2015 (1) TMI 1064 - AT - Income Tax

Transfer pricing adjustment - Held that - In view of the detailed findings and reasons considering the evidence filed and the arguments on behalf of the parties, we deem it appropriate to restore the issue back to the file of the TPO with the direction that the assessee shall place a copy of the Articles & Memorandum of Association before the TPO and address the primary object for which the assessee was incorporated. The assessee shall also categorically take a stand whether there is any other agreement linked to address its stated claim of providing sales and support services sales made through AEs or VARs. The taxpayer shall ensure that it is made available to the TPO. All the relevant evidences including the specific document on the basis of which the services have been called upon for rendering and the basis on which the invoices have been raised needs to be made available to the Revenue. The evidence placed on record in the absence of any explanation as to how the figures have been arrived at in the invoice cannot be said to be sufficient and cogent evidence. Needless to say that apart from above direction the TPO is at a liberty to call for any other document as proof of evidence which he so considers it necessary for deciding the issue. Similarly the assessee is also at liberty to place fresh evidence if any in support of its claim. The TPO thereafter shall consider the same and shall pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. Needless to say that the TPO after a FAR analysis characterizing the assessee shall carry out the exercise of search for comparables in order to decide whether the transaction is at arms length or not. - Decided in favour of assessee for statistical purposes.

Issues Involved:

1. Assessment of total income.
2. Transfer pricing adjustment for Business Support Services (BSS).
3. Rejection of economic analysis and FAR profile.
4. Selection and rejection of comparable companies.
5. Denial of 5 percent range benefit.
6. Denial of economic/risk adjustments.
7. Use of multiple year data for arm's length price determination.
8. Disallowance of business expenditure as capital in nature.
9. Credit of tax deducted at source.
10. Partial relief in relation to tax credit under DTAA.
11. Levy of interest under sections 234B and 234D and withdrawal of interest under section 244A.

Detailed Analysis:

1. Assessment of Total Income:
The AO assessed the total income of the appellant at Rs. 17,05,43,540 against the returned income of Rs. 7,62,84,060 under section 143(3) r.w.s 144C(13) of the Act. The appellant contested the adjustment made by the AO, which was upheld by the DRP.

2. Transfer Pricing Adjustment for BSS:
The AO/TPO made an adjustment of Rs. 9,28,51,374 regarding the international transaction for BSS provided by the appellant to its AE, claiming it was not at arm's length per sections 92C(1) and 92C(2) of the Act, read with rule 10D of the Income-tax Rules, 1962. The appellant argued that the FAR analysis was not correctly understood by the Revenue, leading to a mischaracterization of the appellant as a technical service provider instead of a business support service provider.

3. Rejection of Economic Analysis and FAR Profile:
The AO/DRP/TPO rejected the economic analysis and FAR profile undertaken by the appellant. The appellant contended that the Revenue failed to appreciate the necessity of having qualified staff to provide business support services for complex products, leading to an incorrect characterization.

4. Selection and Rejection of Comparable Companies:
The AO/DRP/TPO arbitrarily rejected the comparable companies selected by the appellant and selected functionally non-comparable companies using subjective filters. The appellant argued that the selection of comparables should be based on a correct FAR analysis.

5. Denial of 5 Percent Range Benefit:
The AO/DRP/TPO did not provide the appellant the benefit of the 5 percent range as provided by the proviso of section 92C(2) of the Act.

6. Denial of Economic/Risk Adjustments:
The AO/DRP/TPO denied the appellant the benefit of economic/risk adjustments, which the appellant claimed were necessary for a meaningful comparison.

7. Use of Multiple Year Data for Arm's Length Price Determination:
The AO/DRP ignored the provisions of Rule 10B(4) and judicial pronouncements advocating the use of multiple year data for determining the arm's length price. The appellant did not press this ground.

8. Disallowance of Business Expenditure as Capital in Nature:
The AO/DRP disallowed an expenditure of Rs. 14,08,104 incurred for business purposes, alleging it to be capital in nature. The DRP directed the AO to verify the expenditure for deductibility under sections 30, 31, and 37 of the Act, which the appellant argued was beyond the DRP's powers under section 144C(8).

9. Credit of Tax Deducted at Source:
The AO did not give credit for tax deducted at source amounting to Rs. 11,49,518. The appellant did not press this ground.

10. Partial Relief in Relation to Tax Credit under DTAA:
The AO granted only partial relief concerning tax credit available under section 90 of the Act read with Article 23 of the DTAA between India and Japan. The appellant did not press this ground.

11. Levy of Interest under Sections 234B and 234D and Withdrawal of Interest under Section 244A:
The AO levied interest under sections 234B and 234D and withdrew interest under section 244A. This ground was consequential.

Conclusion:
The Tribunal restored the issue back to the TPO for reconsideration, directing the appellant to provide all relevant documents, including the Memorandum and Articles of Association, agreements with AEs, and supporting documents for invoices. The TPO was instructed to conduct a fresh FAR analysis and search for comparables to determine if the transaction is at arm's length. The appeal was allowed for statistical purposes.

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