2013 (8) TMI 697 - AT - Income Tax

Transfer pricing - Order of Dispute Resolution Panel (DRP) - Non-speaking order not stating the objections raised by the assessee and the reasons have also not been given, simply the order of TPO and Assessing Officer are referred - Held that - The matter was referred to the DRP u/s 144C of the IT Act. Under sub-section (1) of Section 144C, the Assessing Officer is under an obligation to forward a draft of the proposed order of assessment to the assessee if he proposes to make on or after the first day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. Under sub-section (2) of Section 144, the assessee within 30 days of the receipt of such draft order can accept the variation made by the Assessing Officer or he can file objections either to Dispute Resolution Panel or to the Assessing Officer. Since the assessee had filed his objections with DRP, then, under sub-section (5) the DRP, upon receipt of objection is under obligation to issue directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment and under sub-section (6) such directions which are put up under sub-section (5) would be further considering the following documents (a) draft order; (b) the objection filed by the assessee; (c) the evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, valuation officer, or TPO or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be colleted by, it; and (g) result of any inquiry made by, or caused to be made by, it. Under sub-section (7), DRP is also authorized before issuing of direction under sub-section (5) to make such further inquiry, as it think fit or cause any further inquiry to be made by any income-tax authority and report the result of the same to it. Under sub-section (8) the DRP has power to confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further inquiry and passing of the assessment order. Under sub-section (11) no direction u/s sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue respectively. Under sub-section (12) directions under sub-section (5) cannot be passed after nine months from the end of the month in which draft order is forwarded to the eligible assessee. Under sub-section (13), on receipt of directions issued under subsection (5), the Assessing Officer has to pass the assessment order in conformity with the directions without providing any further opportunity of being heard to the assessee within one month from the end of the month in which such directions are received. The rejection of comparables are based on detailed reasoning and after applying reasonable filters. The denial of working capital adjustment as also capacity adjustment is based on cogent reasoning, use of current data has been found more appropriate and fresh search has been rejected as there is no valid reason. Similarly, the DRP has rejected the other grounds. Therefore, the order passed by the ld. DRP is a non-speaking order not stating the objections raised by the assessee and the reasons have also not been given as simply the order of TPO and Assessing Officer are referred - Order restored back to DRP to pass a speaking order stating all the objections of the assessee and disposing them by giving cogent reasons for adjudication of the objections of the assessee - Following decision of Evalueserve Com (P.) Ltd. v. Ward 11(2) 2011 (11) TMI 111 - ITAT, DELHI - Decided in favour of assessee.

Summary

Issues Involved:
1. Rejection of adjustment for extraordinary cost towards unutilized space.
2. Rejection of adjustment for extraordinary travel costs during start-up phase.
3. Rejection of adjustment for inauguration expenses incurred during start-up phase.
4. Determination of higher ALP by TPO.
5. Percentage adjustment.
6. Interest under section 234B of the Act.

Issue-wise Detailed Analysis:

1. Rejection of Adjustment for Extraordinary Cost Towards Unutilized Space:
The assessee argued that the DRP did not consider detailed submissions on each ground raised. The DRP reduced the claimed adjustment from 24% to 10.88%, directing the TPO to work out the excess rent payment for 7 months. The DRP's decision was based on the quantum of excess rent payment rather than the concept of adjustment itself.

2. Rejection of Adjustment for Extraordinary Travel Costs During Start-up Phase:
The DRP rejected the adjustment for high travel costs, deeming them normal costs unrelated to the start-up phase. The panel found the claim of these costs being extraordinary for transfer pricing purposes illogical. Therefore, no interference with the TPO's decision was deemed necessary.

3. Rejection of Adjustment for Inauguration Expenses Incurred During Start-up Phase:
Similarly, the DRP found no infirmity in the TPO's rejection of adjustment for inauguration expenses. These were also considered normal costs not warranting special treatment as start-up costs.

4. Determination of Higher ALP by TPO:
The assessee contested the comparables used by the TPO, who applied single-year data as per Rule 10B(4) of the Income-tax Rules, 1962. The DRP upheld the TPO's use of single-year data, stating that the assessee did not demonstrate any extraordinary market situations justifying the use of multi-year data. The DRP also reviewed and adjusted the list of comparables, removing some functionally dissimilar entities and retaining others deemed appropriate.

5. Percentage Adjustment:
The DRP clarified that the 5% adjustment is not a standard deduction but a limit to encourage market price dealings with AEs. The panel cited various rulings to support that the benefit of +/-5% is not universally applicable and is only available when the assessee computes the ALP. The assessee's ALP fell beyond the 5% margin, thus invalidating this objection.

6. Interest Under Section 234B of the Act:
The DRP stated that interest under section 234B is mandatory and compensatory, requiring the assessee to pay it. This ground of objection was thus dismissed.

Non-Speaking Order by DRP:
The Tribunal noted that the DRP's order was non-speaking, lacking detailed reasons for rejecting the assessee's submissions and case laws. Citing a similar case (Evalueserve Com (P.) Ltd. v. Ward 11(2)), the Tribunal emphasized the necessity for the DRP to provide cogent reasons for its decisions.

Tribunal's Decision:
The Tribunal set aside the DRP's order and remanded the matter for fresh adjudication, instructing the DRP to pass a detailed, speaking order addressing all objections with proper reasoning. The DRP is to allow the assessee a reasonable opportunity for a hearing before issuing its directions. Following the DRP's revised order, the Assessing Officer will pass a new order under section 144C(13) of the Act.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the DRP for a detailed re-evaluation of the assessee's objections.