2017 (3) TMI 197 - AT - Income Tax

DRP power or authority to direct the TPO to decide the percentage of risk adjustment - Held that - DRP has no authority either to direct the Assessing Officer or TPO to make further enquiry and decide the matter. The DRP at the best call for remand report from any income tax authority namely either the TPO or the Assessing Officer and decide the issue arises for adjudication by itself. It is also open to the DRP to make further enquiry by itself. However, the DRP has no authority or jurisdiction to direct the TPO to make any enquiry. Thus the order of the lower authorities including the DRP is set aside. The DRP shall decide the issue afresh after considering the relevant material on record.

Summary

Issues:
1. Jurisdiction of the DRP to direct the TPO to decide the percentage of risk adjustment.
2. Selection of comparables for transfer pricing adjustment.
3. Authority of the DRP to make further enquiries and issue directions under Section 144C of the Income Tax Act.

Analysis:
1. The appeal involved a dispute regarding the jurisdiction of the DRP to direct the TPO to decide the percentage of risk adjustment. The Ld. Departmental Representative argued that the DRP exceeded its jurisdiction by instructing the TPO to determine the risk adjustment percentage, contending that the DRP should decide the matter itself under Section 144C of the Act. On the contrary, the Ld. Counsel for the assessee asserted that the DRP had the discretion to either decide the issue or direct the TPO to reconsider, emphasizing that the DRP's direction did not exceed its authority. The Tribunal analyzed the provisions of Section 144C and concluded that the DRP lacked the power to instruct the TPO to conduct further inquiries or make decisions. Therefore, the Tribunal set aside the lower authorities' orders, directing the DRP to reevaluate the issue independently, either by conducting further inquiries or requesting relevant reports, without involving the TPO in decision-making.

2. Another issue in the case pertained to the selection of comparables for transfer pricing adjustment. The assessee had chosen four comparables, including M/s. Ashnoor Textiles Mills Ltd. and M/s. RIBA Textiles Ltd. The TPO rejected M/s. Ashnoor Textiles Ltd., considering it a profitable company, and M/s. SR Industries Ltd., deeming it a loss-making entity. The DRP directed the TPO to include M/s. Ashnoor Textiles Mills Ltd. as a comparable, emphasizing that the TPO's rejection was unjustified. The Tribunal acknowledged the DRP's directive and instructed the DRP to reconsider the issue, allowing for further examination and decision-making without involving the TPO.

3. The Tribunal delved into the authority of the DRP to conduct inquiries and issue directions under Section 144C of the Act. It highlighted that the DRP could call for remand reports but could not instruct the Assessing Officer or TPO to conduct further inquiries or decide matters. The Tribunal emphasized that the DRP should independently decide issues arising for adjudication, either through its own inquiries or by requesting reports. Consequently, the Tribunal allowed the Revenue's appeal, setting aside the previous orders and returning the matter to the DRP for fresh consideration, emphasizing the need for independent decision-making by the DRP based on relevant material and inquiries.

In conclusion, the judgment addressed the jurisdictional limits of the DRP, the selection of comparables for transfer pricing adjustments, and the DRP's authority to conduct inquiries and issue directions under Section 144C of the Income Tax Act, emphasizing the need for independent decision-making by the DRP without involving the TPO in decision-making processes.