2018 (12) TMI 1853 - AT - Income Tax

TP Adjustment - comparable selection - Cyber Media Research Ltd; and ICRA Online Ltd. were accepted by the TPO as comparables in the immediately last two preceding years i.e. A.Ys 2009-10 and 2010-11 then on what premise or reason the same had been rejected as comparables for the year under consideration - HELD THAT - It is not the claim of the TPO/DRP that the functional profile of either of the aforementioned comparables or that of the assessee company had witnessed a change during the year under consideration as against that of the aforementioned preceding years which would have justified the rejection of the said companies as comparables for the year under consideration. We are of the considered view that in the absence of any change in the circumstances a company which has been accepted as a good comparable by the revenue in the earlier years cannot be whimsically rejected in a subsequent year. In the backdrop of the aforesaid observations and the settled position of law the whimsical rejection of the aforementioned companies viz (i) Cyber Media Research Ltd; and (ii) ICRA Online Ltd. by the TPO for benchmarking the ALP of the international transactions of the assessee with its AEs during the year under consideration not being justified thus cannot be sustained and is liable to be vacated. We direct the AO/TPO to re-workout the ALP in the hands of the assessee after including the aforementioned companies i.e. (i) Cyber Media Research Ltd; and (ii) ICRA Online Ltd. as comparables in the final list of comparables. In case the claim of the assessee that after including the aforementioned companies its ALP would fall within the range of is found to be in order then no adjustment to the ALP would be called for in the hands of the assessee. Unexplained credit - Difference between the closing stock and opening stock -A submitted by the assessee before the DRP that the difference in the valuation of stock had arisen only due to software system while preparing the stock statement as per the format that was required during the course of the assessment proceedings - HELD THAT - In the course of proceedings before the DRP it was claim of the assessee that the variance in the valuation of stock was on account of the software system while preparing the statement of stock in the format as was required during the assessment proceedings. However in sharp contradiction of its earlier stand it is now submitted before us that the said variance had arisen on account of loss of stock. Be that as it may in the absence of any plausible explanation as regards the difference of 3, 53, 550/- in the valuation of the stock we find no reason to dislodge the observations of the lower authorities that the assessee had failed to reconcile the variance in the stock. However we find ourselves to be in agreement with the contention of the Ld. A.R that in case the explanation of the assessee as regards the discrepancy in stock of 3, 53, 550/- was not to be accepted then the addition to the said effect could only have been made by increasing the value of the closing stock in the hands of the assessee. We thus in terms of our aforesaid observations uphold the addition.

Summary

Issues Involved:
1. Validity of the Assessing Officer's order under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961.
2. Transfer pricing adjustment of ?93,57,710/- for business facilitation services.
3. Rejection of nine comparable companies by the Transfer Pricing Officer (TPO).
4. Exclusion of infrastructure cost reimbursements from operating revenues.
5. Non-allowance of working capital adjustment.
6. Non-allowance of comparability adjustment for differences in risk and functional profiles.
7. Addition of ?3,53,550/- due to discrepancies between closing and opening stock.

Detailed Analysis:

1. Validity of the Assessing Officer's Order:
The assessee challenged the order passed by the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961, on the grounds of violation of natural justice and non-compliance with mandatory conditions of Section 92CA(3) read with Section 92C(3) of the Act. The TPO did not serve a written show cause notice to the appellant as required.

2. Transfer Pricing Adjustment:
The AO and TPO, following the directions of the Dispute Resolution Panel (DRP), made an upward transfer pricing adjustment of ?93,57,710/- concerning the appellant's international transaction of providing business facilitation services to its associated enterprises (AEs). The TPO rejected 13 comparables from the appellant's set, accepting only M/s Genins India Insurance TPA Ltd. The DRP modified the list of comparables, leading to a final arithmetic mean margin of 15.81%.

3. Rejection of Comparable Companies:
The TPO rejected nine companies from the appellant's comparable set, stating functional differences. The appellant argued that Cyber Media Research Ltd. and ICRA Online Ltd. had been accepted as comparables in the previous two assessment years (2009-10 and 2010-11). The Tribunal found no change in the functional profile of these companies or the assessee, thus rejecting the TPO's exclusion of these comparables as unjustified.

4. Exclusion of Infrastructure Cost Reimbursements:
The TPO excluded infrastructure cost reimbursements from the operating revenues, considering them related to fixed assets. The DRP upheld this exclusion, leading to a recalculated operating margin of 10.01% for the assessee.

5. Non-Allowance of Working Capital Adjustment:
The appellant contended that the TPO erred by not allowing a working capital adjustment, essential for applying the Transactional Net Margin Method (TNMM) to eliminate material differences in working capital deployed by the appellant vis-a-vis comparables. The Tribunal did not specifically address this issue in detail in the judgment.

6. Non-Allowance of Comparability Adjustment for Risk and Functional Profile Differences:
The appellant argued that the TPO failed to allow comparability adjustments for material differences in risk and functional profiles between the appellant and comparable companies. This issue was not separately adjudicated upon in detail in the Tribunal's decision.

7. Addition Due to Stock Discrepancies:
The AO added ?3,53,550/- due to differences between closing and opening stock, treating it as unexplained credits. The DRP directed the AO to verify the reconciliation provided by the assessee. The AO made the addition as the assessee failed to reconcile the discrepancy. The Tribunal upheld the addition but agreed that it should only affect the closing stock value, making it tax neutral for the subsequent year.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO/TPO to rework the ALP by including Cyber Media Research Ltd. and ICRA Online Ltd. as comparables. The addition of ?3,53,550/- for stock discrepancies was upheld but adjusted to affect only the closing stock value. The Tribunal emphasized consistency in accepting comparables from previous years unless justified changes in circumstances are demonstrated.