The Delhi Bench of Income Tax Appellate Tribunal(ITAT) directed the inclusion of Magma Advisory Services Ltd. as a comparable, rejecting its exclusion based on negative cash flow.
Honda R & D (India) P. Ltd., appellant-assessee,challenged the assessment order dated 30.04.2021 for the assessment year 2016-17. The key issue under consideration was the exclusion of Magma Advisory Services Ltd. from the list of comparables by the Transfer Pricing Officer (TPO).
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The Delhi Bench of Income Tax Appellate Tribunal(ITAT) directed the inclusion of Magma Advisory Services Ltd. as a comparable, rejecting its exclusion based on negative cash flow.
Honda R & D (India) P. Ltd., appellant-assessee,challenged the assessment order dated 30.04.2021 for the assessment year 2016-17. The key issue under consideration was the exclusion of Magma Advisory Services Ltd. from the list of comparables by the Transfer Pricing Officer (TPO).
The -assessee contended that Magma was wrongly excluded on the basis of persistent negative cash flow, as stated by the TPO. It was argued that Magma was not a persistent loss-making company, with financial records showing profits in the financial years 2014-15 and 2015-16. Additionally, it was asserted that Magma was functionally comparable, and the TPO had not raised any objections regarding functional disparity.
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The Department argued that Magma was functionally different from the assessee, claiming it was engaged in manpower services, advisory services, market research, and other activities, whereas the assessee was involved in market research and testing services for its Associated Enterprises (AE).
However, the Tribunal noted that the TPO had not cited functional disparity as a reason for exclusion and only relied on negative cash flow, which was found to be incorrect.
The two members comprising Vikas Awasthy(Judicial Member) and Avdhesh Kumar Mishra(Accountant Member) reviewed the financials of Magma and observed that the company had not suffered consecutive losses, making it ineligible for exclusion based on persistent negative cash flow. Furthermore, past judicial pronouncements, including a ruling from the Delhi High Court, established that the assessee was engaged in market research and testing services rather than research and development (R&D) activities, thereby countering the Department’s argument on functional disparity.
Based on these findings, the tribunal directed the AO or TPO to include Magma Advisory Services Ltd. in the list of comparables, concluding that its exclusion was unjustified.
In short,the appeal was partly allowed.
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