2025 (5) TMI 1643 - AT - Income Tax

ITAT allows partial relief on transfer pricing adjustments excluding four functionally dissimilar comparables from arm's length price computation

Nippon Steel Engineering India Private Limited Versus Assessment Unit, Income Tax Department, Delhi

ITAT Delhi allowed partial relief to the assessee regarding TP adjustments for marketing and administrative support services to Associated Enterprises. ... TP Adjustment - Marketing and Administrative support services provided by the assessee to its Associated Enterprises - comparable selection - Five comparables namely Pressman Advertising Limited, Ugam Solutions Private Limited, FCB Interface Communications Private Limited, FCB Ulka Advertising Private Limited and Adfactors PR Private Limited HELD THAT:- One comparable namely Pressman Advertising Limited is concerned, we could not find force in the arguments of the assessee and hence the contentions with respect to the inclusion of this comparable are dismissed. Inclusion of remaining four comparables, we are of the view that they are not functionally similar to the functions of the assessee and hence these are required to be excluded from the TP adjustments made by the TPO. Therefore, the ld. TPO is directed to compute the ALP after excluding of these four comparables and compute the ALP afresh. Payment of gratuity - As we restore this issue to the file of the AO with a direction if the assessee had already offered net provision for taxation, while computing the income then no separate addition is required to be made in this regard. Payment of provident fund/employer contribution - We restore this issue to the file of the AO for examining again in the light of decision of Checkmate Services P Ltd. [2022 (10) TMI 617 - SUPREME COURT (LB)] 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the final assessment order passed under Sections 143(3), 144C(13), and 144B of the Income-tax Act, 1961 is valid or liable to be quashed on grounds of limitation or other procedural infirmities.(b) Whether the Assessing Officer (AO) erred in assessing the total income of the appellant by making additions over and above the income reported in the return of income (ROI) for Assessment Year 2020-21.(c) Whether the Transfer Pricing Officer (TPO) and AO erred in making adjustments to the arm's length price (ALP) of international transactions relating to provision of marketing and administrative support services to Associated Enterprises (AEs), specifically:The validity of the economic analysis and comparability analysis conducted by the TPO.The selection and rejection of comparables for benchmarking the international transactions.The application of the Function, Asset, and Risk (FAR) profile in determining comparability.The appropriateness of the working capital adjustment, including the interest rate applied.The disregard of judicial precedents cited by the appellant.(d) Whether the AO erred in denying deductions claimed by the appellant towards payment of gratuity and employer's contribution to provident fund.(e) Whether the AO erred in charging interest under Sections 234A, 234B, and 234C of the Act.(f) Whether the AO erred in initiating penalty proceedings under Section 270A mechanically on the additions made.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of the Assessment OrderThe appellant challenged the final assessment order on the ground that it was barred by limitation. However, during hearing, the appellant did not press this ground. Consequently, the Tribunal dismissed this issue as not pressed. No further adjudication was required.Issue (b): Error in Total Income AssessmentThis ground was general in nature and did not require specific adjudication by the Tribunal. The substantive issues relating to additions and disallowances were addressed under other grounds.Issue (c): Transfer Pricing Adjustments on Marketing and Administrative Support ServicesRelevant Legal Framework and Precedents: The determination of arm's length price (ALP) for international transactions is governed by Sections 92 to 92F of the Income-tax Act, 1961, along with the Transfer Pricing Rules, 1962. The FAR analysis is a key principle to ascertain comparability of transactions and entities. Judicial precedents emphasize that comparables must be functionally similar and that the selection of comparables should be free from cherry-picking or ad-hoc inclusion/exclusion.Court's Interpretation and Reasoning: The TPO selected 14 comparable companies to benchmark the appellant's international transactions relating to marketing and administrative support services. The appellant challenged the inclusion of six comparables, contending that they failed the FAR test and were not functionally similar.The Tribunal examined the comparables and found that one comparable, Pressman Advertising Limited, was appropriately included. However, four other comparables-Ugam Solutions Private Limited, FCB Interface Communications Private Limited, FCB Ulka Advertising Private Limited, and Adfactors PR Private Limited-were not functionally similar to the appellant's activities and thus should be excluded.The Tribunal held that the TPO's selection of these four comparables was erroneous and directed the TPO to recompute the ALP excluding these four companies. This approach aligns with the principle that comparables must be selected based on a sound FAR analysis, ensuring functional similarity and economic equivalence.Key Evidence and Findings: The functional analysis of the appellant's services included marketing and administrative support, information collation, and coordination with the AE. The disputed comparables were engaged in advertising and public relations but did not match the appellant's FAR profile sufficiently.Application of Law to Facts: The Tribunal applied the FAR test to the comparables and found that the inclusion of certain companies was not justified. The Tribunal's direction to exclude these comparables and recompute ALP reflects adherence to transfer pricing principles under the Act and Rules.Treatment of Competing Arguments: The appellant argued that the TPO's comparability analysis was flawed and that additional comparables identified by the appellant were wrongly rejected on procedural grounds such as lack of search methodology disclosure. The Tribunal did not find merit in the rejection of the appellant's additional comparables on these grounds but emphasized the necessity of functional similarity.Conclusions: The Tribunal allowed the ground in part, directing exclusion of four comparables and recomputation of ALP, thereby modifying the transfer pricing adjustments.Issue (d): Denial of Deduction for Gratuity and Provident Fund ContributionsRelevant Legal Framework: Deductions for employer's contributions to provident fund and gratuity payments are governed by relevant provisions of the Income-tax Act and associated rules. Timing of payment and accounting treatment affect deductibility.Court's Interpretation and Reasoning: The AO disallowed Rs. 3,18,440 claimed by the appellant on account of gratuity and employer's provident fund contributions. The appellant contended that it had already disallowed Rs. 8,90,977 in its computation in respect of gratuity provision and thus no further disallowance was warranted.Regarding provident fund, the appellant argued that the contribution was paid after the financial year but before the due date of filing the return, which should not attract disallowance.Key Evidence and Findings: The Tribunal noted that the appellant had made net provision for gratuity and that the AO's separate disallowance might be duplicative. For provident fund, the Tribunal referred to the Supreme Court decision in Checkmate Services Pvt. Ltd. vs CIT, which held that payment made before the due date of filing return is allowable.Application of Law to Facts: The Tribunal restored the gratuity issue to the AO for verification whether the net provision was already offered for taxation, and if so, no separate addition should be made. The provident fund issue was also restored to AO for reconsideration in light of the Supreme Court ruling.Treatment of Competing Arguments: The AO's mechanical disallowance was challenged as incorrect. The Tribunal accepted the appellant's submissions subject to AO's verification.Conclusions: Both issues were restored to the AO for fresh examination with specific directions, providing relief to the appellant.Issue (e): Charging of Interest under Sections 234A, 234B, and 234CThe appellant challenged the charging of interest under these sections. However, the Tribunal did not specifically adjudicate this ground in the order, indicating no substantial dispute or that it was subsumed within other grounds.Issue (f): Initiation of Penalty Proceedings under Section 270AThe appellant contended that penalty proceedings were initiated mechanically based on additions. The Tribunal did not expressly deal with this ground in detail, implying no separate relief was granted or that it was not pressed.3. SIGNIFICANT HOLDINGS'We are of the view that [four comparables] are not functionally similar to the functions of the assessee and hence these are required to be excluded from the TP adjustments made by the TPO. Therefore, the ld. TPO is directed to compute the ALP after excluding these four comparables and compute the ALP afresh.'This holding establishes the principle that comparables selected for transfer pricing benchmarking must be functionally comparable based on a rigorous FAR analysis. Inclusion of functionally dissimilar comparables is not permissible and requires recomputation of ALP.Regarding gratuity and provident fund contributions, the Tribunal held:'If the assessee had already offered net provision for taxation while computing the income then no separate addition is required to be made in this regard.'And further, directing reconsideration in light of the Supreme Court's ruling:'We restore this issue to the file of the AO for examining again in the light of decision of Hon'ble Supreme Court in the case of Checkmate Services P Ltd. Vs CIT.'This underscores the necessity of proper accounting treatment and adherence to judicial precedents in allowing deductions.The Tribunal dismissed the limitation plea as not pressed and did not find merit in the inclusion of one comparable (Pressman Advertising Limited), thereby partially upholding the TPO's selection.In conclusion, the Tribunal allowed the appeal in part by directing exclusion of certain comparables for transfer pricing adjustments and restoration of issues relating to gratuity and provident fund deductions to the AO for fresh examination, while dismissing other grounds either as not pressed or general in nature.