2024 (9) TMI 349 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Most of the operational revenue of ACL, Hughes, HCL, Uniinfo and Seven-3 are from service activity, however in the case of the assessee the total revenue is from trading activity. Therefore we are of considered opinion that ACL, Hughes, HCL, Uniinfo and Seven-3 are functionally dissimilar and are not comparable to the assessee. Hence, we deem it just and proper to exclude these five companies from the list of comparable. Accordingly , we direct the Ld. AO to exclude these five companies from the list of comparable for the purpose of working of profit level indicator( PLI ). Suitability of the entity S.K.Communications - The major receipts of S.K.Communications are from sub-contract work, however in the case of the assessee the total revenue is from trading activity. Therefore we are of considered opinion that S.K.Communications is functionally dissimilar and is not comparable to the assessee. Suitability of the entity Arya - Receipt from the trading activity of Arya is 97.45% of the total revenue from operations, resulting only nominal receipt from services. As the major receipts are from trading activity, the contention of the Ld. AR in this regards is not acceptable and there submission for exclusion of Arya from the list of comparable is dismissed. Suitability of the entity Cineom - Receipt from the trading activity of Cineom is 82.80% of the total revenue from operations, resulting into only 17.20% from other activity. As the major receipts are from trading activity, the contention of the Ld. AR in this regards is not acceptable and there submission for exclusion of Cineom from the list of comparable is dismissed. Inclusion of Globe, which was rejected by the revenue authority due the reason that, company data was not available - AR submitted that, the annual report of Globe is now available on the public domain - If the comparable is functionally same as that of tested party then same cannot be rejected. Hence we direct the Ld. AO to verify the comparability of Globe after providing an opportunity of being heard to the assessee. Accordingly, we allow this ground of the assessee for statistical purpose.

Issues:
1. Determination of Arm's Length Price (ALP) for imported products.
2. Dispute over comparables in Transfer Pricing study.
3. Exclusion of certain comparables based on functional dissimilarity.
4. Inclusion of a comparable company excluded by Revenue authorities.
5. Additional ground of appeal regarding first year of operations.
6. Decision on the nature of business activity of the assessee.

Issue 1: Determination of Arm's Length Price (ALP) for imported products
The appeal was filed against the final assessment order for the A.Y. 2017-18, where the Assessing Officer determined an upward adjustment on imported products based on the Transaction Net Margin Method (TNMM) instead of the Resale Price Method (RPM) adopted by the assessee. The Dispute Resolution Panel directed the adjustment, leading to the appeal.

Issue 2: Dispute over comparables in Transfer Pricing study
The assessee disputed the inclusion of eight comparables in the Transfer Pricing study, arguing functional dissimilarity. The assessee contended that its activities were purely trading, while the comparables were primarily engaged in services. The assessee requested the exclusion of these comparables and the inclusion of another comparable, Globe Mobility Private Limited.

Issue 3: Exclusion of certain comparables based on functional dissimilarity
After reviewing the activities and revenue sources of the comparables, the tribunal excluded five companies from the list of comparables as they were functionally dissimilar to the assessee, engaged mainly in service activities. The tribunal directed the Assessing Officer to exclude these companies for the purpose of working the profit level indicator.

Issue 4: Inclusion of a comparable company excluded by Revenue authorities
The tribunal allowed the assessee's request to consider Globe Mobility Private Limited as a comparable company, as its annual report was now available in the public domain. The tribunal directed the Assessing Officer to verify the comparability of Globe after providing an opportunity for the assessee to be heard.

Issue 5: Additional ground of appeal regarding first year of operations
The assessee raised an additional ground of appeal, arguing that being in the first year of operations, it was unreasonable to expect high profits. However, the tribunal dismissed this ground, considering the nature of the business activity and lack of merit in the argument.

Issue 6: Decision on the nature of business activity of the assessee
After examining the invoices and submissions, the tribunal concluded that the assessee was engaged solely in trading activities without providing any additional services. The tribunal rejected the Revenue's argument that the assessee also provided installation services, affirming that the assessee's business was purely trading.

This comprehensive summary covers the issues involved in the legal judgment, detailing the arguments, decisions, and reasoning provided by the tribunal for each issue.

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