2017 (4) TMI 1007 - AT - Income Tax

TPA - Adjustment made by the assessee for the non-operational expenses - Held that - The assessee s business module cannot be straightway compared with other comparables, unless the extraordinary item of expenditure excluded while comparing so as to arrive at correct margin of profit. It was brought to our notice that TPO had accepted the pricing pattern of the assessee in the succeeding assessment year namely 2013-14 & 2014-15 and there was transfer pricing adjustment in these assessment years. It is also brought to our notice that there is a steady increase in revenue generated by the assessee in the subsequent assessment year on account of new project without any change in pricing pattern of the project with the same A.E. In such circumstances, it is not appropriate to ignore the extraordinary items of expenditure in the form of employee salary cost and consultancy charges incurred by the assessee in the assessment year under consideration. Hence, we are of the opinion that an adjustment has to be given towards this, while computing the ALP as once the adjustment is made, the PLI would be higher than that of comparable arrived at 26%. In our opinion there cannot be any upward adjustment of ₹ 2.64 crores to the value of international transaction in the assessment year under consideration. Accordingly, the ground taken by the assessee is allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Rejection of adjustment for non-operational expenses by the assessee.
3. Determination of Arm's Length Price (ALP) and Profit Level Indicator (PLI).
4. Acceptance of Transfer Pricing Officer's (TPO) comparables and methodology.
5. Validity of economic adjustments claimed by the assessee.
6. Applicability of CUP method as an alternative analysis.
7. Treatment of employee cost and consultancy charges as operating costs.
8. Upward adjustment of ?2.64 crores to the value of international transactions.
9. Levy of penalty under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Condonation of Delay:
The appeal was filed late by 3 days due to the Director being out of station. The Tribunal found the reasons bonafide and condoned the delay.

2. Rejection of Adjustment for Non-operational Expenses:
The assessee's appeal was primarily concerned with the rejection of adjustments made for non-operational expenses. The TPO disregarded these adjustments, leading to an upward adjustment of ?2.64 crores.

3. Determination of ALP and PLI:
The TPO used the Transactional Net Margin Method (TNMM) and selected eight comparable companies. The TPO computed the PLI at 18.95% and determined the ALP, resulting in an upward adjustment as the appellant's margin did not fall within the ±5% range of the ALP.

4. Acceptance of TPO's Comparables and Methodology:
The TPO rejected the assessee's comparables for not meeting specific criteria. The TPO applied various filters to determine functionally similar comparables, leading to the selection of different companies with an average margin of 18.95%.

5. Validity of Economic Adjustments:
The TPO rejected the economic adjustments claimed by the assessee, including adjustments for non-operating costs and employee training expenses, as these were not substantiated by the financials or Director's report.

6. Applicability of CUP Method:
The assessee proposed an alternative analysis under the Comparable Uncontrolled Price (CUP) method, which was rejected by the TPO due to the lack of agreements detailing functions and remuneration with non-AE clients.

7. Treatment of Employee Cost and Consultancy Charges:
The TPO treated employee costs and consultancy charges as operating costs. The Tribunal, however, found that these costs were related to future projects and should not be considered as operating expenses. The Tribunal noted that these expenses were not project-specific and could not be capitalized as work-in-progress.

8. Upward Adjustment of ?2.64 Crores:
The Tribunal concluded that the extraordinary items of expenditure, such as employee costs and consultancy charges, should be excluded while computing the ALP. The Tribunal found that once these adjustments were made, the PLI would be higher than that of the comparables, negating the need for an upward adjustment of ?2.64 crores.

9. Levy of Penalty Under Section 271(1)(c):
Since the main ground of the appeal was allowed, the question of levying a penalty for furnishing inaccurate particulars of income or concealment of income did not arise.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the extraordinary expenses should be excluded from the operating costs, and no upward adjustment was warranted. Consequently, the penalty under section 271(1)(c) was also not applicable.