Tribunal Partially Allows Appeal on Transfer Pricing Adjustments

The Tribunal partly allowed the appeal, reversing the inclusion of certain companies as comparables and deleting transfer pricing adjustments for management services and royalty payments. The initiation of penalty proceedings was dismissed as premature. The order was pronounced on 29th January 2020.

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Issues Involved:
1. Transfer pricing adjustment for marketing support services.
2. Inclusion of ICRA Management Consulting Services Ltd. as a comparable.
3. Inclusion of Quadrant Communications as a comparable.
4. Inclusion of Asian Business Exhibition & Conference Ltd. as a comparable.
5. Transfer pricing adjustment for management services.
6. Transfer pricing adjustment for royalty payment.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment for Marketing Support Services:
The primary issue revolves around the transfer pricing adjustment amounting to Rs. 68,58,514/- for marketing support services. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to include certain companies as comparables, which the assessee contested.

2. Inclusion of ICRA Management Consulting Services Ltd. as a Comparable:
The AO included ICRA Management Consulting Services Ltd. as a comparable without recording any reason. The DRP directed the Transfer Pricing Officer (TPO) to verify the comparability based on the company's annual report for the financial year 2009-10. The Tribunal upheld the DRP's directions, instructing the AO to get a report from the TPO and decide on the comparability.

3. Inclusion of Quadrant Communications as a Comparable:
The assessee objected to the inclusion of Quadrant Communications, arguing it was not functionally comparable and lacked the required data. The TPO and DRP upheld its inclusion, stating it was engaged in advertising and marketing communications solutions. However, the Tribunal noted the absence of relevant activities in Quadrant Communications' annual report and the non-availability of data in the public domain. Consequently, the Tribunal reversed the DRP's direction, excluding Quadrant Communications as a comparable and deleting the adjustment made by the AO.

4. Inclusion of Asian Business Exhibition & Conference Ltd. as a Comparable:
The assessee argued that Asian Business Exhibition & Conference Ltd. was functionally different, being involved in organizing exhibitions and trade fairs. The TPO and DRP included it as a comparable. However, the Tribunal referenced a previous order excluding this company from comparables due to its distinct business activities. The Tribunal found that the income from marketing support services was minimal compared to the total income, thus excluding Asian Business Exhibition & Conference Ltd. from the comparables.

5. Transfer Pricing Adjustment for Management Services:
The assessee challenged the DRP's confirmation of a transfer pricing adjustment of Rs. 1,27,37,577/- for management services. The Tribunal referenced its previous decision for the assessment year 2009-10, where it found the TPO had ignored the evidence provided by the assessee. The Tribunal reiterated that the TPO or AO cannot question the business decision to avail services and make payments. The Tribunal reversed the DRP's order and directed the AO to accept the value of managerial services as claimed by the assessee.

6. Transfer Pricing Adjustment for Royalty Payment:
The assessee contested the adjustment of Rs. 27,32,494/- for royalty payments. The TPO treated the royalty at Nil, considering the assessee a contract manufacturer. The DRP upheld this view. The Tribunal examined the technical collaboration agreement and noted that the assessee availed technical know-how, patents, and trademarks from its associated enterprise. The Tribunal found that the royalty payment was justified and directed the AO to accept the arm's length price adopted by the assessee, deleting the transfer pricing adjustment.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee's challenge to the initiation of penalty proceedings under section 271(1)(c) was deemed premature and dismissed without adjudication.

Conclusion:
The Tribunal allowed the appeal partly, providing relief to the assessee on several grounds. The inclusion of certain companies as comparables was reversed, and the transfer pricing adjustments for management services and royalty payments were deleted. The initiation of penalty proceedings was dismissed as premature. The order was pronounced on 29th January 2020.

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