2020 (3) TMI 1189 - AT - Income Tax

Tribunal rules in favor of assessee in transfer pricing case, emphasizing functional differences and risk adjustments.

The Tribunal found in favor of the assessee in a transfer pricing adjustment case. It ruled that the TPO erred in characterizing the functional profile of ... TP Adjustment - comparable selection - functional similarity - HELD THAT:- Assessee is engaged in providing business support/liaising and coordination services companies functionally dissimilar with that of assessee need to be deselected from final list. Risk adjustment - assessee for rendering of support and coordination is remunerated at cost plus basis - HELD THAT:- The risk factors like marketing and business risk etc. which are normally associated with any independent entity are more as compared to the assessee which is a risk mitigated entity and is insulated from various kind of risk operating as a capital service provider. Accordingly, we agree with the assessee that risk adjustments are warranted in case of comparables on account of the difference in the risk profile of the assessee vis-à-vis the comparable companies. As brought on record that the Tribunal in assessee’s own case for the Assessment Year 2011-12 and 2012-13 has allowed the risk adjustment to the net margin of the comparable in order to align the risk profile of the assessee. The ld. counsel has also given the quantification of the risk adjustment which has been placed in the paper book at pages 447 to 449, wherein it has given the difference between the bank rates and SBI base rates and quantification factor as been laid down by the Sony India (P) Ltd. vs. DCIT [2008 (9) TMI 420 - ITAT DELHI-H] Accordingly, we direct the TPO to examine the assessee’s quantification of risk adjustment specifically where assessee has taken the difference between bank rates and SBI bank rate and the quantification done by the assessee of the risk adjustment on 10.50%, is correct or not. With this direction this issue is remanded back to the TPO/Assessing Officer. Issues Involved:1. Transfer Pricing Adjustment2. Consistent Approach3. Characterization of Functional Profile4. Comparable Companies5. Risk Adjustment6. Levy of Interest under Section 234B7. Levy of Interest under Section 234CDetailed Analysis:1. Transfer Pricing Adjustment:The assessee challenged the computation of a transfer pricing adjustment of INR 2,75,74,335/- to its total income. The adjustment was made due to the arm’s length pricing of the international transaction pertaining to support services entered into with its Associated Enterprise (AE).2. Consistent Approach:The assessee argued that the approach adopted by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) was inconsistent with the provisions of the India-Korea Double Taxation Avoidance Agreement and previous ITAT rulings in the assessee’s own case for AY 2010-11 and AY 2012-13.3. Characterization of Functional Profile:The assessee contended that the TPO misunderstood its business model and functional and risk profile, thereby not accepting the economic analysis undertaken by the assessee. The TPO considered the activities of the project offices to be technical in nature, while the assessee claimed they were merely administrative and coordinative.4. Comparable Companies:The TPO included companies that were functionally different from the assessee for benchmarking, such as Mitcon Consultancy & Engineering Services Limited, Killick Agencies & Marketing Limited, and Mahindra Consulting Engineers Limited. The assessee argued that these companies were not comparable due to their different functional profiles and business models.- Killick Agencies & Marketing Limited: The company was excluded as it primarily operated as a commission agent, which is functionally different from the assessee’s business support services.- Mitcon Consultancy & Engineering Services Limited: Excluded due to its involvement in technical consultancy services and receipt of government grants, making it functionally dissimilar.- Mahindra Consulting Engineers Limited: Excluded due to its engagement in engineering consultancy services and different revenue recognition methods.The assessee also argued for the inclusion of companies it had selected in its transfer pricing study, which the TPO had rejected.5. Risk Adjustment:The assessee claimed that suitable adjustments were not allowed to account for differences in the risk profile between the assessee and the comparables. The Tribunal agreed that risk adjustments were warranted due to the assessee operating in a risk-mitigated scenario, unlike the comparables.6. Levy of Interest under Section 234B:The assessee contested the levy of interest under section 234B amounting to Rs. 77,07,273. The Tribunal did not specifically address this issue in detail.7. Levy of Interest under Section 234C:The assessee also challenged the levy of interest under section 234C amounting to Rs. 2,13,435. This issue was similarly not addressed in detail by the Tribunal.Conclusion:The Tribunal found that the TPO/DRP erred in treating the functional profile of the project offices as technical in nature. The Tribunal directed the exclusion of Killick Agencies & Marketing Limited, Mitcon Consultancy & Engineering Services Limited, and Mahindra Consulting Engineers Limited from the set of comparables. Additionally, the Tribunal allowed for risk adjustments to the net margin of the comparables to align the risk profile with that of the assessee. The appeal of the assessee was allowed, and the case was remanded back to the TPO/Assessing Officer for examining the quantification of risk adjustment.