2016 (4) TMI 1416 - AT - Income Tax

TP Adjustment - comparable selection - exclusion of one comparable i.e. ICC International Agencies Ltd. (Seg.) - HELD THAT - As in the case of Logica (P) Ltd. vs. ACIT 2015 (3) TMI 401 - ITAT BANGALORE , that assessee company was engaged in the business of rendering software development services and support services to its AE. In the present case also, the assessee company is rendering market support services to its AE. Learned DR of the revenue also could not point out any difference in facts in the present case and in the case of Logica (P) Ltd. vs. ACIT (Supra). In this case i.e. in the case of Logica (P) Ltd. vs. ACIT (Supra), it was held by the tribunal that keeping in mind the functions and risk analysis, it is not possible to compare that assessee with ICC International Agencies Ltd. Correct margin of two companies i.e. Priya International Ltd. and Access Global Solutions Ltd. and adjustment on account of depreciation - These adjustments are approved because the margin of the comparable has to be correctly adopted and adjustment on account of depreciation is also justified if excess/lesser depreciation is charged by the assessee because of adopting a different method of charging depreciation as compared to method of charging depreciation by the comparables. But for factual verification of the correct margin of two companies i.e. Priya International Ltd. and Access Global Solutions Ltd. and adjustment required on account of depreciation, the matter is restored back to Assessing Officer/TPO. Needless to say, before passing the order, adequate opportunity of being heard should be provided to the assessee. Disallowance of expatriate cost - HELD THAT - A clear finding is given by DRP that the liability has been imposed by the HO and the assessee company has agreed to discharge this liability because of non business consideration and learned AR of the assessee could not controvert this categorical finding of DRP. Regarding the argument of commercial expediency, we find that although this contention was raised but the AR of the assessee could not establish the commercial expediency for discharging this liability of the HO and hence, this contention and reliance on the judgment of Hon ble apex court rendered in the case of S. A. Builders 2006 (12) TMI 82 - SUPREME COURT are without any merit since commercial expediency is not established. Regarding the alternative plea of exclusion from cost for TP study also, we find no infirmity in the order of DRP. Accordingly, this ground is also rejected. Disallowance of creditor s outstanding balance - HELD THAT - The basis of the figure noted by the A.O. is available and for this reason, it is not required to restore the matter to the A.O. However, we find that the matter should be restored to the file of the A.O. to consider and decide about various explanations given by the assessee in respect of these differences. We, therefore, restore this matter to the A.O. to decide the issue afresh after giving a finding about various explanations of the assessee after affording reasonable opportunity of being heard to the assessee. This ground is allowed for statistical purposes.

Issues Involved:

1. Assessment and reference to Transfer Pricing Officer (TPO).
2. Fresh comparable search undertaken by the TPO.
3. Comparability Analysis adopted by the TPO.
4. Erroneous data used by the AO/TPO.
5. Non-allowance of appropriate adjustments to the comparable companies by the AO/TPO.
6. Variation of 5% from the arithmetic mean.
7. Disallowance of expatriate cost.
8. Disallowance of creditor’s outstanding balance.

Detailed Analysis:

1. Assessment and Reference to Transfer Pricing Officer (TPO):

The appellant contended that the final assessment order issued by the AO was bad in law and violated the principles of natural justice. The AO did not issue a show cause notice to the appellant as per the proviso to sec. 92C(3) of the Income-tax Act, 1961. Additionally, the AO erred in making a reference to the TPO without recording an opinion that any of the conditions in sec. 92C(3) were satisfied. The tribunal noted that Ground No. 1 was not pressed by the appellant and thus rejected it.

2. Fresh Comparable Search Undertaken by the TPO:

The appellant argued that the TPO conducted a fresh benchmarking analysis using non-contemporaneous data and substituted the appellant’s analysis with his own conjectures. The tribunal acknowledged the appellant's grievances and noted that the exclusion of one comparable, ICC International Agencies Ltd., should be considered due to functional dissimilarity, as held in previous tribunal orders.

3. Comparability Analysis Adopted by the TPO:

The appellant raised multiple issues regarding the TPO's comparability analysis, including the rejection of comparable companies without considering functional and risk analysis, arbitrary application of filters, and inconsistent rejection of companies based on financial results. The tribunal agreed with the appellant on the exclusion of ICC International Agencies Ltd. due to functional dissimilarity. For the correct margin of Priya International Ltd. and Access Global Solutions Ltd., and adjustments on account of depreciation, the tribunal restored the matter to the AO/TPO for factual verification.

4. Erroneous Data Used by the AO/TPO:

The appellant contended that the AO/TPO used non-contemporaneous data not available in the public domain at the time of the transfer pricing study. The tribunal decided that the margin of comparables should be correctly adopted, and adjustments on account of depreciation were justified if the assessee charged excess or lesser depreciation compared to the comparables. The matter was restored to the AO/TPO for factual verification.

5. Non-Allowance of Appropriate Adjustments to the Comparable Companies by the AO/TPO:

The appellant argued that the AO/TPO did not allow appropriate adjustments under Rule 10B for differences in accounting practices, depreciation adjustments, working capital adjustment, and risk profile. The tribunal held that adjustments on account of depreciation were justified and restored the matter to the AO/TPO for factual verification.

6. Variation of 5% from the Arithmetic Mean:

The appellant's Ground No. 6 was decided against them in view of the insertion of section 2A in section 90 with retrospective effect from 01.04.2002. Thus, the tribunal rejected this ground.

7. Disallowance of Expatriate Cost:

The appellant argued that the AO erred in disallowing ?13,512,070 incurred towards expatriate costs, which were related to services rendered by expatriate employees. The tribunal found that the DRP's finding that the liability was imposed by the HO and agreed to by the assessee for non-business considerations was not controverted. The tribunal upheld the disallowance and rejected the appellant's contention of commercial expediency.

8. Disallowance of Creditor’s Outstanding Balance:

The appellant contended that the AO erred in making a disallowance of ?749,172 due to a discrepancy in the outstanding balance with Visualnet India Pvt. Ltd. The tribunal found that the AO's figure of ?749,172 was based on reducing ?127,603 from ?876,775. The tribunal restored the matter to the AO to decide afresh after considering the appellant's explanations and providing a reasonable opportunity of being heard.

Conclusion:

The appeal was partly allowed for statistical purposes, with specific issues restored to the AO/TPO for factual verification and reconsideration.

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