Tribunal adjusts comparables in transfer pricing appeal, directs exclusion of certain companies

The Tribunal partially allowed the appellant's appeal by directing the exclusion of certain companies from the list of comparables, resulting in adjustments to the operating profit determination. The order was issued on 27-02-2015, with the appellant succeeding on some grounds related to transfer pricing documentation, classification of services, and the selection of comparable companies. The issues concerning penalty proceedings and interest levy were either rejected or deemed premature, with specific directions given for the recalculation of interest by the AO.

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Issues Involved:
1. Rejection of Transfer Pricing (TP) Documentation and addition of Rs. 92,82,443.
2. Classification of appellant's services as consultancy services.
3. Rejection of comparable companies selected by appellant.
4. Use of single year data for computing Arm's Length Price (ALP).
5. Determination of ALP using data not available in the public domain.
6. Adjustments on account of risk profile.
7. Limitation of adjustments to the lower end of 5% range.
8. Initiation of penalty proceedings under section 271(1)(c).
9. Levy of interest under section 234A/B/C.

Issue-wise Detailed Analysis:

1. Rejection of TP Documentation and Addition of Rs. 92,82,443:
The appellant contested the rejection of its TP documentation and the addition of Rs. 92,82,443 made by the AO due to differences in ALP determination. The AO had referred the matter to the TPO, who accepted only two out of twelve comparables selected by the appellant and added ten more, determining the PLI at 21.48%. The DRP later excluded three comparables, resulting in a final operating profit determination of 15.23%.

2. Classification of Services as Consultancy Services:
The appellant argued that its ground-level coordination and support services were erroneously considered as consultancy services by the AO and DRP. The appellant's services included logistical support, adherence to safety and branding guidelines, and handling passenger complaints, which were distinct from consultancy services.

3. Rejection of Comparable Companies:
The main dispute involved the selection of three comparables by the TPO: Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. The appellant contended that these companies were not functionally comparable due to their involvement in sophisticated engineering and technical consultancy, unlike the appellant's support services. The Tribunal agreed with the appellant, citing previous decisions that excluded such companies from comparables due to different functional, asset, and risk profiles.

4. Use of Single Year Data:
The appellant's ground relating to the use of single year data versus multiple year data for computing ALP was not pressed, and thus, it was rejected.

5. Determination of ALP Using Non-Public Data:
The appellant did not press the ground related to the AO's use of data obtained from third parties under section 133(6), which was not available in the public domain at the time of TP documentation compliance.

6. Adjustments on Account of Risk Profile:
The appellant argued for suitable adjustments based on its risk profile compared to the selected comparables. However, this ground became academic after the exclusion of the three disputed comparables, as the PLI fell within the acceptable range.

7. Limitation of Adjustments to Lower End of 5% Range:
The appellant's ground regarding the limitation of adjustments to the lower end of the 5% range was rendered academic due to the revised PLI falling within the acceptable range after excluding the disputed comparables.

8. Initiation of Penalty Proceedings:
The ground relating to the initiation of penalty proceedings under section 271(1)(c) was considered premature and thus rejected.

9. Levy of Interest:
The charging of interest under sections 234A/B/C was deemed consequential, and the AO was directed to recalculate interest, if any, while giving effect to the appellate order.

Conclusion:
The Tribunal directed the AO to exclude Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. from the list of comparables. Consequently, the appellant's appeal was partly allowed for statistical purposes. The order was pronounced in open court on 27-02-2015.

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