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2015 (12) TMI 1328 - AT - Income TaxTPA - Method of determination of arm s length price (ALP) - Transfer Pricing Officer confused himself in characterization of the assessee s functions as captive, routine, full-fledged distributor at one place and routine distributor in another place. The Transfer Pricing Officer is also characterizing the assessee as an agent in one place and captive distributor and agent in another place. - Held that - In view of the misunderstanding of the facts by the Transfer Pricing Officer and Dispute Resolution Panel, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Dispute Resolution Panel once again on the basis of the agreement entered into between the assessee and Roca Sanitaria S.A. Spain TDS u/s 194C - disallowance can be made under Section 40(a)(ia) of the Act for short deduction of tax - Held that - Section 40(a)(ia) does not envisage a situation where there was short deduction / lesser deduction as in case of section 201(1A) of the Act. There is an obvious omission to include short deduction / lesser deduction in section 40(a)(ia) of the Act. Therefore, this Tribunal is of the considered opinion that in case of short / lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the assessing officer, cannot be disallowed. Accordingly, the orders of lower authorities are set side and the entire disallowance is deleted - Decided in favour of assessee.
Issues Involved:
1. Determination of the most appropriate transfer pricing method for the assessee. 2. Disallowance under Section 40(a)(ia) of the Income-tax Act for short deduction of tax at source. Issue-wise Detailed Analysis: 1. Determination of the Most Appropriate Transfer Pricing Method for the Assessee: The primary issue revolves around the determination of the Arm's Length Price (ALP) for imported finished goods. The assessee adopted the Resale Price Method (RPM) as the most appropriate method, while the Transfer Pricing Officer (TPO) adopted the Transaction Net Margin Method (TNMM) using Berry Ratio as the profit level indicator. The assessee argued that the RPM was accepted in the previous assessment year (2008-09) and that the business model remained unchanged. The TPO, however, characterized the assessee as a 'captive', 'routine', and 'full-fledged distributor' and also as an 'agent'. The Dispute Resolution Panel (DRP) observed that the assessee performed all valuable functions with risks as an independent entity, but both the TPO and DRP assigned multiple characterizations, leading to a change in the transfer pricing method and profit level indicator. The Tribunal noted that the functions performed by the assessee, the assets employed, and the risks assumed need to be considered for determining the most appropriate method. The Tribunal found that the authorities below could not determine the actual functions performed by the assessee due to misunderstanding. The Tribunal opined that if the assessee is an independent distributor assuming all risks, the RPM would be the most appropriate method. However, since the actual functions performed by the assessee were not determined accurately, the matter needs to be reconsidered by the DRP. The DRP is directed to re-examine the issue afresh based on the agreement between the assessee and Roca Sanitaria S.A. Spain and determine the actual functions performed by the assessee, including the assets employed and risks assumed. 2. Disallowance under Section 40(a)(ia) of the Income-tax Act for Short Deduction of Tax at Source:The Revenue's appeal concerns the disallowance under Section 40(a)(ia) for short deduction of tax at source. The Assessing Officer found that the payment made to BSNL and Tulip Telecom Ltd. was for the use of commercial equipment, requiring tax deduction under Section 194J instead of Section 194C. The DRP directed the Assessing Officer not to make any disallowance based on the judgment of the Calcutta High Court in S.K. Tekriwal v. ITO, which held that for short deduction of TDS, disallowance under Section 40(a)(ia) is not warranted. The Tribunal referred to the Cochin Bench's decision in Apollo Tyres Ltd. v. DCIT, which held that Section 40(a)(ia) does not envisage disallowance for short deduction or lesser deduction of tax. The Tribunal observed that the language of Section 40(a)(ia) does not allow for proportionate disallowance for short deduction, unlike Section 201(1A), which provides for interest on short deduction. Therefore, the Tribunal found that for short deduction of tax, the entire expenditure cannot be disallowed. The Tribunal confirmed the DRP's order, holding that the disallowance under Section 40(a)(ia) for short deduction of tax is not justified. Conclusion:The Tribunal allowed the assessee's appeals for statistical purposes, directing the DRP to reconsider the transfer pricing issue. The Revenue's appeal regarding disallowance under Section 40(a)(ia) was dismissed, and the cross-objection filed by the assessee in support of the DRP's order was also dismissed as not maintainable. Final Orders:I.T.A. Nos. 586/Mds/2015 & 610/Mds/2015 are allowed for statistical purposes. The Revenue's appeal in I.T.A. No. 1169/Mds/2014 and C.O. No. 55/Mds/2014 are dismissed. Order pronounced on 18th December, 2015 at Chennai.
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