2023 (2) TMI 1259 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Concord United Pvt. Ltd. company is majorly dealing with medium and drilling products whereas the assessee deals in industrial automation and process control - we hold that Concord is not functionally comparable to the assessee and accordingly we direct the TPO to exclude the company from the list of comparables. Sharpline Automation Pvt. Ltd. company is deriving income from Sale of products as well as services whereas there is segmental information available in this regard. Considering these facts we are of the view that the company being functionally different cannot be comparable with assessee and accordingly we direct the AO to exclude the company from the list of comparables. Treatment of provision for expected loss and the reversal as being non-operative in nature - AR submitted that the assessee has debited the profit loss account towards provision for estimated loss on construction contract and the reversal of excess provision is credited to the profit loss account - AR drew our attention in this regard to the directions of the DRP where the direction is given for parity of treatment for the provision and the reversal and submitted that the TPO has not properly given effect to the same - HELD THAT - We remit the issue back to the AO/TPO to consider the issue afresh in the light of the directions of the DRP and the Hon ble Tribunal in assessee s own case 2021 (11) TMI 1178 - ITAT BANGALORE TDS u/s 192 - no TDS was deducted on the salary reimbursement - AO held that the salary cost of seconded employees form an integral part of fees for included services and they are not just reimbursements ,therefore tax should have been deducted on the payments - AR submitted that the DRP has upheld the disallowance on the ground that the secondment agreement and assignment letters were produced and whatever was produced was rejected stating the same to be unreliable - AR prayed for the admission of additional evidence as these evidences when considered would substantiate the claim of the assessee - HELD THAT - With regard to disallowance made towards secondment cost, the additional evidences now produced go the root of the issue and the core reason for not allowing the deduction by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record. We accordingly remit the issue back to the AO/TPO for verification of the evidences and allow the deduction as relying on Flipkart Internet Pvt. Ltd case 2022 (6) TMI 1251 - KARNATAKA HIGH COURT Thus ground is allowed for statistical purposes.

Summary

Issues Involved:
1. General grounds.
2. Legal issue relating to Transfer Pricing (TP) adjustment.
3. TP adjustment in the manufacturing segment.
4. Notional interest on trade receivables.
5. Expat salary reimbursement.
6. Restricting the TDS credit.
7. Interest under section 234B.

Detailed Analysis:

General Grounds:
The appeal is against the final assessment order dated 25.10.2019, passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961, for the assessment year 2015-16. The assessee company is engaged in manufacturing, trading, distribution, installation, and servicing of process control systems and industrial automation instruments/equipment and electrical measuring instruments.

Legal Issue Relating to TP Adjustment:
The assessee did not press for ground Nos. 2 & 3 relating to the legal issue during the course of hearing.

TP Adjustment in Manufacturing Segment:
The assessee filed the return of income declaring a total income of Rs. 86,08,17,214. The Transfer Pricing Officer (TPO) made adjustments in the manufacturing segment amounting to Rs. 32,07,44,000. The Dispute Resolution Panel (DRP) provided partial relief by deleting adjustments towards Global Sales & Marketing fees and Management fees. The TPO revised the TP adjustment in the manufacturing segment to Rs. 30,26,25,000 and later to Rs. 13,68,76,000.

The assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method. The TPO accepted only one out of six comparables selected by the assessee and conducted a fresh search, resulting in a final set of comparables with an average margin of 7.54%. The TPO arrived at a TP adjustment in the manufacturing segment of Rs. 32,07,44,000.

The assessee contended the inclusion of certain comparables, specifically Concord United Pvt. Ltd. and Sharpline Automation Pvt. Ltd., arguing they were functionally different. The Tribunal directed the TPO to exclude these companies from the list of comparables, as they were not functionally comparable to the assessee.

Notional Interest on Trade Receivables:
The assessee submitted that the adjustment towards notional interest on trade receivables is not material as per the final OGE dated 5.3.2020. The Tribunal directed the AO to incorporate the changes made to the TP adjustment in the manufacturing segment and the interest on delayed receivables as per the second OGE.

Expat Salary Reimbursement:
The AO disallowed the expat salary reimbursement amounting to Rs. 4,53,92,631 under section 40(a)(i) for non-deduction of TDS. The DRP confirmed the AO's order. The Tribunal referred to the decision of the Karnataka High Court in Flipkart Internet Pvt. Ltd. and the coordinate Bench in Goldman Sachs Services P. Ltd., which held that there is no violation of section 195 for reimbursement of salary costs. The Tribunal remitted the issue back to the AO/TPO for verification of evidence and allowed the deduction.

Restricting the TDS Credit:
The AO was directed to verify and allow the credit for TDS accordingly.

Interest Under Section 234B:
This ground was consequential and did not warrant separate adjudication.

Conclusion:
The Tribunal partly allowed the appeal and directed the AO/TPO to compute the arm's length price in accordance with the directions given in the order. The Tribunal also dismissed the stay petition as it became infructuous.