Transfer pricing adjustment upheld in part under Section 92C; rejects aggregation and certain comparables, accepts back-office ALP

ITAT, MUMBAI upheld a transfer-pricing adjustment in part: it rejected the assessee's aggregation of application research, technology licensing and technical development, finding application research at the BRDTC conferred benefit solely to the A.E. and warranted adjustment for absence of markup. The Tribunal held prior-year data cannot be used unless the assessee specifically demonstrates relevance. It upheld rejection of two comparables as flawed for functional and abnormality reasons. No additional risk or working-capital adjustment was granted, and the ALP for back-office support services was accepted as within the comparable range.

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Issues Involved:
1. Transfer pricing adjustment on provision of technical services.
2. Transfer pricing adjustment on provision of back office support services.
3. Exclusion of loss-making comparables.
4. Consideration of working capital and risk adjustments.
5. Compliance with Dispute Resolution Panel (DRP) directions.

Detailed Analysis:

1. Transfer Pricing Adjustment on Provision of Technical Services:
The TPO aggregated various technical services into one category (total amount Rs. 6,28,71,633) and observed that the assessee did not receive separate compensation for services rendered at the Bangalore Research and Development Technology Centre (BRDTC) amounting to Rs. 4,98,14,572. The TPO rejected the assessee's allocation of costs towards marketing services as financial jugglery to improve margins for the technical segment. The TPO concluded that the transactions were not at arm's length and proposed an addition of Rs. 1,39,18,191.

2. Transfer Pricing Adjustment on Provision of Back Office Support Services:
The TPO noted that the segmental results showed a mark-up of 21.3% as against the agreed compensation of 10%. The TPO rejected the assessee's explanation for the variation and proposed an adjustment of Rs. 55,25,877. The DRP directed the Assessing Officer to compare the average mean worked out by him with the 21% actual profit shown by the assessee and apply the +/- 5% range. The Assessing Officer, however, retained the adjustment.

3. Exclusion of Loss-Making Comparables:
The TPO rejected ADS Diagnostic Ltd. and Neeman Medical International (Asia) Ltd. as comparables. The assessee argued that these companies were functionally comparable despite their losses. The Tribunal upheld the TPO's rejection, stating that the loss-making units were not comparable due to specific reasons like competition and abnormal profitability changes.

4. Consideration of Working Capital and Risk Adjustments:
The assessee did not press for working capital and risk adjustments. The TPO had already allowed a 0.47% working capital adjustment, and no further adjustments were deemed necessary.

5. Compliance with DRP Directions:
The DRP directed the Assessing Officer to compare the average mean worked out by him with the 21% actual profit shown by the assessee and apply the +/- 5% range. The Tribunal held that the Assessing Officer must follow the DRP's directions. The Tribunal found that the actual income of Rs. 4,21,23,805 was within the +/- 5% range of the ALP, and thus, no adjustment was required.

Conclusion:
The Tribunal allowed the assessee's appeal in part, directing the Assessing Officer to follow the DRP's directions and delete the adjustments made on back office support services. The Tribunal upheld the TPO's rejection of loss-making comparables and did not allow further working capital and risk adjustments.

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