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2016 (8) TMI 555 - AT - Income TaxSham transactions of the assessee with its AE s - Held that - Initially it was the TPO who analysed the transaction and gave a finding that the AEs have not rendered any services to the assessee and that the transactions are sham transactions. It is thereafter that the AO also went into the details of the services rendered by the AE and have come to the conclusions that the transactions are sham. Therefore, it is clear that the TPO has travelled beyond his jurisdiction as held by the Hon ble Delhi High Court in the case of EKL Appliances (2012 (4) TMI 346 - DELHI HIGH COURT ). Further, applying the benefit test i.e. whether the payments made by the assessee are commensurate to the benefits acquired by it under the agreement, also fails, in view of the above decision. Therefore, in our opinion, the TPO as well as the AO are not correct in holding that the transactions between the assessee and its AEs are sham, particularly since the assessee was responsible for the designing Highway. The findings of the authorities below that the entire work has been executed by the sub contractor has already been found to be not correct. In view of the same, we hold that the assessee has received some services from its AEs. Whether the benefit received by the assessee is commensurate to the payment made by it, cannot be gone into in view of the above cited decisions and therefore, we set aside the orders of the AO and the CIT (A) on this issue. Coming to the computation of the ALP, we find that the Courts have repeatedly held that the TP adjustments can only be made by adopting the prescribed five methods. The TPO has not computed the ALP by holding the transactions as sham. Therefore, the matter needs reconsideration and recomputation of the ALP by the TPO. In view of the same we deem it fit and proper to set aside the orders of the AO and set aside the matter to the AO/TPO for re-determination of the ALP in accordance with the rules and the precedents on the issue.- Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Transfer pricing adjustment proposed by the AO. 2. Levy of penalty under section 271(1)(c) of the Act. Detailed Analysis: Issue 1: Transfer Pricing Adjustment (ITA No.457/Hyd/2007) 1. Sham Transaction Allegation: - The AO disallowed the technical and consultancy fee of ?7,50,00,000, terming the payment made towards technical services as a sham transaction. - The TPO and AO concluded that the assessee failed to furnish sufficient evidence proving that the associated enterprises (AEs) provided the technical services claimed. - The TPO observed that the materials provided were general guidance forms, which did not substantiate the claim of specific technical services rendered by the AEs. - The assessee argued that the TPO's role is limited to determining the Arm’s Length Price (ALP) and not the genuineness of the transaction. The assessee also provided various judicial precedents to support its claim. 2. Benefit Test: - The assessee contended that substantial evidence, including email correspondence and teleconferences, was produced to demonstrate the technical consultancy services received. - The TPO, however, held that the evidence submitted did not prove that the AEs provided services worth ?7.5 crores and treated the ALP of the services at ‘Nil’. 3. Rejection of Documentation: - The AO and TPO rejected the documentation provided by the assessee, considering it insufficient to prove the rendering of technical services. - The assessee maintained that the design and engineering services were crucial and were not subcontracted, thus necessitating the services from the AEs. 4. Benchmarking and Methodology: - The TPO did not apply any prescribed method for determining the ALP, instead, declared the transaction as not genuine. - The Tribunal noted that the TPO should have followed one of the prescribed methods to determine the ALP and that the TPO exceeded his jurisdiction by questioning the genuineness of the transaction. 5. Conclusion: - The Tribunal found that the assessee had received some services from its AEs and the TPO’s role is limited to determining the ALP. - The matter was remanded back to the AO/TPO for re-determination of the ALP using the prescribed methods. Issue 2: Penalty under Section 271(1)(c) (ITA No.1658/Hyd/2008) 1. Penalty for Concealment: - The AO levied a penalty under section 271(1)(c) for allegedly concealing income by furnishing inaccurate particulars regarding the ALP of technical consultancy support fees. - The CIT (A) confirmed the penalty, aligning with the AO’s findings. 2. Tribunal’s Decision: - Given that the primary issue regarding the ALP determination was remanded for reconsideration, the penalty could not be sustained at this stage. - The Tribunal set aside the penalty order, granting the AO the liberty to re-initiate penalty proceedings if required after the reassessment. Summary: Both the appeals were treated as allowed for statistical purposes. The Tribunal remanded the matter to the AO/TPO for re-determination of the ALP in accordance with the prescribed methods and precedents, and set aside the penalty order with the liberty for the AO to re-initiate penalty proceedings post reassessment.
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