2016 (4) TMI 88 - HC - Income Tax

Tribunal Decision on Transfer Pricing Exclusions and Adjustments: Key Takeaways and Implications

The Tribunal found the exclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable erroneous, as it engaged in turnkey projects, meeting ... Comparability in transfer pricing - Segmental revenue filter for selection of comparables - Non-comparability of Government/public sector undertakings due to non-commercial considerations - Presumption of arm's length by reason of Reserve Bank of India approvalComparability in transfer pricing - Segmental revenue filter for selection of comparables - Inclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable for determining the arm's length price. - HELD THAT: - The Tribunal found, on the basis of the annual report placed on record, that Gillanders Arbuthnot had an Engineering Division engaged in turnkey projects and that the segmental revenue from that division (Rs. 74.17 crores as recorded by the Tribunal) exceeded the respondent's filter threshold of Rs. 25 crores. The Transfer Pricing Officer had proceeded on the erroneous premise that Gillanders Arbuthnot was not engaged in execution of turnkey projects. The High Court held that the Tribunal's finding on these factual matters was a permissible view and neither incorrect nor perverse, and therefore the Tribunal was justified in including Gillanders Arbuthnot as a comparable.Tribunal's inclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable sustained; question does not raise a substantial question of law and is not entertained.Non-comparability of Government/public sector undertakings due to non-commercial considerations - Comparability in transfer pricing - Exclusion of Engineers India Ltd. from the list of comparables for determining the arm's length price. - HELD THAT: - The Tribunal noted from Engineers India Ltd.'s annual report that a substantial portion of its turnkey-project revenue arose from contracts with public sector undertakings and that such contracts are influenced by considerations other than pure profit motive (for example, social obligations). Applying the same related-party transaction filter (25%) employed in the TPO's analysis, Engineers India Ltd.'s profile rendered it unsuitable as a comparable. The High Court held that the Tribunal's conclusion was a reasonable and possible view warranting no interference.Tribunal's exclusion of Engineers India Ltd. from the comparable set sustained; question does not raise a substantial question of law and is not entertained.Presumption of arm's length by reason of Reserve Bank of India approval - Comparability in transfer pricing - Whether payment of royalty approved by the Reserve Bank of India must be treated as being at arm's length price (question admitted for determination). - HELD THAT: - The High Court has not finally decided this question. The appeal was admitted on this substantial question of law (as recorded by the Court) for hearing and determination. The Registry was directed to place the papers and proceedings before the Tribunal to keep them available for production when sought by the Court. No merits determination on the legal effect of RBI approval as establishing arm's length price was made in this order. [Paras 6]Appeal admitted on the substantial question of law concerning RBI approval and arm's length treatment; to be heard further.Final Conclusion: The Tribunal's factual determinations to include M/s. Gillanders Arbuthnot & Co. Ltd. and to exclude Engineers India Ltd. as comparables are upheld and do not raise substantial questions of law; the appeal is admitted only on the substantial question whether RBI approval of the royalty payment entitles it to be treated as arm's length, which remains for further hearing. Issues involved:1. Inclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable2. Exclusion of M/s. Engineers India Ltd. from the list of comparables3. Treatment of royalty payment as Arm's Length PriceAnalysis:1. Inclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable:- The respondent assessee contested the exclusion of M/s. Gillanders Arbuthnot & Co. Ltd. as a comparable due to its alleged primary engagement in cotton and man-made fiber yarn trading. However, evidence showed the company also had an Engineering Division involved in turnkey projects with substantial revenue.- The Tribunal found the TPO's exclusion erroneous as M/s. Gillanders Arbuthnot & Co. Ltd. did engage in turnkey projects, meeting the criteria for comparability.- The Tribunal's factual findings were deemed reasonable, as the Revenue failed to demonstrate any inaccuracies or perversions in the decision, leading to the dismissal of this issue without raising substantial legal questions.2. Exclusion of M/s. Engineers India Ltd. from the list of comparables:- The respondent challenged the inclusion of M/s. Engineers India Ltd. as a comparable, arguing that its revenue from public sector projects, driven by factors beyond profit motive, made it incomparable.- The Tribunal agreed that Engineers India Ltd. was not a suitable comparable due to its project nature and revenue sources, exceeding the 25% filter used for related party transactions.- The Tribunal's decision was upheld as reasonable, with no justification presented for interference, resulting in the rejection of this issue without raising substantial legal questions.3. Treatment of royalty payment as Arm's Length Price:- The Tribunal allowed a royalty payment under RBI approval to be considered at Arm's Length Price, leading to a significant adjustment in the respondent's ALP determination.- This issue was admitted for appeal on the substantial question of law, indicating a need for further examination and clarification in subsequent proceedings.The judgment provides a detailed analysis of the issues raised concerning the selection of comparables and the treatment of royalty payments under transfer pricing regulations. While some issues were dismissed due to lack of substantial legal questions, others were admitted for further review, emphasizing the importance of accurate comparability analysis and ALP determination in transfer pricing assessments.