2025 (7) TMI 1035 - AT - Income Tax

ITAT Delhi remands transfer pricing case for fresh comparable selection in Research Support Services

Fil India Business & Research Services Private Limited Versus DCIT, National Faceless Assessment Centre, Delhi

The ITAT Delhi remanded the transfer pricing adjustment case back to the AO/TPO for fresh comparable selection. The appellant challenged the TPO's ... TP Adjustment - Appellant's international transactions pertaining to provision of Research Support Services - MAM selection - Comparable selection - assessee submitted that the assessee has selected TNMM as most appropriate method and by using gross profit/total costs as PLI, computed the ALP where the tested parties margin was 20% and on the basis of 9 comparable companies, the adjusted average rate comes 11.46% to 15.68% with the median of 15.49% - HELD THAT:- The assessee has raised three objections. (i) selection of the comparable companies which have failed RTP filter; (ii) selection of comparable having dissimilar activities and (iii) by not including the companies suggested by the assessee on the basis of modified filter applied. It is also seen that assessee has requested before the ld. DRP that the AO/TPO has not taken corrected margins, for which the ld. DRP in para 6.2.5 of its order directed the AO /TPO to consider the objections regarding computation of margins, however, as per assessee such exercise was not done at the end of AO/TPO. We restore the issue back to the file of AO/TPO with direction to select fresh set of comparable after applying RPT filter where RPT filter with maximum filter criteria of 25% be taken as benchmark as has been upheld by the Hon’ble Jurisdictional High Court in various judicial pronouncement cited hereinabove. AO/TPO is further directed to exclude M/s Angel Financial Advisors Private Limited from the final set of comparable as it is functionally dissimilar and re-worked out the comparable analysis of the companies suggested by the assessee as tabulated herein above. The AO/TPO is also directed to take the correct margins and applied the same accordingly. With these directions, the grounds of appeal No.2 to 2.11 of the assessee are partly allowed for statistical purposes. Levy of interest u/s 234B and 234C - Since, the ratio laid down in the case of Colte Technology Services India Pvt. Ltd. [2022 (5) TMI 272 - ITAT DELHI] squarely applicable to the facts of the present, thus, by respectfully following the same, we direct the AO/TPO to charge the interest u/s 234B and 234C on the final income determined ignoring the additional income offered by the assessee in the modified return filed based on the APA with CBDT. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal include:Whether the Assessing Officer (AO) and Transfer Pricing Officer (TPO) were justified in enhancing the income of the assessee by Rs. 1,53,73,858/- on account of international transactions related to provision of Research Development Services, particularly regarding the selection and rejection of comparable companies for determining the Arm's Length Price (ALP) under the Transfer Pricing provisions of the Income Tax Act, 1961 ('the Act').Whether the AO/TPO complied with the directions of the Dispute Resolution Panel (DRP) in verifying and recomputing the operating margins of comparables.Whether the disallowance of Rs. 50,484/- pertaining to employees' contribution to Provident Fund (PF) was justified, given the timing of deposit and relevant statutory provisions.Whether interest under sections 234B and 234C of the Act is leviable on additional income arising from the modified return filed pursuant to an Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT).Whether the AO erred in not granting due credit for prepaid taxes while computing the demand.Whether the initiation of penalty proceedings under section 270A of the Act was premature.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Transfer Pricing Adjustment and Selection of Comparable CompaniesRelevant legal framework and precedents: The determination of ALP in international transactions is governed by sections 92C and 92CA of the Income Tax Act, with the Transfer Pricing Officer empowered to make adjustments under section 92CA(3). The Transfer Pricing documentation maintained under section 92D and Rule 10D of the Income Tax Rules is relevant. The comparability analysis involves selecting companies comparable in terms of functions performed, assets employed, and risks assumed. The Related Party Transactions (RPT) filter is applied to exclude companies with significant related party transactions, generally accepted threshold being 15-25% of sales, as upheld by the Hon'ble Jurisdictional High Court in multiple decisions.Court's interpretation and reasoning: The assessee adopted the Transactional Net Margin Method (TNMM) using gross profit to total cost as the Profit Level Indicator (PLI), selecting nine comparable companies with margins ranging from 11.46% to 38.93%, median 15.49%, against the assessee's margin of 20%. The TPO rejected the assessee's comparables and conducted a fresh analysis applying additional filters, selecting six comparables, four of which failed the RPT filter (exceeding 25% related party transactions) and one was functionally dissimilar (engaged in distribution of financial products rather than research support services).The assessee contended that the TPO's selection was flawed due to inclusion of companies with high RPT and functional dissimilarity, and exclusion of comparables proposed by the assessee which passed the filters, including SG Analytics Private Ltd., Axience Consulting Private Limited, and Cyber Media Research and Service Limited. The assessee relied on judicial precedents to support the 25% RPT threshold and functional comparability principles.The DRP had directed the AO/TPO to verify the objections regarding working capital adjustments and margins, but the assessee submitted that such directions were not properly followed.Key evidence and findings: The Tribunal examined the list of comparables selected by both parties, the RPT percentages, and functional profiles. It noted the failure of four comparables in the TPO's list to meet the RPT filter and the functional dissimilarity of one. The Tribunal also noted the assessee's proposed comparables met the quantitative filters.Application of law to facts: The Tribunal relied on the principle that comparables must be functionally similar and must not have excessive related party transactions beyond the accepted threshold. It observed that the TPO's selection did not adhere to these principles and that the DRP's directions for verification of margins were not fully complied with.Treatment of competing arguments: The AO/TPO argued that the fresh filters and comparables selected were appropriate and that the DRP's directions were followed. The assessee challenged the selection on grounds of RPT and functional dissimilarity and non-compliance with DRP directions.Conclusions: The Tribunal partly allowed the appeal on this issue, restoring the matter to the AO/TPO with directions to:Apply the RPT filter with a maximum threshold of 25% as benchmark.Exclude the functionally dissimilar company (Angel Financial Advisors Pvt. Ltd.) from comparables.Consider the comparables proposed by the assessee that meet the filters.Recompute the operating margins correctly as per the DRP's directions.Issue 2: Disallowance of Employees' Contribution to PFRelevant legal framework and precedents: Section 36(1)(va) read with section 438 of the Act allows deduction for employees' contribution to PF if deposited before the due date of filing the return under section 139(1). The assessee relied on the jurisdictional High Court decision in Commissioner of Income-tax v. AIMIL Limited.Court's interpretation and reasoning: The assessee did not press this ground during the hearing, resulting in its dismissal.Issue 3: Levy of Interest under Sections 234B and 234C on Additional Income Arising from APARelevant legal framework and precedents: Sections 234B and 234C impose interest for default or short payment of advance tax. Section 209 requires advance tax payment based on estimated income. The question is whether interest is payable on additional income arising post-filing of return due to APA adjustments. The Tribunal referred to a coordinate bench decision in Colte Technology Services India Pvt. Ltd. that held interest under these sections is not leviable on additional income arising from APA. Several High Court decisions were also cited supporting the principle that interest is payable only if there is default in payment of advance tax based on reasonable estimation.Court's interpretation and reasoning: The Tribunal observed that the assessee had filed a modified return pursuant to APA with enhanced income, which was unforeseeable at the time of advance tax estimation and payment. The e-filing utility mandated payment of interest to validate the modified return, which the assessee paid under protest and sought refund. The Tribunal held that since the additional income was not reasonably foreseeable at the time of advance tax payment, charging interest under sections 234B and 234C is not justified.Key evidence and findings: The Tribunal noted the modified return filed on 29.03.2019, the APA terms, and the payment of interest computed by the e-filing utility. It also considered the legal precedents affirming that interest is compensatory and payable only when there is default in advance tax payment.Application of law to facts: The Tribunal applied the principle that the assessee cannot be held liable for interest on income not reasonably estimable at the time of advance tax payment. It followed the coordinate bench ruling in Colte Technology Services India Pvt. Ltd. and other High Court decisions to hold that interest levy on APA-related additional income is illegal.Treatment of competing arguments: The Revenue contended that since the assessee paid interest as computed, no refund is warranted. The Tribunal rejected this, emphasizing the legal principle that interest is payable only on default and that the assessee was compelled to pay interest due to e-filing portal constraints.Conclusions: The Tribunal allowed the appeal on this ground, directing the AO/TPO to charge interest under sections 234B and 234C on the income excluding the additional income arising from APA.Issue 4: Credit of Prepaid TaxesCourt's interpretation and reasoning: The Tribunal directed the AO to allow credit of all prepaid taxes after necessary verification, without detailed discussion.Issue 5: Initiation of Penalty Proceedings under Section 270ACourt's interpretation and reasoning: The Tribunal held that initiation of penalty proceedings at this stage is premature and dismissed this ground.3. SIGNIFICANT HOLDINGSThe Tribunal established the following core principles and made key determinations:'The AO/TPO is directed to select fresh set of comparables after applying RPT filter where RPT filter with maximum filter criteria of 25% be taken as benchmark as has been upheld by the Hon'ble Jurisdictional High Court in various judicial pronouncement.''The AO/TPO is further directed to exclude M/s Angel Financial Advisors Private Limited from the final set of comparable as it is functionally dissimilar.''The AO/TPO is also directed to take the correct margins and apply the same accordingly.'On interest, the Tribunal quoted the coordinate bench ruling: 'We hold that the levy of interest u/s 234B and 234C of the Income Tax Act on additional income agreed as per advance pricing agreement entered between appellant and the CBDT is illegal.'The Tribunal emphasized that 'the assessee was left with no alternate but to deposit the interest u/s 234B and 234C so computed' due to e-filing portal constraints and thus the claim for refund of excess interest is genuine.The Tribunal directed the AO to grant credit for prepaid taxes after verification and dismissed penalty proceedings as premature.