Tribunal excludes 3 comparables from transfer pricing analysis, directs AO to redo arm's length price calculation.

Case Name:

Intrepid Travel Pty. Ltd. Vs. Asstt. Director of Income-tax (ITAT Delhi)

Key Takeaways:

- The Tribunal excluded the three comparables from the list of comparables for ALP determination, as they were not functionally similar to the assessee's business. - The Tribunal directed the Assessing Officer (AO) to redo the ALP calculation after excluding the three comparables. - The Tribunal held that unless the comparable is functionally similar to the tested party's function, it cannot be included in the list of comparables for computing ALP as per Rule 10B(2)(b). **Issue:** Whether the three comparables, namely Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. (Seg.), selected by the TPO and approved by the DRP, were functionally comparable to the assessee's business for the purpose of determining the arm's length price of the assessee's international transactions. **Facts:** - The assessee, a branch office of Intrepid Travel Pty. Limited, Australia, was engaged in organizing package tours and trips for tourists in various parts of the world, including India. - The assessee provided ground support travel-related services, including attending to the administration and coordination of tours, arranging hotel accommodation, travel, transport, tour guides, and other such travel-related services to Intrepid Australia. - The TPO and the DRP had selected certain comparables, including Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. (Seg.), for determining the ALP of the assessee's international transactions. - The assessee objected to the inclusion of these three comparables, arguing that they were not functionally comparable to the assessee's business. **Arguments:** - The assessee argued that Chokshi Laboratories Ltd. was engaged in providing calibration and lab testing services, consultancy services, and pollution control services, which were not functionally comparable to the assessee's business. - The assessee contended that Indus Technical & Financial Consultants Ltd. was engaged in manufacturing activity, which was not comparable to the assessee's business. - The assessee submitted that WAPCOS Ltd. was engaged in providing sophisticated engineering consultancy services in the field of infrastructure, which entailed a completely different function, asset, and risk profile compared to the assessee's routine coordination and support services. - The assessee relied on various judicial precedents, including DCIT vs. M/s MCI Com India P. Ltd. & ors., H&M Hennes & Mauritz India Pvt. Ltd. vs. DCIT, and Nortel Networks India P. Ltd. vs. Addl. CIT, where similar comparables were excluded from the list of comparables for ALP determination. **Key Legal Precedents:** 1. DCIT vs. M/s MCI Com India P. Ltd. & ors. (ITA no. 4187/Del/2010 & ors dated 30-8-2012) 2. H&M Hennes & Mauritz India Pvt. Ltd. vs. DCIT (ITA no. 4704/Del/2012 dated 12-4-2013) 3. Nortel Networks India P. Ltd. vs. Addl. CIT (ITA nos. 4765/Del/2011 & 427/Del/2013 dated 25-02-2014) **Judgment:** The Tribunal agreed with the assessee's contentions and held that the three comparables, namely Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. (Seg.), were not functionally comparable to the assessee's business and should be excluded from the list of comparables for ALP determination. The Tribunal directed the Assessing Officer (AO) to exclude these three comparables and redo the ALP calculation. **FAQs:** **Q1. What was the main issue in this case?** The main issue was whether the three comparables selected by the TPO and approved by the DRP were functionally comparable to the assessee's business for the purpose of determining the arm's length price of the assessee's international transactions. **Q2. Why did the Tribunal exclude the three comparables?** The Tribunal excluded the three comparables because they were not functionally similar to the assessee's business, as required by Rule 10B(2)(b) for selecting comparables for ALP determination. **Q3. What were the key legal precedents cited in this case?** The key legal precedents cited were DCIT vs. M/s MCI Com India P. Ltd. & ors., H&M Hennes & Mauritz India Pvt. Ltd. vs. DCIT, and Nortel Networks India P. Ltd. vs. Addl. CIT, where similar comparables were excluded from the list of comparables for ALP determination. **Q4. What was the Tribunal's direction to the Assessing Officer?** The Tribunal directed the Assessing Officer to exclude the three comparables, namely Chokshi Laboratories Ltd., Indus Technical & Financial Consultants Ltd., and WAPCOS Ltd. (Seg.), from the list of comparables and redo the ALP calculation. **Q5. What was the significance of this case?** This case highlighted the importance of selecting functionally comparable companies for the purpose of determining the arm's length price of international transactions, as per the provisions of Rule 10B(2)(b). It also provided guidance on the application of the functional comparability principle in transfer pricing cases.

This appeal, preferred by the assessee, is directed against the assessment order dated 19-09-2012, framed by the AO pursuant to DRP directions u/s 144C, pertaining to assessment year 2007-08.

2. Brief facts are that the assessee for the relevant assessment year filed it return of income declaring income of Rs. 1986319/-. The assessee had entered into following international transactions:

2.1. The AO made a reference to TPO to determine the ALP u/s 92C(3) in respect of aforementioned transactions. The assessee’s operating margins to cost was 4.25%. In order to justify its ALP, the assessee had taken 12 comparables, which are referred in para 4.3 of TPO’s order. The TPO only accepted two comparables out of 12, selected by assessee and rejected the rest of the ten. He resorted to search suitable comparables and selected ten more comparables and thus determined the PLI at 21.48%. The assessee filed objection before DRP and the DRP excluded 3 comparables after which the AO finally determined the operating profit at 15.23%. Being aggrieved, the assessee is in appeal before us and has, inter alia, taken following grounds of appeal:

1.That the learned AO has agreed on the facts and in law in rejecting the TP Documentation maintained by the appellant and making an addition of Rs. 92,82,443 on account of difference of Arm Length Price as determined by the learned TPO and Transfer Pricing of the appellant. The addition of Rs.92,82,443 made to the income of the Appellant is illegal, erroneous and controversy to law and fact.

2.The Honorable DRP and the learned AO has erred in facts and in law by considering the appellant's ground level coordination & support services as primarily consultancy services.

3.The learned AO has erred in facts and in law by rejecting the comparable companies selected by the appellant and by hand picking the companies by placing arbitrary filters. Some of such filters wrongly used by the learned AO are:

- Rejecting companies with turnover less than INR 1 crores:

- Rejecting companies having different accounting years;

- Accepting companies earning super normal profits

4. That on facts and in law, the Hon'ble DRP and learned AO have erred in rejecting the appellant's claim to use of multiple year data for computing the arm's length price and, instead, has adhered to the use of single year updated data to conclude the arm's length price of the international transaction.

5. That on facts and in law, the learned AO has entered in determining the ALP by considering data relating to FY 2007-08 only and using powers u/s 133(6) to obtain information from third parties, which were not available in the public domain at the time of compliance with TP documentation requirement.

6.The Honorable DRP and the learned AO has erred in Law and facts by not providing suitable adjustments on account of risk profile of the assessee with comparable companies.

7.The Honorable DRP & learned AO has erred in Law by not considering that the adjustments to the ALP, should be limed to the lower end of 5 percent range as the assessee has the right to exercise this option under the proviso to section 92C of the Act.

8. That the learned AO has erred, in law, and on facts in initiating penalty proceedings under section 271(1)(c) of the Act against t he appellant.

9. Without prejudice to the above grounds, the learned AO has erred in levying interest under section 234A/B/C of the Act while completely disregarding the provisions of the Act and the judicial precedents.”

3. Ground nos. 4 & 5 have not been pressed, hence the same stand rejected being not pressed.

4. Ground nos. 1, 2 and 3 deal with comparables. The main dispute in the present appeal is with regard to selection of 3 comparables by TPO viz.

(i) Chokshi Laboratories Ltd.

(ii) Indus Technical & Financial consultants Ltd.

(iii) WAPCOS Ltd. (Seg.)

4.1. The assessee is a branch office of Intrepid Travel Pty. Limited, having head office at Australia and is engaged in the business of organizing package tours and trips for tourists in various parts of the world including India. The assessee provides ground support travel related services, which include attending to the administration and co-ordination of the tours, arranging hotel accommodation, travel, transport, tour guides and other such travel related services to Intrepid Australia. Intrepid group was started in 1989 in Australia as a tour and travel agency providing specialized tours to various locations in Asia. Intrepid group focuses on travelling in which travelers experience the local public, transport for commuting, small scale locally owned establishments for lodging and eating, travelling in small groups while still maintaining high ‘travelling’ standards. Thus, partly the services rendered by asessee included the following:

- To provide on-ground co-ordination and logistical support to enable the successful operation of the Intrepid Itineraries. This logistical support includes the provision of group leaders and the organization of local suppliers.

- To operate the trips in accordance with Intrepid’s Safety and Responsible Travel policies;

- To operate these trips in accordance with Intrepid Travel’s branding guidelines;

- To communicate any necessary itinerary alterations to Intrepid Travel at the earliest opportunity;

- To assist in handling of any passenger complaints in a prompt and professional manner.

- To negotiate competitive fees with local operators, for itineraries and product as requested by Intrepid Travel within agreed timeframes.

4.2. In respect of transactions of Project Support Services, the assessee had benchmarked the same by using TNMM as the most appropriate method. The PLI used was OP/OC. The calculation of operating profit by the assessee had been carried out at an entity level. There is no dispute on these issues.

4.3. The asessee has also not pressed the ground relating to selection/ use of multiple year data vis a vis current year’s data for computing the ALP.

4.4. The assessee’s main objection before DRP was that it was in supporting/ cooperation services’ under broad category of ‘business support’ whereas the comparables selected by TPO and confirmed by ld. DRP were in sophisticated engineering and technical consultancy having different FAR. Ld. counsel pointed out that ld. DRP, after considering the assessee’s objections, had excluded Apitco Limited, RITES Ltd. and Vapi Waste & Effluent Management. As regards the three comparables in dispute viz. Chokshi Laboratories Ltd., Indus Technical & Financial consultants Ltd.; and WAPCOS Ltd. (Seg.), ld. DRP did not agree with the assessee’s contention that it was an engineering company since it had consultancy segment also. The Ld. DRP further observed that since neither the department nor the assessee had found any consultancy comparables in the tourism sector, therefore, this comparable could not be rejected.

5. Ld. counsel pointed out that Chokshi Laboratories Ltd was engaged in providing calibration and lab testing services, consultancy services and pollution control services of various products. Therefore, functionally it could not be compared with the assessee.

5.1. As regards Indus Technical & Financial consultants Ltd., ld. counsel pointed out that this company was engaged in the manufacturing activity, which is not comparable activity with that performed by the assessee. Further, on the web site of this company, it was noted as under:

“We are also a renowned manufacturer of TMT Bars. We area dynamic and fast growing company with diverse exposure in many fields. Our firm has been serving the industry for over two decades with a range of unbeatable services. With the twin advantages of strong experience and excellent expertise, we enjoy the strong support of innumerable clients in India.”

5.2. He, therefore, submitted that this company also was not functionally comparable with the assessee being performing highly technical nature.

5.3. As regards WAPCOS, ld. counsel submitted that it was engaged in providing sophisticated engineering consultancy services in the field of infrastructure in areas like ports and harbours, environmental impact assessment, water and sanitation, micro canalization, rural electrification both in India as well as outside India. It was providing engineering and technical consultancy services which entail completely different function, asset and risk profile as compared to assessee’s routine coordination and support services.

5.4. Ld. counsel submitted that in view of Rule 10B(2)(b), these three comparables have to be excluded.

5.5. Ld. counsel relied on following decisions:

(i) DCIT Vs. M/s MCI Com India P. Ltd. & ors. (ITA no. 4187/Del/2010 & ors dated 30-8-2012), wherein, in the TP study, the assessee’s description of business and its comparable company was as follows:

“Water and Power Consultancy Services (India) Ltd. (WAPCOS) WAPCOS provides consulting in the domestic and international water and power sectors. Services offered include market intelligence, feasibility studies, planning/ project formulation, field investigations and testing, engineering design, contract management, quality assurance & management and human resource development.

The company has identified its business activity into two business segment i.e. Consultancy & Engineering projects and Lump Sum Turnkey projects (As per the Annual Report for financial year 2003-04). WAPCOS has been providing consultancy services in all facets of Water Resources, Power and Infrastructure Sectors in India and Abroad.

"Main fields of the company cover Irrigation, Water Management, Drainage, Ground Water Exploration, Development, Flood Control, Reclamation and River Management, Dam and Reservoir, Power Engineering; Hydro Power Generation; Agricultural Development; Waterways; Systems Studies and Information Technology, Human Resources Development.

WAPCOS has also been venturing into newer fields such as Software Development, City Development Plans, financial Management System Technical Education, Quality Control and Construction supervision, Roads & Bridges. "

5.6. He further pointed out that high risk profile of EIL, Rites, Wapcos and TCE rendered the company’s financial results non-comparable to the margins earned by the assessee from its marketing support activities. The Tribunal, after considering these submissions, accepting the finding of first appellate authority, observing as under:

“We agree with the view of the First Appellate Authority that EIL, Rites, Wapcos and TCE are engineering companies and provide end-to-end solutions and whereas the assesssee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable.”

5.7. Ld. counsel further submitted that this decision has been confirmed by Hon’ble Delhi High court vide its order dated 29-5-2013 in the case of CIT Vs. Verizon Indi Pvt. Ltd. (ITA no. 271/2013).

(ii) H&M Hennes & Mauritz India Pvt. Ltd. Vs. DCIT (ITA no. 4704/Del/2012 dated 12-4-2013).

Ld. counsel pointed out that in this decision also the Wapcos was excluded from comparables on the ground of being technical and engineering companies not comparables to administrative support services.

(iii) Nortel Networks India P. Ltd. Vs. Addl. CIT (ITA nos. 4765/Del/2011 & 427/Del/2013 dated 25-02-2014)

In this decision all the earlier decisions have been considered and in paras 11 and 11.1 of its order the Tribunal has observed as under:

“11. We have heard the rival contentions and perused the material available on record. Apropos the issue of comparability and the exclusion of Choksi, Rites and WAPCOS, Delhi Tribunal in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. has held that companies like EIL, Rites, Wapsos and TCE are engineering companies which provide end to end solutions and therefore they cannot be compared with assessees who provide marketing support services to the parent company. They were held to be functionally not comparable with thee engineering companies.

11.1. Following the orders of coordinate benches of ITAT in the cases of M/s MCI Com India P. Ltd.; M/s Verizon India P. Ltd. (supra); Estel in ITA no.584/Banglore/06and our own decision in case of Actis Advisers Pvt. Ltd. ITA No. 6390/Del/2012, we hold that Choksi, Rites and WAPCOS being functionally different cannot be applied as appropriate comparable to the assessee. Therefore, they are to be excluded from TP adjustment while determining the ALP.”

5.8. He, therefore, submitted that in view of these decisions, these three comparables being not functionally comparables with the assessee’s FAR, are to be excluded.

6. Ld. CIT(DR) submitted that ld. DRP has not examined Choksi Laboratories Ltd. and Indus Technical & Financial Consultants Ltd. and has given finding only with regard to WAPCOS. Therefore, the matter should be restored to the file of ld. DRP.

7. In rejoinder, ld. counsel pointed out that assessee had raised specific objection before ld. DRP, which is available at pages 12 & 13 of the objections raised before ld. DRP.

8. We have considered the rival submissions and have perused the record of the case. There is no gain saying that unless the comparable is functionally similar to the tested party’s function, the same cannot be included in the list of comparables for computing ALP as per the provisions of Rule 10B(2)(b). Ld. DRP while considering the comparable Wapcos, inter alia, observed that neither the department nor the assessee has found any consultancy comparables in the tourism sector. Therefore, it becomes imperative that only those comparables should be taken into consideration which have close similarity with the functions carried out by tested party.

8.1. As regards Wapcos Ltd., we find that ld. DRP has approved the inclusion of this comparable on the basis that there is consultancy segment of Wapcos. However, no segmental details of this comparable have been brought on record. Therefore, since this comparable was admittedly an engineering company, the same could not be included in the list of comparables. This aspect is also covered by various decisions noted in ld. counsel’s arguments.

8.2. As regards Chokshi Laboratories Ltd. , it is not in dispute that the said comparable was engaged in providing testing services for various products, calibration, pollution control services and therefore, we failed to appreciate as to how this could at all be considered comparable with the business profile of assessee. Therefore, this has to be excluded from the list of comparables.

8.3. As regards Indus Technical & Financial consultants Ltd., as per web site details, reproduced earlier, this company was engaged in the manufacturing activity and, therefore, had completely different FAR from the tested party.

8.4. Accordingly, in view of above discussion, we direct the AO to exclude the above three comparables from the list of comparables selected by him.

9. Ground nos. 6 & 7: Ld. counsel pointed out that after exclusion of above three comparables from the list of comparables, the PLI would come within (+)(-) 5% range and, therefore, this ground has become academic .

10. Ground no. 8 relating to levy of penalty, is premature and stands rejected accordingly.

11. Ground no. 9: The charging of interest u/s 234A/B/C is consequential. The AO shall recalculate the charging of interest, if any, while giving effect to appellate order.

12. In the result, assessee’s appeal is partly allowed for statistical purposes.

Order pronounced in open court on 27-02-2015.

Sd/- Sd/-

(H.S. SIDHU) (S.V. MEHROTRA )

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 27-02-2015.