2016 (6) TMI 1340 - AT - Income Tax

Addition on account of arm s length price adjustment - including certain companies in the final set of comparables and excluding certain companies claimed to be comparable to the assessee - Held that - Direct the TPO not include M/s. Mohindra Consulting India Ltd. while working out the Arm s length price adjustment as to the functional dissimilarity as well as a related party transaction to the extent of 15.51 % Direct the TPO to adjudicate the issue as to whether M/s. Mitcon Consultancy and Engg. Services Ltd. is to be included or not after giving a due and proper opportunity of being heard to the assessee. The TPO is also directed to consider the claim of the assessee that this company was functionally different and it failed the service revenue filter. The claim of the assessee with regard to M/s. Tata Consulting Engineers was that it was having different lines of services and having very high turnover filter in comparison to the lower turnover filter of the assesee. This fact should also be examined by the TPO. Accordingly this issue is set aside to the file of the TPO to be adjudicated as directed above. Charging of interest u/s 234D and withdrawing interest u/s 244A - the assessee stated that proper opportunity of being heard was not given by the AO. Therefore this issue should be decided by the AO after giving an opportunity of being heard to the assessee in accordance with law.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Non-satisfaction of conditions set out in section 92C(3) of the Income Tax Act.
3. Enhancement of income by INR 13,147,114.
4. Errors in Transfer Pricing adjustments.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Computation of interest under section 234D and withdrawal of interest under section 244A.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant contended that the assessment order passed by the Learned Assessing Officer (Ld. AO) is bad in law. However, this ground was considered general in nature and did not require specific comments from the tribunal.

2. Non-satisfaction of Conditions in Section 92C(3):
The appellant argued that the conditions set out in section 92C(3) of the Act were not satisfied. This issue was also deemed general and did not require specific comments.

3. Enhancement of Income by INR 13,147,114:
The appellant did not press grounds 3 to 3.2, which pertained to the enhancement of income by INR 13,147,114. Therefore, these grounds were not considered by the tribunal.

4. Errors in Transfer Pricing Adjustments:
The appellant raised several sub-issues under this main issue, focusing on errors in the Transfer Pricing adjustments:

4.1 Inclusion and Exclusion of Comparables:
The appellant argued that certain companies were wrongly included and excluded in the final set of comparables. The TPO had included companies like HSCC (India) Ltd., Acropetal Technologies Ltd., Mahindra Consulting Engineers Ltd., Mitcon Consultancy & Engg. Services Ltd., and TCE Consulting Engineers Ltd. The tribunal noted that the TPO’s selection of comparables led to an adjustment of ?33,770,769 under section 92CA of the Act.

4.2 Working Capital Adjustment:
The Dispute Resolution Panel (DRP) directed the TPO to allow the benefit of working capital adjustment and re-compute the service revenue filter for Mitcon Consultancy & Engg. Services Ltd. The TPO provided the working capital adjustment, resulting in a revised arm’s length margin of 20.52%.

4.3 Functional Dissimilarity:
The appellant contended that Mahindra Consulting Engineers Ltd. and Mitcon Consultancy & Engg. Services Ltd. were functionally dissimilar. The tribunal agreed that Mahindra Consulting Engineers Ltd. should be excluded based on a previous ITAT order. The tribunal also directed the TPO to recheck the service income filter for Mitcon Consultancy & Engg. Services Ltd. and consider its functional dissimilarity.

4.4 Turnover Filter:
The appellant argued that Tata Consulting Engineers Ltd. had a significantly higher turnover compared to the appellant. The tribunal directed the TPO to examine this claim and adjudicate accordingly.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The appellant argued that the Ld. AO initiated penalty proceedings under section 271(1)(c) mechanically and without recording adequate satisfaction. This ground was considered premature and did not require specific comments.

6. Computation of Interest under Section 234D and Withdrawal of Interest under Section 244A:
The appellant contended that the AO proposed to compute interest under section 234D and withdraw interest under section 244A mechanically and without satisfactory reasons. The tribunal directed the AO to decide this issue after giving the appellant an opportunity of being heard, in accordance with law.

Conclusion:
The appeal was partly allowed for statistical purposes. The tribunal directed the TPO to exclude Mahindra Consulting Engineers Ltd. from the comparables, recheck the service income filter for Mitcon Consultancy & Engg. Services Ltd., and examine the turnover filter for Tata Consulting Engineers Ltd. The issue of interest computation and withdrawal was remanded back to the AO for reconsideration after providing an opportunity of being heard to the appellant.