2018 (7) TMI 2327 - AT - Income Tax

TP Adjustment - MAM selection - determination of arm s length price of international transaction - HELD THAT - Since there is no factual and functional difference in the activities of assessee for the year under consideration as compared to the Previous Year respectfully following the above observation of Co-Ordinate Bench in assessee s own case for A.Y.2009-10 we direct Ld.TPO to benchmark international transactions by using TNMM as most appropriate method at entity level. Provision for service tax on rent expenses in the books of accounts - AO treated the entire amount as an unascertained liability and disallowed it - HELD THAT - Considering the legal position of applicability of service tax on rental income the liability to collect and deposit service tax on rent income was on the landlord which was in dispute before Hon ble High Courts for a considerable period of time. It is an admitted position that assessee has made payment as per invoice raised by landlord in Assessment Year under consideration for Gurgaon premises whereas insofar as the Bangalore premises are concerned no payment was made as the invoice was not released. We therefore direct Ld.A.O to verify if service tax liability towards Bangalore premises has been made by assessee as subsequently the law was absolutely clear and the burden was cast upon the landlord to mandatorily collect service tax to be deposited with Government. Assessee is directed to provide all the bills/invoices raised by the landlord in respect of both the premises and A.O. is directed to verify actual payment made and to allow as per law. This ground raised by assessee stands allowed for statistical purposes. Nature of expenses - disallowance of service tax considering it as prior period expenses - HELD THAT - . On perusal of order passed by Service Tax Department party has claimed a rebate which is not corresponding with the amount of service tax and cess paid by the party during the material period. As the party has not submitted copies of ST-3 returns of the relevant period it is not a certain double how the duty element rebate of which is claimed has been discharged by the party. We therefore direct Ld.AO to verify the actual amount paid by assessee and accordingly allow the claim. TDS credit denied - since assessee has not offered income to tax it was not eligible for credit of TDS - HELD THAT - As AR submitted that customers of assessee had duly deducted and deposited taxes while making payment to assessee which is why it is reflected in the form 26 AS of assessee. We direct Ld. AO to verify the claim of TDS credit and allow as per law. Working capital adjustment - HELD THAT - As there is no difference in the FAR analysis as well as the factual matrix for year under consideration vis-a-vis Assessment Year 2009-10 we do not find any infirmity in granting working capital adjustment of tested party and comparables provided the necessary details/data have been provided by assessee.

Summary

Issues Involved:
1. Assessment of Income and Transfer Pricing Adjustments
2. Rejection of Economic Analysis and Segregation of Transactions
3. Computation of Operating Margin
4. Rejection/Selection of Comparable Companies
5. Disallowance of Provision for Service Tax on Rent Expenses
6. Disallowance of Payment of Advance for Service Tax
7. Denial of Credit of TDS
8. Difference in TDS as per Profit & Loss Account and Form 26AS
9. Levy of Interest and Initiation of Penalty Proceedings
10. Working Capital Adjustment

Detailed Analysis:

1. Assessment of Income and Transfer Pricing Adjustments:
The learned AO assessed the income of the appellant at INR 17,740,270 for AY 2011-12 and INR 4,40,51,560 for AY 2012-13, against the returned loss of INR 17,161,261 and returned income of INR 64,69,150, respectively. The AO made adjustments of INR 29,255,299 and INR 3,63,76,118 in respect of the distribution segment under section 92CA(3) of the Act for AY 2011-12 and AY 2012-13, respectively.

2. Rejection of Economic Analysis and Segregation of Transactions:
The AO/TPO/DRP rejected the economic analysis undertaken by the appellant, which was in accordance with the Act and Rules. The AO/TPO/DRP erred in segregating closely linked transactions for determining the arm’s length price (ALP) instead of adopting a combined transaction approach. The Tribunal upheld that the TNMM should be used as the most appropriate method at the entity level, consistent with previous years, and rejected the segregation approach.

3. Computation of Operating Margin:
The AO/TPO/DRP erred in computing the operating margin by excluding certain operating income and including extraordinary expenses. The Tribunal directed the AO to recompute the operating margin by including all relevant incomes and excluding extraordinary expenses.

4. Rejection/Selection of Comparable Companies:
The AO/TPO/DRP erred by rejecting a comparable company (Ashco Niulab Industries Limited) identified by the appellant for having a different accounting year. The Tribunal directed the AO to reconsider the inclusion of this comparable company.

5. Disallowance of Provision for Service Tax on Rent Expenses:
The AO disallowed the provision made by the appellant for service tax on rent expenses, considering it an unascertained liability. The Tribunal directed the AO to verify the actual payment of service tax and allow the claim accordingly.

6. Disallowance of Payment of Advance for Service Tax:
The AO disallowed the service tax amounting to INR 5,172,191, considering it a prior period expense. The Tribunal directed the AO to verify the actual amount paid and allow the claim based on the Service Tax Department's order.

7. Denial of Credit of TDS:
The AO denied the TDS credit of INR 712,544 to the appellant, stating that the corresponding income was not offered to tax. The Tribunal directed the AO to verify the TDS credit claim and allow it as per law.

8. Difference in TDS as per Profit & Loss Account and Form 26AS:
The AO added INR 37,101 to the income of the appellant due to a difference in TDS as per the Profit & Loss Account and Form 26AS. The appellant did not press this ground, and it was dismissed.

9. Levy of Interest and Initiation of Penalty Proceedings:
The AO charged interest under Sections 234A and 234B of the Act and initiated penalty proceedings under Sections 271(1)(c) and 271B of the Act. The Tribunal noted that these grounds are consequential and premature at this stage, respectively, and did not adjudicate them.

10. Working Capital Adjustment:
The Tribunal upheld the DRP's direction to grant working capital adjustment to improve comparability, consistent with previous years' decisions. The Tribunal found no reason to interfere with this direction.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both AY 2011-12 and AY 2012-13, directing the AO to recompute the income and adjustments as per the Tribunal's findings and directions. The revenue's appeal regarding working capital adjustment was dismissed.