Trading companies excluded as transfer pricing comparables due to functional dissimilarity with service-based operations

ITAT Hyderabad ruled on transfer pricing comparable selection in a trading activity case. The tribunal excluded five companies (ACL, Hughes, HCL, Uniinfo, Seven-3) from comparables due to functional dissimilarity, as their revenue primarily came from services while the assessee engaged in trading. S.K. Communications was also excluded for similar reasons. However, Arya and Cineom were retained as comparables since their trading revenue constituted 97.45% and 82.80% respectively of total operations. The tribunal directed the AO to verify Globe's comparability after the assessee provided its annual report, allowing this ground for statistical purposes.

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Issues:
1. Determination of Arm's Length Price (ALP) for imported products.
2. Dispute over comparables in Transfer Pricing study.
3. Exclusion of certain comparables based on functional dissimilarity.
4. Inclusion of a comparable company excluded by Revenue authorities.
5. Additional ground of appeal regarding first year of operations.
6. Decision on the nature of business activity of the assessee.

Issue 1: Determination of Arm's Length Price (ALP) for imported products
The appeal was filed against the final assessment order for the A.Y. 2017-18, where the Assessing Officer determined an upward adjustment on imported products based on the Transaction Net Margin Method (TNMM) instead of the Resale Price Method (RPM) adopted by the assessee. The Dispute Resolution Panel directed the adjustment, leading to the appeal.

Issue 2: Dispute over comparables in Transfer Pricing study
The assessee disputed the inclusion of eight comparables in the Transfer Pricing study, arguing functional dissimilarity. The assessee contended that its activities were purely trading, while the comparables were primarily engaged in services. The assessee requested the exclusion of these comparables and the inclusion of another comparable, Globe Mobility Private Limited.

Issue 3: Exclusion of certain comparables based on functional dissimilarity
After reviewing the activities and revenue sources of the comparables, the tribunal excluded five companies from the list of comparables as they were functionally dissimilar to the assessee, engaged mainly in service activities. The tribunal directed the Assessing Officer to exclude these companies for the purpose of working the profit level indicator.

Issue 4: Inclusion of a comparable company excluded by Revenue authorities
The tribunal allowed the assessee's request to consider Globe Mobility Private Limited as a comparable company, as its annual report was now available in the public domain. The tribunal directed the Assessing Officer to verify the comparability of Globe after providing an opportunity for the assessee to be heard.

Issue 5: Additional ground of appeal regarding first year of operations
The assessee raised an additional ground of appeal, arguing that being in the first year of operations, it was unreasonable to expect high profits. However, the tribunal dismissed this ground, considering the nature of the business activity and lack of merit in the argument.

Issue 6: Decision on the nature of business activity of the assessee
After examining the invoices and submissions, the tribunal concluded that the assessee was engaged solely in trading activities without providing any additional services. The tribunal rejected the Revenue's argument that the assessee also provided installation services, affirming that the assessee's business was purely trading.

This comprehensive summary covers the issues involved in the legal judgment, detailing the arguments, decisions, and reasoning provided by the tribunal for each issue.

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