2019 (11) TMI 1810 - AT - Income Tax

TP Adjustment - years covered under APA - comparable analysis - Applicability of roll Back provisions - AR submitted that assessee has entered into advanced pricing agreement APA for assessment years 2014-15 to 2018-19 covering all international transactions undertaken by assessee during the said period and that years under consideration are not covered by said APA - AR also submitted that FAR analysis of trading segment for year under consideration is identical to years covered under APA and thus prayed for rollback same margin to be applied to the year under consideration as agreed in APA - HELD THAT - Roll Back provisions are dealt with as per Rule 10MA of Income tax Rules 1962. We have perused APA dated 31/07/2018 for assessment years 2014-15 to 2018-19, between assessee and CBDT in respect of AE's most particularly mentioned in Appendix 1(a). In APA signed by assessee, there is no roll back provision for years under consideration. However, circumstances which provides for applying the rule, needs to be analysed. The transaction must be identical in terms of functions, risks assumed regarding international transaction must be same. Having regards to above discussion, we find it necessary to set aside the issue to Ld. TPO/AO to verify FAR of assessment years for which APA was entered and assessment years under consideration. Ld. AO/TPO shall compare international transaction for years under consideration and terms of APA and to compute ALP of transaction in accordance with law. Under such circumstances, additional ground raised by assessee becomes academic and therefore, we are not adjudicating the same. Appeals allowed for statistical purposes.

Summary

Issues Involved:
1. Incorrect interpretation of law by AO.
2. Dispute over the total income assessed.
3. Rejection of Resale Price Method (RPM) and adoption of Transactional Net Margin Method (TNMM) for determining Arm's Length Price (ALP).
4. Use of fresh comparable search and data not available at the time of documentation.
5. Rejection of multiple year data and use of FY 2008-09 data only.
6. Rejection of companies adopted as comparable by the appellant.
7. Selection of functionally different companies as comparable.
8. Selection of companies based on unreasonable comparability criteria.
9. Non-provision of working capital adjustment.
10. Levying of interest under sections 234B and 234C.
11. Initiation of penalty proceedings under section 271(1)(c).
12. Dispute over SAP charges transaction and use of Comparable Uncontrolled Price (CUP) method.
13. Dispute over the exclusion of comparable companies and working capital adjustment by the Dispute Resolution Panel (DRP).

Issue-wise Detailed Analysis:

1. Incorrect Interpretation of Law:
The appellant contended that the Assessing Officer’s (AO) order was based on an incorrect interpretation of law, making it legally untenable.

2. Dispute Over Total Income Assessed:
The appellant argued that the CIT(A) erred in assessing the total income at Rs. 42,01,21,617 as opposed to the returned income of Rs. 31,26,88,290.

3. Rejection of RPM and Adoption of TNMM:
The CIT(A) upheld the AO/Transfer Pricing Officer (TPO)'s decision to reject the Resale Price Method (RPM) and adopt the Transactional Net Margin Method (TNMM) for determining the ALP of international transactions. The Tribunal noted that the assessee applied RPM for the trading segment, but the TPO applied TNMM instead.

4. Use of Fresh Comparable Search:
The TPO conducted a fresh comparable search during assessment proceedings using information/data not available to the assessee at the time of documentation, which the appellant argued was inappropriate.

5. Rejection of Multiple Year Data:
The TPO and AO rejected the use of multiple-year data and used data for FY 2008-09 only in determining the ALP under TNMM, which the appellant contested.

6. Rejection of Comparable Companies:
The TPO and AO rejected the companies adopted as comparable by the appellant in the transfer pricing study for determining the ALP. The Tribunal noted that the appellant had included companies like Ashco Industries Limited and Bombardier Transportation India Limited, which were rejected by the TPO.

7. Selection of Functionally Different Companies:
The TPO selected certain companies as comparable, which the appellant argued were functionally different from the appellant’s operations. The Tribunal observed that companies like Energy Development Company Limited were included by the TPO despite being functionally different.

8. Unreasonable Comparability Criteria:
The TPO rejected companies whose data for FY 2008-09 was unavailable, companies with revenue below Rs. 1 Crore, and those with different accounting years, which the appellant argued was unreasonable.

9. Non-provision of Working Capital Adjustment:
The TPO and AO did not provide the benefit of working capital adjustment by adjusting the net margins of the comparable companies, which the appellant contested.

10. Levying Interest Under Sections 234B and 234C:
The CIT(A) and AO levied interest under sections 234B and 234C, which the appellant argued was erroneous.

11. Penalty Proceedings Under Section 271(1)(c):
The CIT(A) and AO initiated penalty proceedings under section 271(1)(c), which the appellant argued was unjustified.

12. SAP Charges Transaction and CUP Method:
The TPO and AO held that payments made for SAP ERP platform maintenance were not at arm's length and applied the CUP method, considering the charges for SAP implementation rather than maintenance, which the appellant contested.

13. Exclusion of Comparable Companies and Working Capital Adjustment by DRP:
The DRP directed the TPO/AO to exclude certain companies like Energy Development Co. Ltd. as not functionally comparable and to adjust the profit margin for advances received from AE, which the revenue contested.

Tribunal's Decision:
The Tribunal set aside the issue to the AO/TPO to verify the FAR analysis of the assessment years under consideration against the years covered under the APA. The Tribunal directed the AO/TPO to compare the international transactions and compute the ALP in accordance with the law. The Tribunal noted that the APA did not cover the years under consideration but required a detailed analysis to determine if the transactions were identical. The Tribunal allowed the cross-appeals for statistical purposes and remanded the matter for further examination.

Order Pronounced:
The order was pronounced in open court on 21-11-2019, allowing the cross-appeals for statistical purposes and directing further verification by the AO/TPO.