2017 (9) TMI 113 - AT - Income Tax

Addition on account of arm s length price - adjustment on account of cost allocation in respect to shared services from AE - comparability - comparable selected are operating since long and the assessee is in the initial stages of operation - Held that - The assessee has pointed out specific instances which were not considered by the ld. CIT(A) and certain informations relating to comparables which were available at the time of preparing the TP study were not later on available and furnished to the ld. CIT(A), but those were not appreciated in right perspective. Moreover, from the submissions of the assessee before the ld. CIT(A) as discussed in the former part of this order, it is clear that the comparables selected by the TPO were operating since long and the assessee is in the initial stages of its operation then considerable adjustments has to be made to the operating expenses in order to give due leverage to the contribution of income to the fixed cost so as to bring it at the level playing field with the comparables. In view the decision in case of MGE UPS System India Pvt. Ltd. Vs DCIT, Circle-6(1), New Delhi (2016 (5) TMI 1387 - ITAT DELHI) deem it appropriate to set aside this case back to the file of the AO/TPO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. Appeal of the assessee is allowed for statistical purposes.

Issues Involved:
1. Confirmation of total income determination.
2. Disregard of arm's length price determined by the appellant.
3. Rejection of projected operating margins for determining arm's length price.
4. Non-acceptance of quantitative adjustments for capacity utilization.
5. Ignoring the operating loss of the AE in Singapore.
6. Rejection of certain comparables identified by the appellant.
7. Use of single-year data instead of multiple-year data.
8. Use of Comparable Uncontrolled Price (CUP) method.
9. Initiation of penalty proceedings under section 271(1)(c).
10. Ignoring the first-year operational challenges and high fixed costs.

Detailed Analysis:

1. Confirmation of Total Income Determination:
The appellant contested the CIT(A)'s confirmation of the AO's order, which determined the total income at INR 87,06,390/- against a returned loss of INR 47,77,917/-. The Tribunal noted that the appellant's income was adjusted based on the arm's length price without considering the initial operational losses.

2. Disregard of Arm's Length Price Determined by the Appellant:
The appellant argued that the AO did not satisfy the conditions specified in Section 92C(3) before disregarding the arm's length price determined by the appellant. The CIT(A) upheld the AO's action, stating that the transfer pricing study conducted by the appellant was defective and not reliable, as it used prior-year data without demonstrating its material effect on the current year's transactions.

3. Rejection of Projected Operating Margins:
The appellant's use of projected operating margins for the first year of operations was rejected by the TPO/AO. The CIT(A) supported this rejection, stating that the comparability analysis must be based on contemporaneous data. The Tribunal highlighted that the appellant's claim for adjustments due to initial operational losses was not considered adequately.

4. Non-Acceptance of Quantitative Adjustments for Capacity Utilization:
The TPO/AO rejected the appellant's claim for adjustments based on capacity utilization differences, arguing that this concept is more relevant in the manufacturing sector. The CIT(A) upheld this view, noting that the appellant did not provide a proper analysis of the comparables' capacity utilization.

5. Ignoring the Operating Loss of the AE in Singapore:
The appellant contended that the AE in Singapore also faced operating losses, negating any profit-shifting motive. The CIT(A) dismissed this ground, stating that the appellant did not submit relevant facts and data to support this claim.

6. Rejection of Certain Comparables Identified by the Appellant:
The TPO/AO rejected some comparables identified by the appellant and selected functionally dissimilar companies. The CIT(A) upheld this decision, noting that the appellant's selection of comparables was inconsistent and not reliable.

7. Use of Single-Year Data Instead of Multiple-Year Data:
The appellant argued that the AO erred by using single-year data instead of multiple-year data. The CIT(A) upheld the AO's approach, emphasizing that the comparability analysis should be based on contemporaneous data.

8. Use of Comparable Uncontrolled Price (CUP) Method:
The TPO/AO used the CUP method for benchmarking the international transaction involving management and administration support services, concluding that the arm's length value was NIL. The CIT(A) upheld this adjustment, following precedents set by the ITAT in similar cases.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings against the appellant for concealing particulars of income or furnishing inaccurate particulars. This issue was not specifically addressed in the Tribunal's order.

10. Ignoring First-Year Operational Challenges and High Fixed Costs:
The appellant argued that the first year of operations involved high fixed costs and business exigencies, warranting adjustments. The Tribunal noted that the CIT(A) did not consider these arguments adequately and set aside the case for fresh consideration by the AO/TPO, emphasizing the need to account for initial operational challenges and fixed costs.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO to reconsider the case, taking into account the appellant's initial operational challenges, capacity utilization adjustments, and proper comparability analysis. The Tribunal emphasized the need for a level playing field in determining the arm's length price and the importance of considering the appellant's specific circumstances.

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