2014 (1) TMI 954 - AT - Income Tax

Reasons recorded for computation of ALP u/s 92CA(1) of the Act Compliance of section 92C(3) of the Act Held that - The company does not have any reportable related party transactions which have a bearing on the operating profits of the company - TPO has failed to notice that the Ma Foi data for December 2007 has substantial portion i.e. 9 months data that falls within the FY 2007-08 - Comparable companies draw up their financial statements for statutory purposes under the Companies Act, 1956, which are considered for comparability - The financial statements may be independently drawn up for tax purposes as of March 31 - The Companies are free to adopt different statutory year-ends, which may or may not coincide with the March year end - The fact that a company has a statutory year-end on December 31, 2007 as against the financial year end for tax purposes of March 31, 2008 does not by itself render that company incomparable, for the reason that the financial information is very much contemporaneous and falls within the period permitted by the Income-tax Rules, 1962. There is no difference, in view of DRP, between Personal Employer Organisation (PEO) and recruitment agency functionally - The revenue model may be different but that is an accounting issue, functionally there is no difference - The reason for recruitment from India is to avail, the services at a particular price - The detailed objections raised by counsel for the assessee and DRP has not considered the objections of the assessee and merely held that Info Edge (India) Ltd. and Overseas Manpower Corporation Ltd. are functionally same as the assessee - in Assessment Year 2007-08 the matter has already been restored back to the file of the DRP - keeping in the view the entire conspectus of the case and in the light of the submissions made by counsel for the assessee and the findings recorded by the DRP the matter is required to be remitted back to the DRP/AO for re-adjudication Decided in favour of Assessee.

Issues Involved:
1. Jurisdictional error in the reference to TPO.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Rejection of comparables and selection of inappropriate comparables.
4. Treatment of reimbursement of expenses.
5. Misconstruing business model.
6. Initiation of penalty under section 271(1)(c).
7. Computation of interest under sections 234B and 234D.

Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The assessee argued that the reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) suffered from a jurisdictional error due to the absence of recorded reasons in the assessment order justifying the necessity or expediency of such a reference as required under section 92CA(1) of the Income-tax Act.

2. Determination of Arm's Length Price (ALP) for International Transactions:
The assessee employed the Transactional Net Margin Method (TNMM) and used Operating Profit/Total Cost (OP/TC) as its Profit Level Indicator (PLI). The average margin of 13 foreign comparables was 3.43%, while the assessee's margin was 5.8%. The TPO, however, selected a different set of comparables, determining an average margin of 17.87% and computed an adjustment under section 92CA at Rs. 5,12,05,343.

3. Rejection of Comparables and Selection of Inappropriate Comparables:
The TPO rejected the assessee's comparables and included Overseas Manpower Corporation Ltd. and Info Edge (India) Ltd., which the assessee contended were functionally different as they were recruitment agencies, not Professional Employer Organizations (PEOs). The assessee argued that the revenue model and cost structures of PEOs and recruitment agencies are fundamentally different, making them unsuitable for comparison. The assessee also contested the rejection of Adecco Flexione Workforce Solutions Pvt. Ltd. and Ma Foi Management Consultants Ltd. as comparables.

4. Treatment of Reimbursement of Expenses:
The assessee argued that the reimbursement of expenses by Associated Enterprises (AEs) should be treated as a "pass-through" transaction without any markup, as it does not generate revenue for the assessee.

5. Misconstruing Business Model:
The assessee contended that its business model was akin to a Professional Employer Organization (PEO) and not a recruitment agency. The assessee argued that the TPO and DRP failed to recognize this distinction, leading to erroneous comparisons and adjustments.

6. Initiation of Penalty under Section 271(1)(c):
The assessee claimed that the initiation of penalty under section 271(1)(c) was mechanical and without proper satisfaction recorded by the AO.

7. Computation of Interest under Sections 234B and 234D:
The assessee argued that the computation of interest under sections 234B and 234D was done mechanically without satisfactory reasons.

Tribunal's Decision:
The Tribunal noted that the Dispute Resolution Panel (DRP) had not adequately considered the objections raised by the assessee, particularly regarding the functional differences between PEOs and recruitment agencies. The Tribunal observed that the DRP's order lacked detailed reasoning and merely concurred with the TPO's findings without addressing the assessee's contentions.

Given the detailed objections and the inadequacy of the DRP's reasoning, the Tribunal decided to set aside the DRP/AO's order and restore the matter to the DRP for re-adjudication. The DRP was directed to pass a speaking order after thoroughly considering the assessee's contentions.

Conclusion:
The appeal was allowed for statistical purposes, and the matter was remanded to the DRP for fresh consideration and a detailed order addressing the assessee's objections.

← Previous Next →