2014 (4) TMI 468 - AT - Income Tax

Benefit u/s 92C(2) - CIT(A) gave benefit of safe-harbour of 5% under 2nd proviso to Section 92C(2) Held that - Ld. DR has no objection to restore matter to CIT(A) to decide same afresh on merits by a speaking order - Set aside impugned order of CIT(A) and restore matter to file of CIT(A) with direction to decide issue/grounds of appeal taken by assessee on merits by reasoned order after giving due opportunity of hearing to parties as per law - Hence Grounds of appeal taken by Revenue as well as by assessee in cross-objection are allowed Decided partly in favour of Revenue.

Summary

Issues:
1. Benefit of safe-harbour under Section 92C(2)
2. Disregarding benchmarking analysis and comparable companies
3. Conducting fresh benchmarking analysis using non-contemporaneous data
4. Selection of alleged comparable companies with arbitrary search strategy
5. Using data obtained under section 133(6) not available in public domain
6. Functional non-comparability of services
7. Comparing different types of services for ALP determination
8. Inconsistent criteria for rejecting comparables
9. Reliability of margins/book results of selected companies
10. Selection of companies with significantly high turnover
11. Computing margin of alleged comparables based on multiple year financial data
12. Risk adjustment for international transactions
13. Erroneous reasons for making income adjustment
14. Motive to shift profits outside of India

Analysis:
1. The appeal was filed by the department against the order of the ld. CIT(A) for assessment year 2007-08, challenging the benefit of safe-harbour of 5% under the 2nd proviso to Section 92C(2). The department argued that this safe-harbour is not a standard deduction as per the Memorandum to the Finance Bill and CBDT Notification. The assessee also filed a cross-objection disputing the TPO's benchmarking analysis and selection of comparable companies based on contemporaneous data. The grounds raised by the assessee covered various aspects, including the comparability analysis, use of non-contemporaneous data, selection of comparables, and rejection of certain companies based on margins and turnover.

2. The TPO computed an adjustment to the Arm's Length Price (ALP) for international transactions, leading to an addition to the assessee's income. The TPO's approach in selecting comparables and conducting benchmarking analysis was contested by the assessee before the ld. CIT(A). The assessee also challenged the denial of a 5% deduction from the ALP, arguing that the amendment to Section 92C(2) cannot have retrospective effect for the relevant assessment year. The ld. CIT(A) allowed the benefit of -5% deduction, citing a previous ITAT decision, and did not adjudicate on other grounds raised by the assessee.

3. During the hearing, the representatives discussed the appeal and cross-objection, with the assessee seeking a decision on the merits of the other grounds not adjudicated by the ld. CIT(A). The matter was then restored to the ld. CIT(A) for a fresh decision on the issue/grounds of appeal taken by the assessee. The order of the ld. CIT(A) was set aside, and the matter was directed to be decided after giving due opportunity of hearing to the parties. Both the appeal of the department and the cross-objection filed by the assessee were allowed for statistical purposes, leading to the final decision pronounced in the open court on 25 October 2013.