2013 (4) TMI 772 - AT - Income Tax

Summary

Issues Involved:
1. Upward adjustment in the Arm's Length Price (ALP) by Rs. 2,54,30,779.
2. Rejection of the approach adopted for transfer pricing analysis and contemporaneous documentation.
3. Non-consideration of expenses incurred in shifting office for determining operating expenses under TNMM method.

Summary:

Issue 1: Upward Adjustment in ALP
The primary issue in Grounds 1 to 4 is the upward adjustment in the ALP by Rs. 2,54,30,779. The assessee, engaged in providing services to its Associate Enterprises (AEs), filed a Transfer Pricing Study Report using the Cost Plus Method. The Transfer Pricing Officer (TPO) rejected this method, opting for the Transaction Net Margin Method (TNMM) instead. The TPO selected comparables from Prowess and Capitaline databases, specifically IOT Design and Engineering Ltd. and L&T Valdel Engineering Ltd., and calculated an arithmetic mean PLI of 17.30% against the assessee's 3.23%, leading to the adjustment. The Dispute Resolution Panel (DRP) upheld the TPO's findings, dismissing the assessee's comparables as randomly selected and biased. The Tribunal found that the DRP failed to address the functional comparability of the TPO's selected comparables and remanded the matter back to the DRP for a fresh adjudication, emphasizing the need for a detailed functional analysis.

Issue 2: Rejection of Transfer Pricing Approach
The DRP/TPO/AO rejected the approach adopted by the assessee for transfer pricing analysis, including the contemporaneous documentation. The Tribunal noted that the DRP dismissed the assessee's comparables without a proper functional analysis and remanded the issue back to the DRP for a detailed examination, ensuring a speaking order is passed.

Issue 3: Non-consideration of Office Shifting Expenses
In Ground No. 5, the assessee contended that the expenses of Rs. 77,56,037 incurred in shifting office should be considered in determining operating expenses under the TNMM method. However, no arguments were advanced by the assessee during the hearing, leading to the dismissal of this ground for want of prosecution.

Conclusion:
The appeal is partly allowed for statistical purposes, with the matter remanded to the DRP for a fresh adjudication on the functional comparability of the selected comparables and a detailed examination of the transfer pricing approach. The ground related to office shifting expenses is dismissed due to lack of prosecution.