Transfer pricing comparables and shipping treaty relief: unreliable margins were excluded, remands ordered, and withholding disallowance deleted.

Acropetal Technologies Ltd. was excluded from the transfer pricing comparables set because fraud-related irregularities and fund diversion made its margins and financial reliability doubtful. Accuspeed Engineering Ltd. and Kirloskar Consultants Ltd. were remitted for fresh verification, while Harita Techserv Ltd. was also sent back to the transfer pricing authority because the record required reconsideration of its comparability. Ocean freight paid to the Korean AE for shipment in international traffic was held to fall under the India-Korea shipping article, not as royalty or fees for technical services, so no TDS was required and the section 40(a)(i) disallowance was deleted.

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Issues: (i) whether Acropetal Technologies Ltd. could be retained as a comparable in the transfer pricing analysis; (ii) whether Accuspeed Engineering Ltd., Kirloskar Consultants Ltd. and Harita Techserv Ltd. were to be excluded or sent back for fresh verification; and (iii) whether ocean freight charges paid to the Korean AE were liable for tax deduction at source and disallowance under section 40(a)(i).

Issue (i): whether Acropetal Technologies Ltd. could be retained as a comparable in the transfer pricing analysis.

Analysis: The comparable was sought to be excluded because of its extraordinarily high margin and because its financials were affected by irregularities found by the securities regulator. The material placed showed that the company had committed fraud in utilisation of IPO funds and had diverted funds to non-business purposes, which had a bearing on its operating margins. On that basis, the functional and financial reliability of the company as a comparable was found to be doubtful.

Conclusion: Acropetal Technologies Ltd. was directed to be excluded from the comparables set, in favour of the assessee.

Issue (ii): whether Accuspeed Engineering Ltd., Kirloskar Consultants Ltd. and Harita Techserv Ltd. were to be excluded or sent back for fresh verification.

Analysis: In respect of Accuspeed Engineering Ltd. and Kirloskar Consultants Ltd., financial statements were produced before the Tribunal and the earlier rejection was based on non-availability of relevant-year data. The matter therefore required verification of the financials and a fresh decision on comparability. As regards Harita Techserv Ltd., there was inconsistency between the reasons recorded by the transfer pricing authority and the appellate directions, and the assessee produced material suggesting engineering-design similarity. The issue therefore also warranted reconsideration by the transfer pricing authority.

Conclusion: The comparability issues relating to Accuspeed Engineering Ltd. and Kirloskar Consultants Ltd. were remitted for verification, and the issue relating to Harita Techserv Ltd. was also set aside to the transfer pricing authority, in favour of statistical disposal for the assessee.

Issue (iii): whether ocean freight charges paid to the Korean AE were liable for tax deduction at source and disallowance under section 40(a)(i).

Analysis: The payment was for hiring of ships for shipment of goods in international traffic. The Tribunal treated the payment as falling within the shipping article of the India-Korea treaty and not as royalty or fees for technical services. Since the income was held taxable only in the State of residence of the shipping enterprise, no withholding obligation arose in India and the related disallowance could not survive.

Conclusion: The disallowance under section 40(a)(i) was deleted and the assessee succeeded on this issue.

Final Conclusion: One appeal was allowed and the other was partly allowed for statistical purposes, with the transfer pricing issues partly remanded and the withholding tax disallowance fully deleted.

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