2016 (4) TMI 1176 - AT - Income Tax

TP adjustment - whether the TPO has erred in not considering correct OP/TC margin of M/s. M.N. Dastur & Company (P.) Ltd. of 0.18% and thereafter failed to comply with the directions issued by the ld. DRP? - Held that - Undisputedly, during the rectification proceedings filed before TPO u/s 144 by the assessee, correct computation of OP/TC method of M/s. M.N. Dastur & Co. Pvt. Ltd. of 0.18% was filed which was verified by the TPO and has not disputed the same in any manner. At the same time, the AO has also allowed to perpetuate the error committed by the TPO in considering the OP/TC margin of M/s. M.N. Dastur & Co. Pvt. Ltd. by recording its OP/TC margin at 8.46% instead of actual OP/TC margin of 0.18%. So, we are of the considered view that the matter is required to be restored to the TPO to decide the matter afresh by taking actual margin of OP/TC by M/s. M.N. Dastur & Co. Pvt. Ltd. and then to compute the adjustment of transfer pricing. Consequently, ground determined in favour of the assessee. Including functionally dissimilar companies as comparable - Held that - From the given guidelines it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case except pointing out various risks the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken by the comparables or not and if so how these risks affected each of them and whether such adjustment would improve the comparability It may also be mentioned that it is incorrect to say that the taxpayer is working Virtually in a risk free environment. As mentioned above the taxpayer too bears several risks like technology risk, foreign exchange risk, manpower risk, etc. No doubt, the assessee company has claimed risk adjustment during TP proceedings for benchmarking with the comparable companies but the detail of the risk adjustment sought for by the assessee is not available on the file. So, we are of the considered view that assessee is to provide the details of the risk adjustment sought for and in case, it comes within / - 5% then no such benefit is to be given. Otherwise, TPO is directed to decide the matter afresh after providing an opportunity of being heard. - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Validity of the Assessment Order
2. Jurisdictional Error in Reference to TPO
3. Non-consideration of Correct OP/TC Margin
4. Enhancement of Income by ?31,301,467
5. Initiation of Penalty Proceedings
6. Non-allowance of Tax Credit
7. Levy of Interest u/s 234B

Detailed Analysis:

Issue 1: Validity of the Assessment Order
The assessee argued that the Assessment Order passed by the AO, in accordance with the directions of the DRP, was vitiated due to a lack of appropriate application of mind. However, this ground was not pressed by the assessee during the hearing.

Issue 2: Jurisdictional Error in Reference to TPO
The assessee claimed that the reference made u/s 143(2) of the Act by the AO to the TPO suffered from a jurisdictional error as no reasons were recorded in the draft assessment order. This issue was also not pressed by the assessee during the hearing.

Issue 3: Non-consideration of Correct OP/TC Margin
The core issue was whether the TPO erred in not considering the correct OP/TC margin of M/s. M.N. Dastur & Co. Pvt. Ltd. at 0.18% as directed by the DRP. The Tribunal found that the TPO and AO failed to comply with the DRP's directions and incorrectly recorded the margin at 8.46%. The matter was restored to the TPO to decide afresh by taking the actual margin of 0.18%.

Issue 4: Enhancement of Income by ?31,301,467
The assessee contested the addition to its income by ?31,301,467, arguing that the TPO included functionally dissimilar companies as comparables. The Tribunal examined the functional profiles of the comparables:
- Mahindra Consulting Engineers Ltd.: Found functionally dissimilar and having significant related party transactions.
- Stup Consultants Pvt. Ltd.: Excluded due to functional dissimilarity and abnormal growth in turnover.
- Semac Ltd.: Excluded due to illegible annual report and lack of segmental information.

The Tribunal also directed the inclusion of three comparables: Projects & Development India Limited, Geometric Limited, and Kitco Limited, as they met the required filters.

Issue 5: Initiation of Penalty Proceedings
The assessee argued that the AO erred in initiating penalty proceedings u/s 271(1)(C) of the Act mechanically and without recording any satisfaction. This ground was not pressed by the assessee during the hearing.

Issue 6: Non-allowance of Tax Credit
The assessee contended that the AO erred in not allowing tax credit claimed in the return of income totaling ?7,958,453. The Tribunal did not specifically address this issue in the judgment.

Issue 7: Levy of Interest u/s 234B
The assessee argued that the AO erred in levying interest u/s 234B of the Act. This ground was not pressed by the assessee during the hearing.

Conclusion:
The Tribunal allowed the appeal for statistical purposes and restored the file to the TPO to decide afresh, particularly focusing on the correct OP/TC margin of M/s. M.N. Dastur & Co. Pvt. Ltd., and reconsidering the inclusion/exclusion of specific comparables. The TPO was directed to provide an opportunity of being heard to the assessee.