2016 (4) TMI 1280 - AT - Income Tax

TPA - comparable selection criteria - Held that - the addition is to be confined only to the component of transactions with associate enterprises alone and not to the entire segmental results. Where separate data is not available, then the principle of proportionality is to be applied and where the data relating to control and uncontrolled cost price is not available, then proportionate sales relatable to international transactions with its associate enterprises i.e. controlled cost has to be worked out and the addition, if any, is to be confined to the component of international transactions with its associate enterprises alone and not to the entire segmental entity. Assessing Officer/TPO directed to consider profit margins of only engineering design services segment and the same be applied to benchmark the international transactions entered into by the assessee with its associate enterprises. The assessee was in the business of rendering designing and developing services relating to products in CAD/CAM of auto parts and also customer support servicing and techno marketing services to its associate enterprises i.e. TACO and Visteon International Holdings, USA, thus companies functionally dissimilar with that of assessee need not to be added to final comparable list. Erroneous computation of deduction under section 10A - claim of the assessee was rejected, in view of the assessee being agreed to exclude the expenditure incurred in foreign currency from export turnover and total turnover - Held that - In view of the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders Pvt. Ltd. (2012 (7) TMI 158 - BOMBAY HIGH COURT) the appellate authorities had power to consider the claim not made in the return of income. The Tribunal in turn, following the same directed the Assessing Officer to compute the deduction under section 10A of the Act as per law after giving an opportunity of hearing to the assessee. The learned Authorized Representative for the assessee pointed out that during the assessment proceedings relating to the instant assessment year i.e. 2009-10, this plea was raised before the Assessing Officer. However, following the consistency, since the issue has been set-aside to the file of Assessing Officer in the preceding year, we direct the Assessing Officer to compute the deduction under section 10A of the Act in accordance with law and in line with the directions of Tribunal in assessment year 2008-09. The Assessing Officer shall afford reasonable opportunity of hearing to the assessee. The ground of appeal No.11 raised by the assessee is thus, allowed for statistical purposes. The grounds of appeal raised by the assessee are partly allowed.

Issues Involved:
1. Transfer Pricing adjustment
2. Erroneous rejection of segmental profitability
3. Erroneous computation of adjustment
4. Search Matrix and FAR Analysis not shared
5. Erroneous selection of comparable companies
6. Erroneous application of export filter
7. Erroneous rejection of comparable companies
8. Erroneous computation of operating margins
9. Benefit of risk adjustment
10. Benefit of the variation/reduction of 5 percent from the arithmetic mean
11. Erroneous computation of deduction under section 10A
12. Initiation of penalty proceedings
13. Levy of interest obligation on account of transfer pricing adjustment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The learned DCIT, following the directions of the DRP, made an adjustment amounting to ?38,004,052 to the value of international transactions entered into by the appellant with its Associated Enterprise (AE) in respect of the provision of Engineering Design Services. The Tribunal noted that the TPO had selected a fresh set of comparables, and the arithmetic mean PLI of the comparables was computed at 34.86%. The Tribunal directed the Assessing Officer to re-compute the PLI of the segment consisting of international transactions after affording a reasonable opportunity of hearing to the assessee.

2. Erroneous Rejection of Segmental Profitability:
The Tribunal found merit in the assessee's claim that only segmental profitability pertaining to the international transaction with its AEs should be considered. The Tribunal directed the Assessing Officer/TPO to re-work the PLI based on the segmental profitability of the engineering design services provided to AEs, following the decision in the assessee's own case for the assessment year 2008-09.

3. Erroneous Computation of Adjustment:
The Tribunal held that the adjustment should be limited to the international transactions with AEs and not to the entire transactions in the segment. The principle of proportionality should be applied where separate data is not available. The addition should be confined to the component of international transactions with AEs alone.

4. Search Matrix and FAR Analysis Not Shared:
The Tribunal did not provide specific directions on this issue but emphasized the need for transparency and sharing relevant information with the assessee.

5. Erroneous Selection of Comparable Companies:
The Tribunal directed the exclusion of certain companies from the final set of comparables based on functional dissimilarity and super normal profits. Specifically, Acropetal Technologies Ltd. and Genesys International Corporation Ltd. were excluded. The Tribunal directed the TPO to consider only the profit margins of the engineering design services segment of Acropetal Technologies Ltd.

6. Erroneous Application of Export Filter:
The Tribunal did not provide specific directions on this issue but emphasized the need for proper application of filters in selecting comparables.

7. Erroneous Rejection of Comparable Companies:
The Tribunal directed the inclusion of ICRA Techno Analytics Limited as a comparable company, following the decision in the assessee's own case for the assessment year 2008-09.

8. Erroneous Computation of Operating Margins:
The Tribunal directed the TPO to re-compute the operating margins of the comparable companies correctly, considering the errors pointed out by the assessee.

9. Benefit of Risk Adjustment:
The Tribunal restored the issue of risk adjustment to the file of the Assessing Officer/TPO to consider the claim of the assessee and decide in accordance with the law, following the decision in the assessee's own case for the assessment year 2008-09.

10. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:
The Tribunal did not provide specific directions on this issue but emphasized the need to consider the benefit of +/- 5 percent as per the proviso to section 92C(2) of the Act.

11. Erroneous Computation of Deduction under Section 10A:
The Tribunal directed the Assessing Officer to compute the deduction under section 10A of the Act in accordance with the law and in line with the directions of the Tribunal in the assessee's own case for the assessment year 2008-09.

12. Initiation of Penalty Proceedings:
The Tribunal did not provide specific directions on this issue but emphasized the need for proper consideration of facts before initiating penalty proceedings.

13. Levy of Interest Obligation on Account of Transfer Pricing Adjustment:
The Tribunal did not provide specific directions on this issue but emphasized the need for proper computation of interest under section 234B of the Act.

Conclusion:
The appeal of the assessee was partly allowed, with directions for re-computation and reconsideration of several issues by the Assessing Officer/TPO, following the principles laid down in the assessee's own case for the assessment year 2008-09. The Tribunal emphasized the need for transparency, proper application of filters, and consideration of segmental profitability in transfer pricing adjustments.

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