2020 (4) TMI 909 - AT - Income Tax

TP Adjustment - Comparable selection - decision of TPO DRP in adopting the threshold limit of 25% for Related Party Transaction filter as against the limit of 10% adopted by the assessee - HELD THAT - We notice that the Ld DRP has given its decision of adoption of RPT filter, which is not the objection of the assessee. With regard to the claim for Capacity Utilisation Adjustment, the Ld DRP, has expressed that the assessee has not raised this objection before the TPO and accordingly declined to adjudicate this ground. With regard to the substitution of PLI from OP/OR to OP/OC, the assessee had raised objection in ground 8.1 urged before Ld DRP. However, the Ld DRP has not adjudicated the same. We notice that the assessee has furnished details of the companies, in its paper book. We notice that the Ld DRP has rejected the claim of the assessee by making general observations, i.e., without addressing specific grounds urged in respect of each of the companies. We have noticed that the assessee, in its Transfer Pricing study, has made adjustment towards under utilization of capacity. However, the said adjustment was not given by the TPO. Hence, we are of the view that the Ld DRP was not justified in declining to adjudicate this claim of the assessee. As noticed earlier, the Ld DRP has not adjudicated the issue relating to selection of PLI. We are of the view that the Ld DRP has passed a non-speaking order. In this view of the matter, we are of the opinion that all the issues relating to Transfer pricing adjustment need to be restored to the file of Ld DRP/AO for adjudicating all the objections of the assessee by a speaking order. Accordingly, we set aside the Transfer pricing adjustment made in the final assessment order and restore all the issues relating there to the file of AO/DRP with the direction to the Ld DRP to pass a speaking order. Disallowance made u/s 40(a)(ia) of the Act in respect of year end provisions made - HELD THAT - Before us, the ld A.R argued that the yearend provisions are required to be made as per accounting principles on estimated basis. Assessee could not deduct tax therefrom, since the payees are not known. However, we notice that the assessee has stated before Ld DRP that the provisions have been made for payment to contractors, subcontractors, professional fees, royalty, rent and commission. Hence the payees should be known to the assessee. Accordingly, we are of the view that the assessee should have deducted tax at source, when the payees are known. Accordingly we confirm the addition made by the AO u/s 40(a)(ia) of the Act.

Summary

Issues:
1. Transfer Pricing Adjustment
2. Disallowance under section 40(a)(ia) of the Act

Transfer Pricing Adjustment:
The Appellate Tribunal ITAT Bangalore dealt with an appeal challenging an order passed by the assessing officer for the assessment year 2013-14. The dispute arose regarding transfer pricing adjustments made by the Taxation Officer (TPO) in relation to the international transactions of the assessee, a subsidiary of a US-based company engaged in manufacturing sintered products and other related items. The TPO made adjustments based on the Profit Level Indicator (PLI) under the TNMM method, leading to a transfer pricing adjustment of Rs. 4.98 crores. The Dispute Resolution Panel (DRP) and the Assessing Officer (AO) upheld the TPO's adjustments. The assessee raised various grounds challenging the TPO and DRP decisions, including objections related to the threshold limit for Related Party Transactions (RPT) filter, selection of comparable companies, and the PLI adopted by the TPO.

In its analysis, the Tribunal noted that the DRP's order was non-speaking and lacked specific adjudication on the grounds raised by the assessee. The Tribunal observed that the DRP failed to address the assessee's objections adequately, especially regarding the underutilization of capacity adjustment and the selection of PLI. Consequently, the Tribunal set aside the transfer pricing adjustments and directed the DRP to pass a speaking order after considering all objections raised by the assessee.

Disallowance under section 40(a)(ia) of the Act:
The second issue involved the disallowance made under section 40(a)(ia) of the Act concerning year-end provisions made by the assessee. The tax auditor highlighted the failure of the assessee to deduct tax at source from these provisions, leading to a demand raised by the Income Tax Officer (TDS). The CIT(A) provided relief for TDS payments made subsequently but confirmed a demand of Rs. 5,682. The AO disallowed an amount of Rs. 2,84,100 under section 40(a)(ia) in the final assessment order, which was upheld by the DRP. The assessee argued that the provisions were made on an estimated basis and that the payees were not known at the time of provision. However, the Tribunal noted that the assessee had identified the payees as contractors, subcontractors, etc., indicating prior knowledge of the recipients. Consequently, the Tribunal upheld the addition made by the AO under section 40(a)(ia) of the Act.

In conclusion, the Tribunal partly allowed the assessee's appeal, confirming the disallowance under section 40(a)(ia) while setting aside the transfer pricing adjustments for reconsideration by the DRP.