Tribunal orders re-examination of additional remuneration in international transactions

The Tribunal partially allowed the Revenue's appeal, directing a re-examination of the pertinence of additional remuneration to the relevant international transactions. The decision was made on 6th November 2017.

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Issues Involved:

1. Exclusion of Ultramine and Pigments Ltd. from the final set of comparables.
2. Consideration of additional remuneration of Rs. 10,26,67,942/- received in financial year 2006-07 for the financial year 2004-05.
3. General grounds of appeal.

Detailed Analysis:

Issue 1: Exclusion of Ultramine and Pigments Ltd. from the final set of comparables

The Revenue challenged the CIT(A)'s direction to exclude Ultramine and Pigments Ltd. from the final set of comparables. The CIT(A) had directed this exclusion based on the company's extreme volatility and variations in its business performance, citing profit margins of 155.79% during the financial year under consideration, which were exceptionally high and inconsistent with preceding and succeeding years. The CIT(A) concluded that the company's functions, assets, and risks (FAR) were not comparable to the assessee.

The Revenue argued that high/extremely high profits do not, by themselves, justify exclusion from comparables, referencing the Delhi High Court's decision in Chryscapital Investment Advisors India (P) Ltd. Vs. DCIT. The Tribunal agreed with the Revenue, stating that the assessee had not demonstrated any material differences in FAR between itself and Ultramine and Pigments Ltd. Therefore, the Tribunal held that the comparable could not be excluded solely based on high profits, and allowed the Revenue's ground.

Issue 2: Consideration of additional remuneration of Rs. 10,26,67,942/- received in financial year 2006-07 for the financial year 2004-05

The CIT(A) directed the inclusion of additional remuneration received in financial year 2006-07 for services rendered in financial year 2004-05 in the Profit Level Indicator (PLI) for the year under consideration. The CIT(A) reasoned that this inclusion followed the matching principle and was consistent with the approach accepted by the DRP for subsequent assessment years.

The Revenue contended that it was unclear whether the re-negotiated service fee pertained solely to IT-enabled back-office services or included other services. The Tribunal agreed that this issue had not been sufficiently examined by the lower authorities. Thus, the Tribunal restored the issue to the AO/TPO for verification and decision in accordance with the law, allowing the ground for statistical purposes.

Issue 3: General grounds of appeal

The Tribunal found the third ground to be general in nature and dismissed it as infructuous.

Conclusion:

The Tribunal allowed the Revenue's appeal partly for statistical purposes, directing a re-examination of the additional remuneration's pertinence to the relevant international transactions. The decision was pronounced in the open court on 6th November 2017.

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