2023 (12) TMI 984 - HC - Income Tax

TP Adjustment - building design services rendered by assessee - assessee had taken recourse to the ratio of operating profit and total cost in arriving at the PLI - Tribunal justification in rejecting the Profit Level Indicator (PLI) (which is a ratio of operating profit to total cost) adopted by the AO - as submitted that since separate segmental accounts were not available, it was difficult to segregate the cost incurred by assessee in the deployment of employees concerning AEs and non-AEs - HELD THAT - As assessee had maintained segmental accounts, and accounts vis-a-vis salary expenditure were maintained project-wise, the employees deployed with regard to the transactions entered with AEs were identifiable. The conclusion arrived at by the DRP that common employees were allocated was a finding that did not emerge from the record. The Tribunal evidently was of the view that the employees deployed with AEs and non-AEs were identifiable as the accounts were maintained project-wise.The view taken by the DRP that hourly worksheets of employees were not maintained was unsustainable, as there was no such requirement in law. This conclusion was reached by the Tribunal also for the reason that salaries to employees were not paid on an hourly basis. Given the aforesaid findings of fact, in our view, the Tribunal correctly concluded that the PLI had been properly computed by the respondent/assessee. Tribunal justification in rejecting M/s Korus Engineering Solutions Pvt. Ltd. as a comparable - According to us, the DRP made no attempt to establish as to how Korus was functionally comparable with assessee. It is for this reason perhaps that the Tribunal stated that the information which was obtained from the website of Korus was sketchy and therefore Korus could not be used as comparable to benchmark international transactions entered into between the respondent/assessee and its AEs. Having regard to the foregoing, we are of the opinion that the Tribunal has returned findings of fact and adopted the correct approach qua both issues, and hence no interference is called for with the impugned order. No substantial question of law arises.

Summary

Issues Involved:
The judgment concerns an appeal regarding the Assessment Year (AY) 2012-13, where the appellant/revenue challenges an order passed by the Income Tax Appellate Tribunal (Tribunal).

First Issue - Profit Level Indicator (PLI) Adoption:
The first issue revolves around whether the Tribunal was justified in rejecting the Profit Level Indicator (PLI) adopted by the Assessing Officer (AO). The appellant argues that due to the unavailability of separate segmental accounts, the method used by the Transfer Pricing Officer (TPO) to allocate costs based on turnover was appropriate. On the other hand, the respondent contends that project-wise expenses were identifiable, and turnover method could not have been used for cost allocation. The Tribunal found that the PLI computed by the respondent was higher than the average of comparables, indicating arm's length transaction. It disagreed with the TPO's approach of allocating expenses based on turnover, stating that segmental accounts were maintained, and employees were identifiable project-wise. The Tribunal's findings supported the respondent's computation of PLI, leading to the conclusion that the Tribunal correctly handled this issue.

Second Issue - Comparable Selection:
The second issue questions the rejection of M/s Korus Engineering Solutions Pvt. Ltd. as a comparable entity by the Tribunal. The appellant argues that sufficient information was available to use Korus for benchmarking, contrary to the Tribunal's decision. The respondent, however, asserts that the functional profiles of Korus and the respondent were different, making a proper comparison for benchmarking unfeasible. The Tribunal found that the functional profile of Korus, as available in the public domain, was deficient. It noted that the DRP accepted Korus without a detailed analysis of its comparability with the respondent. The Tribunal deemed the information on Korus as "sketchy," leading to the conclusion that Korus was not suitable for benchmarking international transactions. The Tribunal's factual findings supported the rejection of Korus as a comparable entity, indicating that the Tribunal appropriately handled this issue.

Conclusion:
The High Court upheld the Tribunal's decision, stating that no substantial question of law arose for consideration. The judgment closed the appeal without interference, affirming the Tribunal's findings on both the PLI adoption and comparable selection issues.