Tribunal directs adjustments in Transfer Pricing case, partial success for appellant

The appellant's challenge against Transfer Pricing Officer's (TPO) adjustments regarding comparables was partially successful, with specific inclusions and exclusions directed by the Tribunal. The assignment of NIL value to international transactions related to Intra Group Services (IGS) was referred back to the TPO for further examination. The disallowance under section 40a(ia) for failure to deduct tax at source on payments made to non-residents was deleted by the Tribunal. The appeal was allowed in part, with directions for adjustments and deletions, pronounced on 23.10.2019.

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Issues Involved:
1. Transfer Pricing adjustments regarding comparables.
2. Assigning NIL value to the value of international transactions related to receipt of Intra Group Services (IGS).
3. Disallowance under section 40a(ia) of the Income-tax Act, 1961.

Detailed Analysis:

1. Transfer Pricing Adjustments Regarding Comparables:
The appellant company, engaged in international air and ocean export and import shipments, challenged the Transfer Pricing Officer's (TPO) selection of comparables. The TPO rejected the comparables selected by the assessee and conducted a fresh search, resulting in an upward adjustment of Rs. 8,18,45,970/- based on the arithmetic mean of the new comparables, which was 11.23% compared to the assessee's profit margin of 2.74%.

The Dispute Resolution Panel (DRP) accepted the TPO's broader comparability approach but directed the exclusion of Agarwal Industrial Corporation Limited. The Tribunal further analyzed the comparables:

- VRL Logistics Limited: Excluded due to dissimilar business functions and unclear segmental accounts.
- BIC Logistics Limited: Excluded as it is engaged in road transportation, unlike the appellant's non-vessel owning freight forwarding services.
- Central Warehousing Corporation: Excluded due to its diversified services and lack of segmental details.
- Innovative B2B Logistics Solutions Limited: Restored to the TPO for re-examination of Related Party Transactions (RPT) filter.
- Gordon Woodrofee Logistics Ltd: Included in the final list as it fits the turnover filter applied by the TPO.

The Tribunal allowed the grievance relating to transfer pricing adjustment regarding comparables, directing specific inclusions and exclusions.

2. Assigning NIL Value to the Value of International Transactions Related to Receipt of Intra Group Services (IGS):
The TPO assigned NIL value to the IGS payments made to the Associated Enterprises (AE), amounting to Rs. 35,89,000/-, due to the assessee's failure to demonstrate the need and benefits derived from such services.

The Tribunal referred to the Delhi High Court's decisions in EKL Appliances Ltd. and Bausch & Lomb Eyecare (India) Pvt. Ltd., emphasizing that the TPO can only examine the rendition of services and supporting evidences, not the necessity or prudence of the expenditure. The Tribunal restored the issue to the TPO, directing an examination of the rendition of services with supporting evidences.

3. Disallowance Under Section 40a(ia) of the Income-tax Act, 1961:
The Assessing Officer disallowed Rs. 19,95,53,304/- under section 40a(ia) for the assessee's failure to deduct tax at source on payments made to non-residents. The Tribunal noted that the payments were for business activities, not technical or professional services, and there was no business connection in India, thus not requiring tax deduction under section 195.

The Tribunal upheld the decision in the assessee's favor, referencing the Mumbai ITAT decision in UPS SCS (Asia) Limited, and directed the deletion of the disallowance.

Conclusion:
The appeal was allowed in part for statistical purposes, with specific directions for the TPO regarding the comparables and IGS adjustments, and the disallowance under section 40a(ia) was deleted. The order was pronounced in the open court on 23.10.2019.

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