2016 (5) TMI 1491 - AT - Income Tax

TP adjustment - comparable selection - emphasis on product comparability - HELD THAT - It would have been better if the TPO had dealt the issue raised by the DRP rather than challenging the jurisdiction of the DRP. It is a fact that the two comparable companies were not dealing in the same product as that of the assessee. Therefore they were at par with the other four comparables. In the TNMM what is to be seen is functional comparability and not the product comparability. If the TPO wanted to emphasis on product comparability then he should not have accepted the remaining two comparables. Considering the above we are of the opinion that the order of the DRP does not suffer from any infirmity. First effective Ground (GOA 1 39, 056/- only in the books of account during the year under consideration whereas an amount of 12.40 lakhs was written back. It appears that the TPO without understanding the difference between the writing back of balance and writing off the balance had made the adjustment. The balance written back was offered for taxation by the assessee. Therefore we fail to understand that how the TPO proposed the adjustment. DRP had rightly deleted the addition but we are surprised to notice that in such a straight case the department has decided to file an appeal. It shows lack of judicial discretion on part of the officers who have recommended/approved the appeal. Such frivolous appeal not only waste the time of the Tribunal but also increase the burden of the DRs unnecessarily. In our opinion there is no need to interfere with the order of DRP. So confirming its order we decide second effective ground against revenue. Working capital adjustment - HELD THAT - As far as the request of the assessee to consider 39, 056/- as working capital adjustment we would like to state that same could be granted as it has already suffered taxation.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Allowance of bad debts claim.

Issue 1: Determination of Arm's Length Price (ALP) for International Transactions

The assessee, part of the Rolls-Royce group, engaged in various services including marketing, sales support, and after-sales services, had significant international transactions. The assessee used the Transactional Net Margin Method (TNMM) for benchmarking three segments and the Comparable Uncontrolled Price (CUP) method for the after-sales service segment. The Transfer Pricing Officer (TPO) found discrepancies in the comparables selected by the assessee. The TPO rejected four out of six comparables on grounds of functional differences, resulting in an arithmetic mean of 18.07% for the remaining two comparables, leading to a proposed adjustment of ?36.65 lakhs.

The Dispute Resolution Panel (DRP) found merit in the assessee's argument that either all comparables should be accepted or rejected. The DRP directed the assessee to furnish an alternate set of comparables, which was remanded to the TPO for comments. The TPO maintained that the remaining two comparables were functionally similar to the assessee, but the DRP found that the TPO failed to justify the selective acceptance/rejection of comparables. The DRP accepted the new set of comparables provided by the assessee, finding them more similar to the assessee's activities, and deleted the proposed adjustment.

The Tribunal supported the DRP's decision, noting that the TPO did not address the core issue of selective comparables and failed to justify the rejection of four comparables. It emphasized the importance of functional comparability over product comparability in TNMM. The Tribunal upheld the DRP's order, rejecting the TPO's approach as illogical and inconsistent.

Issue 2: Allowance of Bad Debts Claim

The TPO observed that the assessee had written off certain amounts as bad debts but did not provide sufficient evidence for the nature of these debts. Consequently, the TPO made an adjustment of ?13.00 lakhs.

The assessee argued before the DRP that the written-off amounts were part of the normal business income. The DRP found that the TPO had not commented on the items written back and noted that the assessee had already offered the written-back amount for taxation, leading to double taxation. The DRP deleted the adjustment except for ?39,056/-.

The Tribunal found that the TPO misunderstood the difference between writing off and writing back balances. It confirmed that the balance written back was already offered for taxation by the assessee. The Tribunal criticized the department for filing an appeal in such a straightforward case, highlighting the unnecessary burden it placed on the Tribunal and the Departmental Representatives. The Tribunal upheld the DRP's order, confirming the deletion of the adjustment and allowing the working capital adjustment for ?39,056/-.

Conclusion:

The Tribunal upheld the DRP's decisions on both issues, emphasizing the importance of functional comparability in transfer pricing and criticizing the TPO's approach as inconsistent and illogical. The Tribunal also highlighted the improper understanding of bad debts by the TPO and confirmed the DRP's deletion of the adjustment, allowing the assessee's claims.