Revenue fails to prove functional similarity in transfer pricing case as five comparables excluded

The Revenue challenged the exclusion of five comparables (Info Edge India Ltd., Media Research Users Council, MMTV Ltd., Power Systems Operation Corpn. Ltd., and TSR Darashaw) in a transfer pricing adjustment case before ITAT Delhi. The Tribunal dismissed the Revenue's appeal, holding that these comparables were functionally dissimilar to the assessee company. The assessee provided marketing support services to its Japanese parent and group companies, while the contested comparables had different functional profiles as evidenced by their annual reports. The DRP's direction to exclude these comparables was upheld, with the Revenue failing to demonstrate functional similarity between the comparables and the assessee.

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Issues Involved:
1. Direction by DRP-2 to AO regarding reduction of addition on account of arm’s length price.
2. Direction by DRP-2 to TPO to exclude certain companies from the final set of comparables.

Detailed Analysis:

Issue 1: Direction by DRP-2 to AO regarding reduction of addition on account of arm’s length price
The Revenue filed an appeal against the Assessment Order dated 20.10.2015, where the Dispute Resolution Panel (DRP-2) directed the Assessing Officer (AO) to complete the assessment per its observations, resulting in a reduction of Rs. 1,19,41,815/- on account of the proposed addition of arm’s length price of the international transaction with its associated enterprises. The DRP-2's directive led to a significant reduction in the addition proposed by the AO.

Issue 2: Direction by DRP-2 to TPO to exclude certain companies from the final set of comparables
The DRP-2 directed the Transfer Pricing Officer (TPO) to exclude five companies from the final set of comparables. These companies were:
1. Info Edge (India) Ltd.
2. Media Research Users Council
3. MMTV Ltd.
4. Power Systems Operation Corporation Ltd.
5. TSR Darashaw Pvt. Ltd.

The Revenue contested this exclusion, arguing that the TPO had provided a detailed discussion justifying the inclusion of these companies. However, the DRP-2 found these companies functionally dissimilar to the assessee, Teijin India, which is engaged in providing marketing support services to Teijin Japan and other Teijin Group companies.

Analysis of Comparables:

1. Media Research Users Council (MRUC):
- DRP-2 found MRUC functionally different as it is a not-for-profit body conducting media research, which fails the export income filter and has an abnormal profit margin.
- The Tribunal upheld this exclusion, noting MRUC's distinct functional profile and its role in media research, which is not comparable to the marketing support services provided by the assessee.

2. Info Edge (India) Ltd.:
- DRP-2 excluded this company, noting its involvement in high-end diversified services like recruitment, matrimony, real estate, and education, which are not comparable to the assessee's marketing support services.
- The Tribunal supported this exclusion, referencing previous cases (Adobe Systems India Pvt. Ltd. and Rolls-Royce India Pvt. Ltd.) where Info Edge was found functionally different due to its online portal activities and significant intangibles.

3. MMTV Ltd.:
- DRP-2 excluded MMTV Ltd. due to its engagement in television broadcasting and related operations, which are functionally different from the assessee’s services.
- The Tribunal upheld this exclusion, emphasizing MMTV’s distinct business operations and significant intangibles.

4. Power Systems Operation Corporation Ltd.:
- DRP-2 excluded this government-owned company due to its functional differences, high related party transactions (RPT filter 48.20%), and failure to meet the export turnover filter.
- The Tribunal agreed with this exclusion, noting the company’s distinct business model and operational scope.

5. TSR Darashaw Pvt. Ltd.:
- DRP-2 excluded TSR Darashaw Pvt. Ltd. as it provides IT-enabled services like share registry, transfer services, and payroll management, which are functionally different from the assessee’s marketing support services.
- The Tribunal upheld this exclusion, referencing prior decisions where TSR Darashaw was found functionally different in similar contexts.

Conclusion:
The Tribunal, after reviewing the annual reports and functional profiles of the contested comparables, upheld the DRP-2’s directions to exclude these companies from the final set of comparables. The Tribunal found that these companies were functionally dissimilar to the assessee, which is engaged in providing marketing support services. Consequently, the appeal filed by the Revenue was dismissed. The order was pronounced in the Open Court on 25th January 2019.

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