Tribunal Directs Adjustment for Working Capital & Risk, No Intra-Group Services Adjustment

The Tribunal allowed the appeal of the assessee, directing the AO to rectify the order to include the working capital adjustment and accord risk adjustment to the net margin of the comparables. The Tribunal also held that no adjustment was necessary for the payment of intra-group services, accepting the 5% markup as reasonable.

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Issues Involved:
1. Adjustment of loss by the AO.
2. Adjustment on account of difference in arm’s length price of international transactions.
3. Inclusion of "Just Dial Ltd." as a comparable.
4. Rejection of comparables selected by the assessee.
5. Working capital adjustment.
6. Risk adjustment.
7. Adjustment on account of arm’s length price of administrative support services.

Issue-wise Analysis:

1. Adjustment of Loss by the AO:
The AO completed the assessment under section 144C read with section 143(3) of the Income-tax Act, 1961, determining a loss of Rs. 3,29,43,540 against the loss of Rs. 6,79,40,379 returned by the appellant.

2. Adjustment on Account of Difference in Arm’s Length Price of International Transactions:
The AO made an adjustment of Rs. 3,49,96,839 based on the order passed under section 92CA(3) by the Transfer Pricing Officer (TPO).

3. Inclusion of "Just Dial Ltd." as a Comparable:
The assessee objected to the inclusion of "Just Dial Ltd." as a comparable. The TPO and the ld. DRP held it as functionally comparable. However, the Tribunal found that "Just Dial" operates as a search engine for multifarious activities and deals with multiple products, whereas the assessee is a captive liaison and marketing service provider for its AE. Hence, "Just Dial" was not considered a right comparable.

4. Rejection of Comparables Selected by the Assessee:
The AO/TPO rejected the comparables considered by the assessee, such as Indian Tourism Development Corporation Ltd., Cyber Media Research Ltd., EDCIL (India) Ltd., and In-house Productions Ltd. The Tribunal did not provide a detailed ruling on this rejection but focused on the inclusion of "Just Dial Ltd." and other adjustments.

5. Working Capital Adjustment:
The ld. DRP allowed the working capital adjustment, but the AO failed to take cognizance of it while giving effect to the directions. The AO was directed to rectify the order to include the working capital adjustment.

6. Risk Adjustment:
The TPO denied risk adjustment, stating that the assessee had not shown that the comparables had undertaken risks. The Tribunal held that the risk of having a single customer is an anticipated risk and not equivalent to the marketing and technical risks faced by the comparables. The Tribunal directed that risk adjustment be accorded to the net margin of the comparables to bring them on par with the assessee company.

7. Adjustment on Account of Arm’s Length Price of Administrative Support Services:
The AO/TPO made an adjustment of Rs. 3,15,29,495, determining the arm’s length price of administrative support services at NIL. The Tribunal found that the services were indeed rendered and availed by the assessee, supported by evidence such as emails, invoices, and agreements. The Tribunal accepted the 5% markup as reasonable and held that no adjustment was called for in determining the ALP for intra-group services.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to rectify the order to include the working capital adjustment and accord risk adjustment to the net margin of the comparables. The Tribunal also held that no adjustment was necessary for the payment of intra-group services, accepting the 5% markup as reasonable. The appeal was pronounced in the Open Court on 17/09/2021.

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