2016 (6) TMI 1296 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee as ITES provided by the assessee to its Associated Enterprises (AEs) have operating profit cost at 14.36%.thus companies functionally dissimilar with that of assessee need to be deselected from final list. Section 10A deduction - Held that - As relying on case of Wipro Ltd. case 2015 (10) TMI 826 - KARNATAKA HIGH COURT we direct the Assessing Officer to allow claim of deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation.

Issues Involved:

1. Legality of the assessment order.
2. Principles of natural justice.
3. Reference to Transfer Pricing Officer (TPO) for determining arm's length price.
4. Alleged motive of tax evasion.
5. Constitution of the Dispute Resolution Panel (DRP).
6. Applicability of Chapter X for additions.
7. Issuance of notices under Section 133(6) and opportunity for cross-examination.
8. Rejection of comparables and transfer pricing analysis.
9. Fresh transfer pricing analysis and inappropriate filters.
10. Selection of inappropriate comparables.
11. Rejection of appellant's proposed comparables.
12. Computation of operating margins.
13. Treatment of foreign exchange gain/loss and provision for bad debt.
14. Adjustments for enterprise and transactional level differences.
15. Justification of price based on a single comparable.
16. Benefit of the +/-5% range under Section 92C(2).
17. Calculation of deduction under Section 10A after setting off brought forward losses.
18. Levy of interest under Section 234B and 234D.

Detailed Analysis:

1. Legality of the Assessment Order:
The appellant challenged the legality of the assessment order passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961, arguing it was bad in law.

2. Principles of Natural Justice:
The appellant contended that the lower authorities disregarded the principles of natural justice in passing the order.

3. Reference to Transfer Pricing Officer (TPO):
The appellant argued against the reference made to the TPO for determining the arm's length price, suggesting it was unwarranted.

4. Alleged Motive of Tax Evasion:
The appellant claimed the order was passed without demonstrating that the appellant had a motive of tax evasion.

5. Constitution of the Dispute Resolution Panel (DRP):
The appellant questioned the constitution of the DRP, arguing it was bad in law as the members were jurisdictional Commissioner/Directors of Income Tax of the appellant.

6. Applicability of Chapter X for Additions:
The appellant argued that the charging or computation provision relating to income under "Profits & Gains of Business or Profession" does not include amounts computed under Chapter X, making the addition under Chapter X bad in law.

7. Issuance of Notices under Section 133(6):
The appellant contended that the process of issuing notices under Section 133(6) was flawed and relied upon without providing complete information and an opportunity to cross-examine the concerned companies.

8. Rejection of Comparables and Transfer Pricing Analysis:
The appellant challenged the rejection of comparables selected by them and the rejection of their transfer pricing analysis by the TPO/A.O.

9. Fresh Transfer Pricing Analysis and Inappropriate Filters:
The appellant argued against the fresh transfer pricing analysis conducted by the TPO/A.O. and the inappropriate filters adopted in this analysis.

10. Selection of Inappropriate Comparables:
The appellant contended that the TPO/A.O. selected inappropriate comparables for determining the arm's length price.

11. Rejection of Appellant's Proposed Comparables:
The appellant challenged the rejection of comparables proposed by them in the transfer pricing analysis.

12. Computation of Operating Margins:
The appellant argued against the computation of operating margins of comparables and the appellant by the TPO/A.O.

13. Treatment of Foreign Exchange Gain/Loss and Provision for Bad Debt:
The appellant contended that the TPO/A.O. inappropriately treated foreign exchange gain or loss and provision for bad debt as non-operating in nature.

14. Adjustments for Enterprise and Transactional Level Differences:
The appellant argued that proper adjustments were not made for enterprise-level and transactional-level differences between the appellant and the comparable companies.

15. Justification of Price Based on a Single Comparable:
The appellant contended that the law does not compel adopting many or any minimum companies as comparables and that the appellant could justify the price paid/charged based on any one comparable only.

16. Benefit of the +/-5% Range under Section 92C(2):
The appellant argued that they were not allowed the benefit of the +/-5% range mentioned in the proviso to Section 92C(2).

17. Calculation of Deduction under Section 10A:
The appellant challenged the calculation of deduction under Section 10A after setting off the brought forward business losses and unabsorbed depreciation allowances of preceding assessment years. The Tribunal directed the Assessing Officer to allow the claim of deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation, following the jurisdictional High Court's decisions.

18. Levy of Interest under Section 234B and 234D:
The appellant contested the levy of interest under Section 234B and 234D, which the Tribunal noted as mandatory and consequential.

Additional Grounds:
The appellant raised additional grounds regarding the application of employee cost filter, related party transaction filter at 15%, and rejection of certain comparables. The Tribunal admitted these additional grounds, noting that the objections raised by the appellant did not require any new fact or investigation for disposal.

Transfer Pricing Adjustment:
The Tribunal examined the functional comparability of several companies and directed the exclusion of certain companies from the list of comparables based on functional dissimilarity, RPT filter, and other criteria. The Tribunal also remanded some issues to the TPO/A.O. for further verification and examination.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain companies from the list of comparables, remanding some issues to the TPO/A.O. for further verification, and directing the Assessing Officer to allow the deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation. The levy of interest under Section 234B and 234D was noted as mandatory and consequential.

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