ITAT allows transfer pricing appeal, rejects comparables for functional dissimilarity, restores unbilled revenue matter to AO

The ITAT Delhi allowed the assessee's appeal for statistical purposes in a transfer pricing dispute. The tribunal rejected certain companies as comparables due to functional dissimilarity with the assessee's marketing support services. Regarding additions for unbilled revenue and security write-offs, the ITAT found the assessee claimed arithmetical errors caused minor figure differences and requested opportunity to reconcile before AO/TPO. The tribunal restored the matter to AO/TPO with directions to grant the assessee another opportunity to substantiate their position that these were contra entries requiring no addition.

---

---

Issues Involved:
1. Transfer Pricing Adjustment
2. Inclusion/Exclusion of Comparables
3. Corporate Tax - Unbilled Revenue Write-off and Security Deposit Write-off
4. Penalty Proceedings
5. Interest Charged under Sections 234B and 234C

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal concerns the order dated 20.12.2016 by the Assessing Officer (AO) under sections 143(3)/144C/92CA(4) of the Income Tax Act, 1961, for the assessment year 2012-13. The primary issue raised by the assessee is the confirmation of an addition of Rs.7,26,52,018/- due to transfer pricing adjustment under section 92CA(3) and non-TP disallowances. The AO, based on the Transfer Pricing Officer's (TPO) findings, confirmed an addition of Rs.5,97,94,267/- under section 92CA(3). The assessee contends that the TPO and the Dispute Resolution Panel (DRP) erred in rejecting its search process and comparables without cogent reasons, incorrectly determining the Arm's Length Price (ALP) by comparing low-risk support services with high-end technical services, and not allowing risk adjustments. The Tribunal dismissed general grounds but focused on the inclusion/exclusion of certain comparables.

2. Inclusion/Exclusion of Comparables:
The Tribunal examined the inclusion/exclusion of comparables used by the TPO. The TPO proposed comparables with an average OP/OC of 30.66%, leading to an upward adjustment of Rs.6,22,45,975/-, later revised to Rs.5,97,94,267/- after DRP's directions. The assessee argued that it provides low-risk support services, unlike the high-end services of the comparables chosen by the TPO. The Tribunal, referring to its previous orders for assessment years 2010-11 and 2011-12, directed the exclusion of Apitco Ltd., Kitco Ltd., Info Edge (India) Pvt. Ltd., and TCE Consulting Engineers Ltd. from the list of comparables due to functional dissimilarities. The Tribunal also restored the issue of HSCC (India) Ltd. to the TPO for fresh adjudication. Additionally, the Tribunal directed the TPO to verify and include Cyber Media Research & Services and Office Care Services Ltd. if they pass the TPO's filters and perform similar functions as the assessee. The issue of Vatika Marketing Ltd. was also restored to the TPO for verification.

3. Corporate Tax - Unbilled Revenue Write-off and Security Deposit Write-off:
The assessee contested the addition of Rs.1,15,59,310/- on account of unbilled revenue write-off and Rs.12,98,441/- for security deposit write-off. The AO disallowed the unbilled revenue write-off, stating the assessee failed to substantiate that the amount booked as revenue from Rolls Royce International Ltd. included the unbilled revenue. The Tribunal restored the issue to the AO/TPO for granting another opportunity to the assessee to substantiate its claim. The security deposit write-off was not pressed by the assessee due to the smallness of the amount, and the Tribunal dismissed this ground.

4. Penalty Proceedings:
The Tribunal dismissed the ground related to penalty proceedings under section 271(1)(c) as premature or consequential in nature.

5. Interest Charged under Sections 234B and 234C:
The Tribunal dismissed the ground related to interest charged under sections 234B and 234C as premature or consequential in nature.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider and verify specific comparables and the unbilled revenue write-off claim, while dismissing other grounds as either not pressed or premature.

---