2022 (2) TMI 160 - AT - Income Tax

Tribunal Excludes Companies from Comparables for Transfer Pricing

The Tribunal upheld the exclusion of Mitcon Consultancy & Engg. Services Ltd, Kicons Limited, and Korus Engineering Solution Pvt. Ltd from the final ... Functional comparability - Arm's Length Price - Transfer pricing - comparable selection - Transactional Net Margin Method (TNMM) - FAR analysis - Exclusion of comparablesFunctional comparability - Transfer pricing - comparable selection - Exclusion of comparables - Kicons Limited was properly excluded from the final set of comparables. - HELD THAT: - The Tribunal accepted the CIT(A)'s conclusion that Kicons Limited is functionally dissimilar to the assessee. The TPO's own materials showed that Kicons carried out execution contracts for solar power and other civil activities (accounted under percentage completion as per AS-7) and was engaged in a variety of non-technical services such as legal, accounting, tax consultancy and market research, whereas the assessee provides specialised management and technological/engineering consultancy in sectors like water and waste management, infrastructure, oil & gas, transportation, energy and environmental services. Given these admitted differences in activities and functions, Kicons cannot be treated as a reliable comparable for benchmarking the assessee's PLI; exclusion by the CIT(A) was therefore justified. [Paras 16]Exclusion of Kicons Limited upheld.Functional comparability - FAR analysis - Exclusion of comparables - Korus Engineering Solutions Limited was properly excluded from the final set of comparables. - HELD THAT: - The Tribunal concurred with the CIT(A) that Korus Engineering Solutions Limited could not reliably serve as a comparable. Although the TPO characterised the company as engaged in technical consultancy and project engineering, available material indicated the company was involved in development of the steel industry and its detailed annual report was not in the public domain. In the absence of adequate publicly available information (management discussion, directors' report, auditor's report) and given the apparent difference in activities, a meaningful FAR analysis could not be undertaken; exclusion on that basis was appropriate. [Paras 17]Exclusion of Korus Engineering Solutions Limited upheld.Functional comparability - Segmental analysis - Exclusion of comparables - Mitcon Consultancy & Engg. Services Limited was properly excluded from the final set of comparables. - HELD THAT: - The Tribunal agreed with the CIT(A) that Mitcon is a multi activity entity deriving revenue from diverse streams (consultancy fees, vocational training, IT courses, income from laboratories, wind power generation, etc.) and that segmental accounts required to isolate a comparable consultancy activity were not available. Although consultancy fees as a revenue line might appear similar, absence of segmental detail prevented reliable assessment of profit margins attributable to comparable services; consequently exclusion by the CIT(A) was warranted. [Paras 18]Exclusion of Mitcon Consultancy & Engg. Services Limited upheld.Final Conclusion: The Revenue's challenge to the CIT(A)'s exclusion of the three comparables is dismissed; the Tribunal upholds the CIT(A)'s exclusions and dismisses the departmental appeal, thereby sustaining the revised set of comparables adopted by the CIT(A) for determination of ALP for the assessment year 2014-15. Issues Involved:1. Exclusion of specific comparables (Mitcon Consultancy & Engg. Services Ltd, Kicons Limited, and Korus Engineering Solution Pvt. Ltd.) in determining Arm's Length Price (ALP) for international transactions.Detailed Analysis:1. Exclusion of Mitcon Consultancy & Engg. Services Ltd:The TPO included Mitcon Consultancy & Engg. Services Ltd as a comparable, asserting it provides technical and engineering consultancy services. However, the CIT (A) found the company engaged in diverse fields like textiles, banking & financial services, energy & carbon consultancy services, and lacked segmental accounts. The annual report revealed multiple revenue streams, including consultancy fees, vocational training, IT courses, and income from laboratories. Given the absence of segmental details and the company's involvement in non-comparable services like wind power generation and training, the CIT (A) rightly excluded it from the final set of comparables. The Tribunal upheld this exclusion, emphasizing the functional dissimilarity and the lack of segmental profit margin details.2. Exclusion of Kicons Limited:The TPO included Kicons Limited, considering it functionally comparable. However, the CIT (A) noted that Kicons Limited is involved in legal, accounting, book-keeping, auditing activities, tax consultancy, market research, public opinion polling, and execution of contracts for solar power projects and other civil activities. These activities differ significantly from the assessee's business of providing management and technological solutions in sectors like water & waste management, infrastructure development, oil & gas, transportation, energy, chemicals, master planning, and environmental services. The Tribunal agreed with the CIT (A) that Kicons Limited's functional dissimilarity warranted its exclusion from the comparables.3. Exclusion of Korus Engineering Solution Pvt. Ltd:The TPO included Korus Engineering Solution Pvt. Ltd, citing its involvement in technical consultancy and project engineering. However, the CIT (A) found that Korus Engineering is engaged in the development of the steel industry, and its annual report was not publicly available, making it difficult to analyze its functional profile comprehensively. The Tribunal upheld the CIT (A)'s decision, noting the absence of detailed reports like management discussion and director's report, which are crucial for a thorough FAR analysis.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the CIT (A)'s exclusion of Mitcon Consultancy & Engg. Services Ltd, Kicons Limited, and Korus Engineering Solution Pvt. Ltd from the final set of comparables. The decision was based on the functional dissimilarity of these companies to the assessee and the lack of necessary segmental details to accurately benchmark the Profit Level Indicator (PLI). The Tribunal's judgment emphasized the importance of ensuring comparability in transfer pricing assessments to determine the Arm's Length Price accurately.