2015 (2) TMI 1164 - HC - Income Tax

Transfer pricing adjustment - Held that - Appeal admitted on the following reframed substantial questions of law ( a) Whether on the facts and circumstances of the case and in law the Tribunal was justified in admitting the fresh evidence in the form of calculations submitted in the chart furnished before the Tribunal by the Respondent Assessee for the first time during the hearing in violation of Rule 29 of the Appellate Tribunal Rules and these calculations were also not validated by the statutory auditors of the RespondentAssessee? (b) Whether on the facts and circumstances of the case and in law the Tribunal was right in directing the A. O. to simply verify the calculations submitted before it for the first time and not instead either upholding the order of the A. O or else setting aside the order to be made denovo as no statutorily audited AE & nonAE segment was available in the audit report of the Assessee? (c) Whether on the facts and circumstances of the case and in law the Tribunal was justified in giving directions to the A. O. to work out the ALP only with respect to international transactions of the Assessee with its AEs though the TNMM analysis was done by the TPO at the entity level as no statutorily audited AE and nonAE segment was available in the audit report of the Assessee and this was done by the A. O. in the spirit of the recognition in the OECD guidelines that in these circumstances comparison of net margin at entity level is the only practical way?

Summary

Issues:
1. Admission of fresh evidence by the Tribunal in violation of rules.
2. Direction given by the Tribunal to the Assessing Officer (AO) regarding verification of calculations.
3. Working out the Arm's Length Price (ALP) only with respect to international transactions.

Issue 1: Admission of Fresh Evidence
The appeal raised concerns about the Tribunal admitting fresh evidence in the form of calculations submitted by the Respondent Assessee during the hearing, which were not validated by statutory auditors. The Appellant questioned the justification of admitting such evidence, especially considering the violation of Rule 29 of the Appellate Tribunal Rules. The issue highlighted the procedural aspect of admitting new evidence during the appeal process and the impact of such evidence on the overall assessment.

Issue 2: Tribunal's Direction to the Assessing Officer
Another substantial question of law revolved around the Tribunal's directive to the Assessing Officer to verify the calculations submitted by the Assessee instead of upholding the AO's order or initiating a denovo assessment. The Appellant contested the Tribunal's decision, questioning whether the AO should have been directed to simply verify the calculations or whether a more comprehensive review of the assessment was warranted. This issue delved into the Tribunal's authority to guide the AO's actions and the scope of review in such cases.

Issue 3: Arm's Length Price Calculation
The third issue pertained to the Tribunal's instruction to the AO to work out the Arm's Length Price (ALP) solely concerning international transactions, despite the TNMM analysis conducted by the Transfer Pricing Officer (TPO) at the entity level. The absence of statutorily audited AE and non-AE segment in the Assessee's audit report was highlighted, leading to a debate on the practicality of comparing net margins at the entity level. The issue raised questions about the appropriate methodology for determining ALP in the absence of specific audit segments and the relevance of international transactions in this context.

Overall, the judgment addressed significant procedural and substantive issues related to the admission of evidence, the direction given to the Assessing Officer, and the methodology for calculating the Arm's Length Price in the context of international transactions. The analysis provided insights into the legal complexities surrounding tax assessments and the interpretation of rules and guidelines governing such proceedings.