- crores, fixed asset base of around ₹ 2,244/- crores, Container fleet of 13,517 units, Speed Wagons of 6,722 and owning Terminals. The assessee, on the other hand, is a service-oriented company with turnover of ₹ 33.24 cr and fixed asset base (gross) of only ₹ 31.22 crores. Container Corporation of India is also operating in Virtual Monopoly conditions. From the above cumulative reasons, we find that FAR of Container Corporation of India is not akin to that of the assessee. It should, therefore, be rejected as a comparable. M/s. Sanco Trans Ltd - Handling charges earned is 40.96% of the total revenue and balance is passive income i.e., hire charges earned and warehouse charges earned which is 59.03%. There are no segmental accounts prepared. M/s. Sanco Trans has earned total operating revenue of ₹ 4296.36 lakh and total employee cost incurred is 511.96 lakhs which in ratio terms is 11.91%. This shows that this is also not a service-oriented company. For reasons akin to that stated above we, therefore, hold that M/s. Sanco Trans cannot be selected as a comparable TPO had computed the PLI of companies selected by him by presuming that FBT expense is a non-operating item - HELD THAT - We have perused the material on record and it is seen that there is no adjudication by the Ld. DRP on this issue. We, therefore, direct the TPO to adopt a uniform policy. Once FBT expense is taken as non-operating while computing the PLI of comparable companies, a similar effect should also be given while computing PLI of the tested party. We, therefore, direct the TPO to re-compute the PLI of assessee excluding FBT expense.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Functional Profile of the Assessee
3. Selection of Comparable Companies
4. Computation of Profit Level Indicator (PLI)
5. Treatment of Fringe Benefit Tax (FBT)

Detailed Analysis:

1. Transfer Pricing Adjustment:
The sole issue in dispute is the Transfer Pricing Adjustment of ? 3,53,24,242/- proposed by the Transfer Pricing Officer (TPO) and sustained by the Disputes Resolution Panel (DRP). The assessee, an Indian company with 51% equity held by a German company and 49% by an Indian resident, engaged in Ground and Passenger Handling services, entered into an international transaction of ? 32,26,71,057/- for ground handling services rendered to its Associated Enterprise (AE). The TPO conducted a fresh search for comparable companies and selected four companies with an OP/TC of 27.99%, proposing an adjustment under section 92CA.

2. Functional Profile of the Assessee:
The TPO doubted the functional profile of the tested party, noting discrepancies between the assessee's claimed activities and those listed on its website. The TPO observed that the assessee had not properly understood its functions, which included services like fueling supervision and aircraft security. However, the assessee contended that it was merely rendering a few facets of Ground Handling Services to its AE, as analyzed in a previous Tribunal order for AY 2007-08. The Tribunal held that the TPO had wrongly interpreted the functions provided by the assessee, which mainly included passengers and baggage handling services, not specialized airport services.

3. Selection of Comparable Companies:
The TPO selected M/s. Container Corporation of India Ltd. and M/s. Sanco Trans Ltd. as comparables. The DRP upheld the selection, excluding M/s. Cochin International Airport Ltd. due to functional dissimilarities. The Tribunal found that Container Corporation of India, with a turnover of ? 3,300 crores and a fixed asset base of ? 2,244 crores, was not a service-oriented company and operated in virtual monopoly conditions. Similarly, M/s. Sanco Trans, primarily engaged in Customs Clearing & Forwarding, was also not service-oriented, with significant passive income. The Tribunal directed the exclusion of both companies as comparables.

4. Computation of Profit Level Indicator (PLI):
The TPO computed the PLI of the comparable companies by excluding Fringe Benefit Tax (FBT) as a non-operating item, while the assessee included it as an operating item in its TP Study. The Tribunal directed the TPO to adopt a uniform policy, excluding FBT expense while computing the PLI of both the tested party and comparable companies.

5. Treatment of Fringe Benefit Tax (FBT):
The Tribunal noted that the TPO had treated FBT expense as non-operating for comparable companies but included it for the assessee. The Tribunal directed the TPO to re-compute the PLI of the assessee by excluding FBT expense, ensuring a consistent approach.

Conclusion:
The Tribunal allowed the appeal, directing the exclusion of M/s. Container Corporation of India Ltd. and M/s. Sanco Trans Ltd. as comparables and the re-computation of the PLI of the assessee by excluding FBT expense. The order emphasized the importance of accurately understanding the functional profile of the assessee and maintaining consistency in the treatment of expenses for comparability analysis.