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2011 (1) TMI 875 - AT - Income TaxArm s length price - Penalty u/s 271(1)(c) - Refrence to TPO - TNMM method - Non speaking order - The basis of addition to the returned income of the assessee is on account of difference in the arm s length price of transactions as declared by the assessee and as computed in order u/s 92CA(4) of the Act - The income computed as per the provisions of section 92CA of the Act is strongly based on the provisions of the Act and on settled principles of law by various judicial rulings Before DRP assessee had submitted the actual margin of the aforesaid companies along with their computations in the proceedings before the TPO, vide submissions dated 20.8.2009 (copy at APB 1, pages 181-200) - assessee claims that its transactions in its ITES segment were at arm s length on applying the wages/sales filter, or even without such application - The detailed objections raised by the assessee with regard to the adjustment made to its income from both its CSD as well as ITES segments have not been considered right from the very beginning, i.e., from the TPO to the DRP. This renders the Orders of the TPO and the AO to be non-speaking, so far as the objections raised by the assessee - in the case of Vodafone Essar Ltd. v. the Dispute Resolution Penal-II & Others , (2011 -TMI - 207599 - Delhi High Court), the jurisdictional High Court has held that it is obligatory for a judicial body like the Dispute Resolution Panel to pass a reasoned order - Appeal is allowed by way of remand to DRP
Issues Involved:
1. Validity of the draft assessment order. 2. Confirmation of the addition of Rs. 59,411,421 to the income of the appellant. 3. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the IT Act. Issue-wise Detailed Analysis: 1. Validity of the Draft Assessment Order: - The appellant raised a general ground stating that the draft assessment order passed by the AO is bad in law and void ab initio. However, this ground was not adjudicated as it was considered general and not requiring specific adjudication. 2. Confirmation of the Addition of Rs. 59,411,421: - Facts and Background: - The appellant, engaged in providing IT-enabled back office services (ITES) and Contract Software Development Services (CSD) to its group companies, claimed that its international transactions were at arm's length based on a benchmarking analysis using the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). - The Transfer Pricing Officer (TPO) made adjustments amounting to Rs. 59,411,421, which were upheld by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP). - CSD Segment Adjustments: - The TPO used four comparables, including Infosys Ltd. and Wipro Ltd., to benchmark the appellant's transactions, resulting in an arm's length DP/TC margin of 27.03% and an adjustment of Rs. 17,173,470. - The appellant objected to the inclusion of Infosys and Wipro, citing their diversified operations, ownership of proprietary products, onsite versus offshore services, and significant differences in turnover. - ITES Segment Adjustments: - The TPO rejected several comparables provided by the appellant and used four companies to benchmark the transactions, resulting in an arm's length OP/TC margin of 20.50% and an adjustment of Rs. 42,237,951. - The appellant objected to the rounding off of margins and the inconsistent application of the wages/sales ratio filter. - Objections and Non-Consideration: - The appellant's detailed objections were not considered by the TPO, AO, or DRP, rendering the orders non-speaking and unsustainable. - The Tribunal found that the objections raised by the appellant were valid and should have been considered. - Legal Provisions and Remand: - Section 144C of the IT Act mandates that the DRP must consider the objections, evidence, and reports before issuing directions. - The Tribunal cited the Supreme Court's ruling in "M/s Sahara India (Farms) v. CIT" and the Delhi High Court's ruling in "Vodafone Essar Ltd. v. the Dispute Resolution Panel-II & Others" to emphasize the necessity of reasoned orders. - The matter was remitted to the DRP for fresh consideration and decision in accordance with the law, ensuring proper opportunity for the appellant to present its case. 3. Initiation of Penalty Proceedings: - The appellant contended that the AO erred in initiating penalty proceedings under section 271(1)(c) read with section 274 of the IT Act. - In light of the remand of the main issue concerning the addition to the income, the issue of penalty proceedings was also remitted to the DRP for fresh consideration based on the outcome of the main issue. Conclusion: - The Tribunal remitted the matter to the DRP for fresh consideration of the appellant's objections regarding the adjustments made to its income from the CSD and ITES segments. - The issue of penalty proceedings was also remitted to the DRP to be decided afresh in accordance with the law. - The appeal filed by the appellant was treated as allowed for statistical purposes.
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