Tribunal allows appeal on Transfer Pricing Adjustment, excludes specific companies from comparables

The Tribunal allowed the appeal in favor of the assessee concerning Transfer Pricing Adjustment. The Tribunal found merit in excluding certain companies from the final set of comparables, including Apar Chematek Lubricants Ltd., Info Edge (India) Ltd., MM TV Limited, and Media Research Users Council. With these exclusions, the Tribunal determined that the margins shown by the assessee were at arm's length with the mean margins of the remaining comparable companies, leading to a decision in favor of the assessee.

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Issues Involved:
1. Transfer Pricing Adjustment.
2. Determination of Arm’s Length Price.
3. Selection of Comparable Companies.
4. Application of Filters for Comparability Analysis.
5. Violation of Rule 10B(2).
6. Rejection of Comparable Companies.
7. Use of Contemporaneous Data.
8. Adjustments for Differences in Risk Profile.
9. Initiation of Penalty Proceedings.
10. Credit for Advance Tax.
11. Computation and Levy of Interest under Section 234B.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the appeal is against the Transfer Pricing Adjustment made in the hands of the assessee. The assessee contested the addition of Rs. 1,71,96,956 to the value of international transactions related to marketing and sales support services provided to its Associated Enterprises (AEs) under Section 92CA(3) of the Income-Tax Act, 1961.

2. Determination of Arm’s Length Price:
The assessee argued that the arm's length price determined by the Transfer Pricing Officer (TPO) at 21.14% Net Cost Plus Mark-up (NCP) margin was erroneous. The assessee’s intercompany pricing of NCP margin of 13.99% and 15.41% was previously accepted as arm's length by the Commissioner of Income Tax (Appeals) and TPO for the immediately preceding and succeeding years (AY 2010-11 and AY 2012-13).

3. Selection of Comparable Companies:
The assessee challenged the selection of certain companies as comparable, asserting that their functional, asset, and risk profiles were dissimilar to that of the assessee. The TPO had selected 15 companies as comparables, but the assessee contended that some of these companies did not meet the required comparability criteria.

4. Application of Filters for Comparability Analysis:
The TPO applied different filters for comparability analysis, which led to the inclusion of certain companies that the assessee argued should not have been considered. The assessee contended that the TPO modified/rejected certain filters applied by the assessee without cogent reasons.

5. Violation of Rule 10B(2):
The assessee argued that the TPO and the Dispute Resolution Panel (DRP) violated the provisions of Rule 10B(2) by including companies like Apar Chematek Lubricants Ltd., Info Edge (India) Ltd., MM TV Ltd., and Media Research Users Council as comparables, despite their dissimilar functional profiles.

6. Rejection of Comparable Companies:
The assessee also contended that the TPO and DRP erred in rejecting Technicom Chemie (I) Limited as a comparable company, despite its similar functional, asset, and risk profile to that of the assessee.

7. Use of Contemporaneous Data:
The assessee argued that the TPO misinterpreted the requirement of ‘contemporaneous’ data under Rule 10B(4) by necessarily using current year data (i.e., financial year 2010-11), thereby breaching the principles of natural justice and ‘impossibility of performance’.

8. Adjustments for Differences in Risk Profile:
The assessee contended that the TPO and DRP did not allow appropriate adjustments under Rule 10B(1)(e)(iii) and Rule 10B(3) to account for differences in the risk profile of the comparables vis-a-vis the assessee.

9. Initiation of Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act by the TPO and DRP.

10. Credit for Advance Tax:
The assessee argued that the Assessing Officer (AO) erred in not granting credit for advance tax of Rs. 9,55,000 paid by the assessee for Assessment Year 2011-12.

11. Computation and Levy of Interest under Section 234B:
The assessee contended that the AO erred in computing and levying interest of Rs. 348,824 under Section 234B of the Act as per the impugned assessment order.

Judgment Summary:

The Tribunal addressed the primary issue of Transfer Pricing Adjustment and the selection of comparable companies. The Tribunal found merit in the assessee's arguments regarding the exclusion of certain companies from the final set of comparables.

Exclusion of Apar Chematek Lubricants Ltd.:
The Tribunal noted that Apar Chematek Lubricants Ltd. failed the Related Party Transaction (RPT) filter as it had 100% earnings from its holding company. Consequently, the Tribunal directed its exclusion from the final list of comparables.

Exclusion of Info Edge (India) Ltd.:
The Tribunal held that Info Edge (India) Ltd., engaged in Internet-based service delivery through various web portals, was not functionally comparable to the assessee, which provided marketing and sales support services. Therefore, it was excluded from the final list of comparables.

Exclusion of MM TV Limited:
The Tribunal found that MM TV Limited, engaged in Television broadcasting and related operations, was not functionally comparable to the assessee. The Tribunal directed its exclusion from the final list of comparables.

Exclusion of Media Research Users Council:
The Tribunal noted that Media Research Users Council, a not-for-profit body undertaking research for its members, was not comparable to the assessee providing marketing and sales support services. The Tribunal directed its exclusion from the final list of comparables.

Conclusion:
With the exclusion of the four companies (Apar Chematek Lubricants Ltd., Info Edge (India) Ltd., MM TV Limited, and Media Research Users Council) from the final list of comparables, the Tribunal held that the margins shown by the assessee were at arm's length with the mean margins of the balance comparable companies. Consequently, the grounds of appeal raised by the assessee were allowed, and the appeal was decided in favor of the assessee.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the open court on the 30th day of October, 2019.

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