2016 (7) TMI 1326 - AT - Income Tax

TPA - selection procedure of comparable - Held that - The assessee company was engaged in the business of export of customized electronic data in the form of designs drawings calculations and other relevant datasheet relating to Project Engineering and Commercial Solutions for power plant refinery petrochemical plant etc. thus companies dissimilar with that of assessee need to be deselected.

Issues Involved:
1. Addition to returned income by recomputing arm's length price of international transactions.
2. Rejection and acceptance of comparable companies.
3. Segmental accounts furnished by the appellant.
4. Directions of the DRP on segmental margins.
5. Imputation of interest on receivables.
6. Interest charged under sections 234B and 234C.
7. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Addition to Returned Income by Recomputing Arm's Length Price:
The appellant contested the addition of INR 25,92,72,701/- to their income by the AO/TPO/DRP. The main contention was the rejection of comparable companies selected by the appellant and the inclusion of functionally dissimilar companies, government-held enterprises, and high turnover companies. The TPO recalculated the PLI and required a fresh search, rejecting several comparables offered by the appellant and introducing new ones. The DRP directed the exclusion of some comparables and the inclusion of others, but the appellant argued that the directions were not fully complied with.

2. Rejection and Acceptance of Comparable Companies:
The appellant challenged the selection and rejection of comparables by the TPO and DRP. They argued that government-owned enterprises and those affiliated with government projects should be excluded as they enjoy preferential treatment, impacting their profit margins. The appellant cited past precedents where such companies were excluded. The Tribunal agreed with the appellant, noting that these companies operate under different market conditions and should not be considered comparables.

3. Segmental Accounts Furnished by the Appellant:
The appellant argued that the segmental accounts prepared by them were rejected by the TPO without valid reasons. They contended that the TPO's reallocation of expenses and the inclusion of reimbursements in the revenue and expenses were inappropriate. The Tribunal noted that the DRP's directions to apply segment results consistently across all segments were not followed, leading to the appellant's grievance.

4. Directions of the DRP on Segmental Margins:
The DRP directed the TPO to apply segment results consistently across all segments. The appellant argued that if the segmental accounts were redrawn as per the DRP's directions, the adjustments in the FAS and IT Infra segments would be reduced to nil. The Tribunal found that the DRP's directions were not fully complied with and restored the issue to the TPO for fresh adjudication.

5. Imputation of Interest on Receivables:
The appellant contested the enhancement of income by INR 10,58,456 by imputing interest on receivables beyond the credit period. They argued that the TPO selected an ad hoc credit period and interest rate without considering detailed submissions. The Tribunal restored the issue to the TPO to consider the facts and the appellant's arguments.

6. Interest Charged Under Sections 234B and 234C:
The appellant contested the interest charged under sections 234B and 234C amounting to INR 5,16,24,544 and INR 10,61,745 respectively. The Tribunal did not specifically address this issue in the judgment.

7. Initiation of Penalty Proceedings Under Section 271(1)(c):
The appellant contested the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not specifically address this issue in the judgment.

Conclusion:
The Tribunal found merit in the appellant's arguments regarding the selection and rejection of comparables and the application of segment results. The issues were restored to the TPO for fresh adjudication, with directions to consider the appellant's arguments and comply with the DRP's directions. The appeal was partly allowed for statistical purposes.

← Previous Next →