Transfer Pricing Adjustments for Contract R&D Service Providers: Honda R&D (India) Private Limited Vs DCIT (ITAT Delhi)
Case Background and Overview
The ITAT Delhi adjudicated an appeal filed by Honda R&D (India) Private Limited against the order passed by the Dispute Resolution Panel, New Delhi, pertaining to Assessment Year 2011-12. The appeal arose from an intimation order dated 11-11-2022 passed under Section 143(1) of the Income Tax Act, 1961.
The assessee, a wholly owned Indian subsidiary of Honda R&D Co. Ltd., Japan, was incorporated under the Companies Act, 1956. Its principal activity involved rendering market research and testing services to its Associated Enterprise (AE), i.e., Honda R&D Japan, which in turn provided R&D services to all Honda Group entities globally. The assessee was remunerated on a cost-plus markup basis for these services.
The assessee filed its return of income on 16-11-2011 declaring total income of Rs. 82,33,481/-. Since international transactions with associated enterprises were involved, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO), New Delhi under Section 92CA(1) of the Income Tax Act, 1961.
Transfer Pricing Transactions Under Scrutiny
The assessee had undertaken the following international transactions, benchmarked using the Transactional Net Margin Method (TNMM):
| Nature of Transaction | Method | ALP as Per Assessee |
|---|---|---|
| Provision of Market Support and Testing Services | TNMM | Rs. 29,48,03,877/- |
| Reimbursement of Expenses by AE to the Assessee | NA | Rs. 8,84,259/- |
| Reimbursement of Expenses by Assessee to AE | NA | Rs. 1,07,577/- |
The TPO, after conducting a detailed search and applying an accept/reject matrix, arrived at a final set of 9 comparable companies with an arithmetic mean margin of 20.03%, resulting in a proposed transfer pricing adjustment of Rs. 4,81,69,158/-. The AO subsequently proposed to assess the assessee's income at Rs. 5,64,09,439/-, as against the returned income of Rs. 82,33,481/-.
Grounds of Appeal
The assessee raised multiple grounds before the Tribunal, including:
- Wrongful enhancement of assessed income from Rs. 82,33,481/- to Rs. 3,50,07,560/-
- Erroneous rejection of certain comparable companies without proper functional analysis
- Misapprehension of the assessee's business model and limited-risk operating environment
- Inconsistent treatment of India Tourism Development Corporation Limited (ITDC)
- Inconsistent treatment of Inhouse Production Limited (Healthcare Segment)
- Incorrect classification of Elbit Diagnostics Limited as a persistent loss-making entity
- Failure to recognise the assessee's "No Risk" status and non-grant of appropriate risk adjustment
- Erroneous determination of arm's length price despite absence of conditions under
Section 92C(3) - Rejection of multiple-year data under
Rule 10B(4)of the Income Tax Rules, 1962 - Non-application of the 5% variation benefit under the proviso to
Section 92C(2)of the Act
Key Issue 1: Comparable Selection — Inclusion and Exclusion
India Tourism Development Corporation Limited (ITDC)
The TPO had rejected ITDC as a comparable on two grounds — an alleged name change and the contention that its primary income was derived from interest. The TPO also treated ITDC as a persistent loss-making company.
The assessee's representative argued that:
- The annual report of ITDC was publicly available and confirmed no name change had occurred
- ITDC had earned profits in the ARM Segment during AY 2010-11
- The DRP itself had accepted ITDC as a valid comparable in AY 2010-11
The Tribunal noted that the TPO had misquoted the loss data relating to ITDC. It relied upon the coordinate bench ruling in Yazaki India Private Limited (Formerly Known as Yazaki India Limited) vs. DCIT, ITA No. 621/PUN/2014, which in turn considered the jurisdictional High Court ruling in CIT vs. Goldman Sachs (India) Securities (P) Ltd. (2016) 290 CTR 236 (Bom).