2017 (4) TMI 410 - HC - Income Tax

TPA - reject the 53 comparable entities - scope of adjudication in remand proceedings - Held that - It is obvious that the ITAT was not seized of any dispute with respect to the appropriateness of including any comparable or excluding any from the list furnished by the assessee. The record nowhere shows that the original TPO report, or the draft assessment order, or even the DRP s determination reflects any concern about the appropriateness of the inclusion of any comparable on the ground of its/their functionality. The ITAT s substantial ruling shows that the TPO had followed the previous order and changed the basis of PLI of Operating Profit/Total Cost to FOB value of the export goods in the hands of the AEs. The assessee had computed its OP/TC at 7.56% based on the cost incurred by it as constituting Total cost . This is reflected in the finding and conclusion that We, therefore, set aside the impugned order and hold that the total cost being the denominator in the PLI of OP/TC, has to be taken as the costs incurred by the assessee and not the FOB value of goods between third party enterprises sourced through the assessee. In other words, the tested party should be the assessee and not it s A.E . The operative part of the ITAT s direction to carry out the exercise afresh since it did not have the figures relating to the comparables has to be therefore, seen in the context of what was actually done. Therefore, the Revenue s argument that the TPO/AO could doubt the appropriateness of the comparables used by the assessee is insubstantial and unmerited. The court is of opinion that the impugned show cause notice cannot be sustained. Firstly, when there is a remand on the basis of a specific finding (in this case, the untenability of shifting of the OP/TC to FOB) the TPO could not have travelled beyond it, given that there was no controversy ever about the inclusion of any comparable. Concededly there was no controversy about the appropriateness of inclusion of any comparable for the ALP determination purpose. Nor was there any finding or direction on that score. In the given circumstances, the Revenue could not have seized upon the direction to determine it afresh as the basis for going into the merits of inclusion of such comparables. Secondly and more fundamentally, the issue of comparables inclusion is not one that goes to define jurisdiction itself. There is authority for the proposition that invocation of jurisdiction is itself in issue, notwithstanding that being not subject to remand. However, that is not the case here. The remand was essentially consequential to give tax effect to the findings of the ITAT.

Summary

Issues Involved:
1. Legitimacy of the show cause notice issued by the Revenue.
2. Scope and limits of the remand by the Income Tax Appellate Tribunal (ITAT).
3. Appropriateness of the comparables used for determining the Arm’s Length Price (ALP).

Detailed Analysis:

1. Legitimacy of the Show Cause Notice:
The petitioner argued that the show cause notice issued by the Revenue was beyond the scope of the remit by the ITAT and sought to reopen issues that had attained finality in judicial orders. The petitioner contended that the Revenue's attempt to reject the 53 comparable entities previously accepted and to introduce new comparables was unlawful. The court concluded that the impugned show cause notice could not be sustained, as the TPO could not travel beyond the specific finding of the remand, which was limited to the untenability of shifting the OP/TC to FOB.

2. Scope and Limits of the Remand by ITAT:
The ITAT had remanded the matter to the TPO for fresh determination of the ALP based on the correct cost base of the petitioner, in line with the judgment of the High Court for the assessment year 2006-07. The ITAT's operative order emphasized that the base in the denominator should be the 'total cost' incurred by the assessee, not the FOB value of goods between third-party enterprises. The court noted that the ITAT was not concerned with the appropriateness of including or excluding any comparable from the list furnished by the assessee. The remand was specifically about determining the correct base in the PLI of OP/TC and did not extend to questioning the basis for the TP exercise.

3. Appropriateness of the Comparables Used for Determining ALP:
The Revenue argued that the TPO acted within his jurisdiction to examine the comparables and determine the ALP based on a functional analysis of the comparables with the FAR of the assessee. The Revenue contended that out of the 53 comparables, 51 could not be accepted due to various reasons, such as different financial years, functional dissimilarity, and lack of current year data. However, the court found that the original TPO report, draft assessment order, and DRP's determination did not reflect any concern about the appropriateness of the comparables based on functionality. The court highlighted that the ITAT's substantial ruling was focused on the base of 'total cost' and not on the inclusion or exclusion of comparables.

Conclusion:
The court concluded that the Revenue's argument that the TPO/AO could doubt the appropriateness of the comparables used by the assessee was insubstantial and unmerited. The court emphasized that the remand was limited to determining the correct base in the PLI of OP/TC and did not extend to questioning the comparables' inclusion. Consequently, the show cause notice dated 23 September 2016 and all proceedings emanating from it were quashed. The writ petition was allowed without any order on costs.