Tribunal orders re-determination of arm's length price for marketing support services

The tribunal directed the AO/TPO to re-determine the arm's length price (ALP) of the international transaction of 'Provision of marketing support services' by considering the correct figure of operating revenue, re-examining comparability of disputed companies, and addressing the issue of working capital adjustment. The tribunal did not grant the risk adjustment due to lack of specific evidence from the assessee. The appeal was allowed for statistical purposes, granting the assessee a reasonable opportunity to present its case.

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Issues Involved:
1. Determination of the assessee's profit margin.
2. Selection of comparable companies.
3. Risk adjustment.

Detailed Analysis:

1. Determination of the Assessee's Profit Margin:
The primary dispute in this appeal concerns the addition of Rs. 4,21,48,306/- by the Assessing Officer (AO) due to a transfer pricing adjustment. The assessee, a subsidiary of Huawei Tech Investment Company Ltd., reported an international transaction of 'Provision of Marketing support services' valued at Rs. 28,89,60,870/-. The assessee applied the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC), calculating its OP/TC at 17.90%. The Transfer Pricing Officer (TPO) did not dispute the application of TNMM or the PLI but recalculated the operating revenue by excluding non-operating expenses, resulting in a different profit margin. The TPO's recalculated operating revenue was Rs. 26,31,19,523/-, leading to a transfer pricing adjustment.

2. Selection of Comparable Companies:
The assessee selected 11 comparable companies, while the TPO shortlisted four companies, resulting in an arithmetic mean OP/TC of 25.31%. The Dispute Resolution Panel (DRP) included two more companies in the comparables list. The tribunal noted that the TPO relied on the preceding year's proceedings for selecting comparables and that the tribunal had restored the matter for the preceding year to the AO for re-examination. Consequently, the tribunal set aside the order and remitted the matter to the TPO/AO for a fresh determination of comparability, including the three disputed companies: Engineers India Ltd., RITES Ltd., and WAPCOS Ltd.

3. Risk Adjustment:
The assessee claimed risk adjustment, arguing it was a captive service provider with lower risk. The TPO denied this adjustment, stating that the assessee did not provide a computation of risk adjustment and was not a risk-free entity. The tribunal upheld the TPO's decision, noting that the initial onus for claiming risk adjustment lies with the assessee, which failed to provide specific evidence of risk differences between itself and the comparables.

Conclusion:
The tribunal directed the AO/TPO to re-determine the ALP of the international transaction of 'Provision of marketing support services' by considering the correct figure of operating revenue at Rs. 28,89,60,870/-, re-examining the comparability of the disputed companies, and addressing the issue of working capital adjustment. The tribunal did not grant the risk adjustment due to the lack of specific evidence from the assessee. The appeal was allowed for statistical purposes, and the assessee was granted a reasonable opportunity to present its case.

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