2017 (11) TMI 1725 - AT - Income Tax

TPA - comparable selection criteria - functional profile - Held that - The assessee company is engaged in the business of digital switching equipment and related software, cellular exchange / transmission equipment and provides related services, intelligent network and broadband solutions, equipment and related services, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Jurisdictional error in reference under section 92CA(1).
2. Rejection of economic analysis and fresh comparability analysis.
3. Contravention of DRP’s directions regarding comparable companies.
4. Use of single-year data instead of multiple-year data.
5. Application of inappropriate filters for comparables.
6. Selection of functionally non-comparable companies.
7. Cherry-picking of comparables.
8. Selection of companies with super normal profits.
9. Computational errors in operating margin.
10. Denial of risk adjustment.
11. Entity-level adjustment for CSD services.
12. Disallowance of liquidated damages under section 37(1).
13. Disallowance under section 14A without recording dissatisfaction.
14. Disallowance of prior period expenditure.
15. Rejection of lower tax rate for slump sale under section 50B.
16. Non-allowance of set-off of brought forward business losses.
17. DRP’s jurisdiction in enhancement under section 144C(8).
18. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Jurisdictional Error in Reference under Section 92CA(1):
The appellant argued that the AO did not record any reasons or have any material to reach a prima facie opinion that it was necessary or expedient to refer the matter to the TPO for computation of ALP. The tribunal did not specifically address this issue in the judgment.

2. Rejection of Economic Analysis and Fresh Comparability Analysis:
The appellant contended that the TPO and DRP erred by not accepting the economic analysis conducted by the appellant and instead conducted a fresh comparability analysis. The tribunal did not provide a detailed discussion on this issue.

3. Contravention of DRP’s Directions Regarding Comparable Companies:
The appellant claimed that the order passed by the AO/TPO was in contravention of the DRP’s specific directions to include certain companies as comparables if they met the approved filters. The tribunal remanded the matter back to the AO/TPO for fresh adjudication, directing them to verify whether the comparables qualify the filters given by the TPO.

4. Use of Single-Year Data Instead of Multiple-Year Data:
The appellant argued that the TPO/DRP erred in rejecting the use of multiple-year data for computing the ALP. The tribunal did not provide a detailed discussion on this issue.

5. Application of Inappropriate Filters for Comparables:
The appellant contended that the TPO/DRP applied inappropriate filters based on turnover, different financial year-end, service income export sales, and employee cost. The tribunal did not provide a detailed discussion on this issue.

6. Selection of Functionally Non-Comparable Companies:
The appellant argued that the TPO/DRP erred in selecting functionally non-comparable companies. The tribunal directed the TPO to exclude certain companies (Infosys, Zylog, Persistent Systems and Solutions Ltd., L&T, E-Zest, Arcopetal) from the list of comparables due to functional differences and extraordinary events.

7. Cherry-Picking of Comparables:
The appellant claimed that the TPO/DRP cherry-picked companies as comparables. The tribunal addressed this by directing the exclusion of certain companies that did not meet the functional comparability criteria.

8. Selection of Companies with Super Normal Profits:
The appellant argued that the TPO/DRP erred in selecting companies with super normal profits. The tribunal addressed this by directing the exclusion of certain companies that did not meet the functional comparability criteria.

9. Computational Errors in Operating Margin:
The appellant contended that the TPO/DRP committed computational errors while computing the operating margin of comparable companies. The tribunal did not provide a detailed discussion on this issue.

10. Denial of Risk Adjustment:
The appellant argued that the TPO/DRP erred in not allowing a risk adjustment to the appellant. The tribunal did not provide a detailed discussion on this issue.

11. Entity-Level Adjustment for CSD Services:
The appellant claimed that the TPO/DRP erred in making an entity-level adjustment by recomputing the operating cost for CSD services. The tribunal did not provide a detailed discussion on this issue.

12. Disallowance of Liquidated Damages under Section 37(1):
The appellant argued that the AO erred in holding that liquidated damages incurred were penal in nature and not allowable under section 37(1). The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

13. Disallowance under Section 14A Without Recording Dissatisfaction:
The appellant contended that the AO erred in making a disallowance under section 14A without recording dissatisfaction with the appellant’s claim. The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

14. Disallowance of Prior Period Expenditure:
The appellant argued that the AO erred in disallowing prior period expenditure. The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

15. Rejection of Lower Tax Rate for Slump Sale under Section 50B:
The appellant claimed that the AO erred in rejecting the lower tax rate for consideration arising from a slump sale transaction. The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

16. Non-Allowance of Set-Off of Brought Forward Business Losses:
The appellant argued that the AO erred in not allowing the set-off of brought forward business losses. The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

17. DRP’s Jurisdiction in Enhancement under Section 144C(8):
The appellant contended that the DRP exceeded its jurisdiction in exercising the powers of enhancement under section 144C(8). The tribunal remanded the matter back to the AO/TPO for fresh adjudication after considering additional evidence.

18. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant argued that the AO erred in initiating penalty proceedings under section 271(1)(c) mechanically and without recording adequate satisfaction. The tribunal did not provide a detailed discussion on this issue.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, remanding several issues back to the AO/TPO for fresh adjudication after considering additional evidence and giving the appellant an opportunity to be heard.

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