Tribunal remands case for reasoned order, upholds exclusions, and directs method change.

The Tribunal remanded the matter to the DRP for passing a reasoned order, allowing the assessee a reasonable opportunity to be heard. The Tribunal upheld exclusions of certain companies as comparables for IT Enabled Services due to functional dissimilarities. It also directed the exclusion of a company from Marketing Support Services comparables due to significant related party transactions. The Tribunal rejected the assessee's argument for using Resale Price Method, upholding the use of Transactional Net Margin Method for distribution activities. The TPO was directed to recompute the Arm's Length Price for all segments, partly allowing the appeal.

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Issues Involved:
1. Non-adjudication of specific grounds by the DRP.
2. Transfer Pricing Adjustments for IT Enabled Services (ITES).
3. Transfer Pricing Adjustments for Marketing Support Services (MSS).
4. Selection of the Most Appropriate Method (MAM) for Distribution Activity.

Detailed Analysis:

1. Non-adjudication of Specific Grounds by the DRP:

The assessee contended that the Dispute Resolution Panel (DRP) did not adjudicate specific grounds raised before it and failed to pass a reasoned speaking order. The Tribunal noted that it is the duty of the DRP to decide the issues raised by the assessee, dealing with all the contentions. Consequently, the matter for A.Y 2006-07 was remanded to the DRP to pass a reasoned and speaking order, ensuring reasonable opportunity of being heard to the assessee. The grounds of appeal were allowed for statistical purposes.

2. Transfer Pricing Adjustments for IT Enabled Services (ITES):

The assessee, engaged in the distribution of academic books and related services, undertook international transactions with its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) proposed adjustments, rejecting the assessee’s filters and imposing additional ones. The CIT(A) directed the exclusion of certain companies from the list of comparables due to different functional profiles, unreliable financial statements, and other reasons. The Tribunal upheld these exclusions, citing precedents and noting that the selected comparables were not functionally similar to the assessee’s ITES segment. The Tribunal directed the exclusion of companies like Flextronics Software Systems Ltd, HCL Comnet Systems & Services Ltd, Infosys BPO Ltd, Wipro Ltd, and Bodhtree Consulting Ltd, among others, from the set of comparables.

3. Transfer Pricing Adjustments for Marketing Support Services (MSS):

The assessee contended that the TPO’s selection of certain comparables for MSS was inappropriate. Specifically, the inclusion of Reliance Communications Infrastructure Ltd was challenged due to its diversified services and significant related party transactions. The Tribunal agreed, noting the absence of segmental data and high related party transactions, and directed the exclusion of this company from the list of comparables.

4. Selection of the Most Appropriate Method (MAM) for Distribution Activity:

The assessee argued that the Resale Price Method (RPM) was the most appropriate method for its distribution activities, while the TPO and CIT(A) applied the Transactional Net Margin Method (TNMM). The Tribunal noted that the agreement involved reprinting and distributing books, which required assets, employees, and risk management, making RPM unsuitable. The Tribunal upheld the use of TNMM, rejecting the assessee’s contention.

The Tribunal directed the TPO to recompute the Arm’s Length Price (ALP) for all three segments (ITES, MSS, and Distribution) after making the necessary adjustments and excluding the indicated comparables. The appeal was partly allowed.

The order was pronounced in the open court on 11.05.2018.

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