2015 (10) TMI 396 - AT - Income Tax

Rejection of the Appellant s TP documentation, comparable companies and analysis thereof - not considering and appreciating the business model of the Appellant and its AEs and classified it as a technical service provider - assessee i.e. AVLTC is a subsidiary of AVL India Private Limited who holds 70% of its shares and the remaining 30% shares are held by AVL Holding GmbH, Austria - Held that - DR who had initially taken the stand that non-discussion would amount to non-acceptance from a reading of the submissions was unable to point out whether the issue was considered at all. In the circumstances it was her submission that if the business model needs to be addressed first then the finding of the CIT(A) giving part relief to the assessee should also be set aside as the remaining issues in both the assessee s appeal and the department s appeal be treated on the same platform. Thus the grounds in the departmental appeal also should be restored back. The Ld. AR stated that qua the remaining grounds on behalf of the assessee the submissions are in the synopsis. However he agreed that in the circumstances the issue may be restored so as to address the first issue first. In the facts of the present case where the Ld. AR has taken the argument that the intensity of functions with the non-AEs are higher than the intensity of functions with the AE s the nuanced difference if any on the business model of the assessee has to be seen. This difference in the intensity of functions is stated to be impacting the characterization of the business model itself which difference is stated to be not considered either by the DRP or the TPO a position which is borne out from the record. We find that in the case of BMW India Pvt. Ltd. vs ACIT (2014 (11) TMI 266 - ITAT DELHI) while examining the plea of the tax payer that it was a routine distributor it was found on analyzing the Agreements and considering the conduct as borne out from the record that based on its intensity of functions performed that the tax payer was not a routine normal distributor. Analyzing the Agreements and the functions undertaken the tax payer s claim that it was a normal distributor was not accepted and the tax payer on an analysis of its Agreement with its AE was found to have performed a greater intensity of functions as opposed to a routine distributor who may not be called upon to perform the intensity of functions undertaken by the BMW. Thus the relevance of the intensity of functions performed as a relevant criteria for characterizing the tax payer as per judicial precedent is well-accepted. Consideration of the difference in the intensity of functions with non-AEs as comparable to lesser intensity of function with AE s also as per judicial precedent on facts is warranted. The objections to the business model as considered by the TPO we find were raised before the DRP and these remain unaddressed the said position is accepted by the parties. In these peculiar facts and circumstances, we find that the submissions of the Ld. Sr. DR inasmuch that the relief granted to the assessee relatable to the exclusion of a comparable challenged by the Revenue before this forum also needs to be set aside. The said approach would in all fairness be appropriate as once the entire edifice of the business model for non-appreciation of relevant facts is demolished the occasion to consider the appropriateness of selection of the comparables with the demolished edifice does not arise. Accordingly for the detailed reason given hereinabove and considering the arguments of the parties on the grounds agitated before us, we set aside the impugned order. The issues are restored back to the file of the AO/TPO with the above directions. TPO/AO is directed to pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. - Decided in favour of assessee and revenue by way of remand.

Issues Involved:
1. Rejection of the Appellant's TP documentation, comparable companies, and analysis thereof.
2. Classification of the Appellant as a "technical service provider".
3. Selection of comparable companies.
4. Treatment of loss on foreign exchange fluctuation as operating in nature.
5. Use of single year data vs. multiple year data.
6. Use of powers u/s 133(6) by the TPO.
7. Economic adjustments and correct computation of the margin of the appellant.
8. Deletion of M/s Semac Ltd. from the final list of comparables.
9. Addition made on account of provision of diminution of value of inventory.

Detailed Analysis:

1. Rejection of the Appellant's TP Documentation, Comparable Companies, and Analysis Thereof:
The appellant argued that the Transfer Pricing Officer (TPO) failed to appreciate the business model of the assessee, leading to mistakes in the selection of comparables. The TPO and the assessee agreed on using the Transactional Net Margin Method (TNMM) and Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI). However, due to a mischaracterization of the assessee's business model, the selection of comparables was flawed. The appellant requested a remand to the TPO to reconsider the business model and subsequently select appropriate comparables.

2. Classification of the Appellant as a "Technical Service Provider":
The appellant contended that the TPO wrongly classified it as a technical support service provider, which led to the selection of high-margin comparables engaged in high-end technical consultancy services. The appellant emphasized that its business model was not correctly appreciated, impacting the characterization and subsequent analysis.

3. Selection of Comparable Companies:
The appellant argued that the TPO selected companies that were not functionally comparable and rejected those that were. The CIT(A) partially accepted the appellant's objections but did not fully address the fundamental issue of the business model's characterization.

4. Treatment of Loss on Foreign Exchange Fluctuation as Operating in Nature:
The appellant contended that the CIT(A) erred in treating the loss on foreign exchange fluctuation as operating in nature for determining the margin. The appellant argued that even if treated as operating, the foreign exchange loss not related to international transactions should be excluded while computing the operating margin.

5. Use of Single Year Data vs. Multiple Year Data:
The CIT(A) and TPO's approach to using single-year data versus multiple-year data was contested. The CIT(A) did not provide a detailed discussion on this issue, which was raised by the appellant.

6. Use of Powers u/s 133(6) by the TPO:
The appellant raised concerns about the TPO's use of powers under section 133(6) of the Income Tax Act, 1961, which allows the TPO to gather information. The CIT(A) did not address this issue in detail.

7. Economic Adjustments and Correct Computation of the Margin of the Appellant:
The appellant argued for economic adjustments to be considered in the computation of margins. The CIT(A) did not provide a detailed discussion on this issue, leading to the appellant's dissatisfaction.

8. Deletion of M/s Semac Ltd. from the Final List of Comparables:
The Revenue contested the CIT(A)'s decision to delete M/s Semac Ltd. from the final list of comparables used by the TPO. The CIT(A) was criticized for making this decision based solely on the appellant's objections without a thorough examination of the facts or obtaining comments from the TPO.

9. Addition Made on Account of Provision of Diminution of Value of Inventory:
The Revenue challenged the CIT(A)'s deletion of the addition made on account of the provision for diminution of value of inventory. The Revenue argued that the appellant failed to provide relevant evidence during the assessment proceedings to support the liability's ascertainment.

Conclusion:
The Tribunal found that the CIT(A) did not adequately address the fundamental issue of the appellant's business model characterization. Consequently, the Tribunal set aside the impugned order and remanded the issues back to the TPO/AO for reconsideration. The TPO/AO was directed to pass a speaking order after giving the appellant a reasonable opportunity to be heard. Both the appellant's and the Revenue's appeals were allowed, and the entire issue, including the issues in the departmental appeal, was restored for fresh consideration.

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