2019 (2) TMI 1805 - AT - Income Tax

TP Adjustment - selection of comparable - companies as found to be fully owned by the Government they cannot be treated as comparable - HELD THAT - As decided in own case 2018 (1) TMI 1566 - ITAT MUMBAI excluding companies from the list of comparables on the reasoning that they are Government Companies. Since the Tribunal has already decided the issue in respect of the very same comparables in assessee s own case in the preceding assessment years respectfully following the aforesaid decisions of the Tribunal we exclude Engineers India Ltd. Rites Ltd. and WAPCOS Ltd. from the list of comparables and direct the Assessing Officer to compute the arm s length price accordingly. Considering the submissions of the learned Authorised Representative that upon exclusion of these three comparables the margin shown by the assessee would fall within 5% of the average margin of the remaining comparables hence no adjustment is required to be made to the arm s length price.

Summary

Issues:
1. Transfer pricing adjustment challenge by the assessee.
2. Exclusion of Government Companies as comparables.
3. Disallowance under section 14A of the Act.
4. Revenue's challenge regarding acceptance of M.N. Dastur & Co. Pvt. Ltd. as a comparable.

Transfer Pricing Adjustment Challenge:
The appeal involved cross appeals by the assessee and the Revenue challenging the assessment order under sections 143(3) and 144C(13) of the Income Tax Act, 1961 for the assessment year 2011-12. The dispute primarily revolved around the addition made on account of transfer pricing adjustment. The Transfer Pricing Officer rejected certain comparables selected by the assessee and independently chose others, resulting in an adjustment to the arm's length price. The DRP granted partial relief to the assessee by accepting one comparable. The issue of comparability of Government Companies was raised, with the Tribunal ultimately excluding Engineers India Ltd., Rites Ltd., and WAPCOS Ltd. from the list of comparables based on precedents from earlier assessment years. This exclusion led to no adjustment being required to the arm's length price, rendering other grounds raised by the assessee on the transfer pricing adjustment of academic importance.

Exclusion of Government Companies as Comparables:
The assessee argued that Government Companies like Engineers India Ltd., Rites Ltd., and WAPCOS Ltd. should not be treated as comparables due to their different dynamics and lack of profit motive. The Tribunal, citing precedents from earlier assessment years, agreed with the assessee's position and excluded these companies from the list of comparables. This exclusion was based on the understanding that Government Companies cannot be directly compared to private entities driven by profit motives, leading to the direction for the Assessing Officer to compute the arm's length price accordingly.

Disallowance under Section 14A of the Act:
The assessee challenged the disallowance of a specific amount under section 14A of the Act, contending that no disallowance should be made as no exempt income was earned during the relevant assessment year. While the Tribunal agreed with the principle that no disallowance should be made in the absence of exempt income, the ground was dismissed as not pressed due to the smallness of the addition, as per the submissions of the authorized representative.

Revenue's Challenge Regarding M.N. Dastur & Co. Pvt. Ltd. as a Comparable:
The Revenue challenged the acceptance of M.N. Dastur & Co. Pvt. Ltd. as a comparable by the DRP. The Transfer Pricing Officer had rejected this company citing involvement in other activities besides engineering services. However, the DRP found that the company's functional profile and revenue composition aligned closely with the assessee, leading to its acceptance as a comparable. The Tribunal upheld the decision of the DRP on the issue of comparability, dismissing the ground raised by the Revenue.

In conclusion, the Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal. The exclusion of certain comparables, the treatment of Government Companies, and the acceptance of M.N. Dastur & Co. Pvt. Ltd. as a comparable were the key determinants in resolving the transfer pricing adjustment challenge and the Revenue's appeal.