2017 (9) TMI 1586 - AT - Income Tax

TPA - ALP determination - Applying the entity level turnover - Held that - It is undisputed and apparent from the directions of the Hon ble DRP that the Hon ble DRP had directed the TPO to calculate the ALP by restricting the adjustment to the international transaction and also allowing credit of amount of ₹ 3698683/- already added back by the assessee in the computation of taxable income. It is very much evident that while passing the order subsequent to the directions of the Hon ble DRP, the AO has not followed the directions of the Hon ble DRP in this regard and has proceeded to calculate the ALP by applying the entity level turnover. Therefore, we deem it fit to restore this issue to the file of the TPO/AO for giving effect to the directions of the Hon ble DRP in a proper manner after verification and after affording due opportunity to the assessee to present its case. Accordingly, ground no. 6 and 8 of the assessee s appeal stand allowed for statistical purposes. Challenging selection of two comparables viz. ITDL Imagetic Ltd. And Tirupati Incs Ltd. - Held that - On going through the profiles of these two comparables, it is undisputed that ITD Imagetic Ltd. is not manufacturing business whereas Tirupati Inc. Ltd. manufacturers printing inks on the other hand, the assessee is a trading company. It is undisputed that the risk profile of a manufacturing company is different from that of a trading company. We are of the considered opinion that the risk profile and the functionality of these two companies being different than that of the assessee company, these two companies should not have been selected as a comparable. Accordingly, we restore these two comparables to the file of the TPO with the direction that these two companies be excluded from the final set of comparables if on verification it is confirmed that both these two companies carry out manufacturing operations. Needless to say, the assessee will be afforded due opportunity of being heard at the time of verification by the TPO. Accordingly, ground no. 7 stands allowed for statistical purposes.

Summary

Issues Involved:
1. Computation of total income.
2. Recalculation of Arm's Length Price (ALP) of international transactions.
3. Application of Comparable Uncontrolled Price (CUP) method.
4. Rejection of Transactional Net Margin Method (TNMM).
5. Rule of consistency.
6. Application of operating profit ratio.
7. Selection of comparable companies.
8. Deduction of already added back amount.
9. Charging of interest under sections 234A, 234B, 234C, and 234D.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Computation of Total Income:
The assessee contested the computation of total income at ?67,84,771 against a returned loss of ?73,53,082. It was argued that the returned loss, supported by audited books and Form 3CEB, should be accepted.

2. Recalculation of ALP:
The assessee objected to the addition of ?1,41,36,214 by recalculating the ALP of international transactions under section 92CA(5). The assessee had applied the TNMM method, which was previously accepted in AY 2008-09, and argued that no specific defects were pointed out by the AO/TPO.

3. Application of CUP Method:
The AO/TPO applied the CUP method instead of the TNMM method. The assessee argued that the facts were similar to AY 2008-09, and there was no justification for deviating from the previously accepted method.

4. Rejection of TNMM:
The rejection of the TNMM method by the AO/TPO/DRP-I was contested. It was argued that the TNMM method was appropriate and had been confirmed by the Hon’ble DRP in AY 2008-09.

5. Rule of Consistency:
The assessee argued that the authorities did not follow the rule of consistency, as there was no difference in the facts of the case for the assessment year in question compared to AY 2008-09.

6. Application of Operating Profit Ratio:
The authorities applied the operating profit ratio on the entire turnover instead of only the turnover generated from transactions with associated enterprises. The Hon’ble DRP had directed the TPO to consider only the transactions with the AEs for adjustment and to exclude the self-adjustment made by the assessee.

7. Selection of Comparable Companies:
The selection of ITDL Imagetic Limited and Tirupati Inks Limited as comparables was contested. The assessee argued that these companies were wholly manufacturing companies, while the assessee was entirely in trading business, making them inappropriate comparables.

8. Deduction of Already Added Back Amount:
The authorities did not deduct ?36,98,683 from the adjustment amount calculated by the AO/TPO, which had already been added back by the assessee in the computation of taxable income. The Hon’ble DRP had directed the TPO to allow this deduction.

9. Charging of Interest:
The assessee contested the charging of interest under sections 234A, 234B, 234C, and 234D of the Income-tax Act, 1961, and urged the ITAT to direct the AO to modify the order accordingly.

10. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under section 271(1)(c) was contested. The assessee argued that there was no concealment of income or furnishing of inaccurate particulars, making the initiation of penalty proceedings unjustified.

Judgment:
The ITAT restored the issue of ALP calculation to the file of the TPO/AO for proper verification and compliance with the Hon’ble DRP's directions. The selection of ITDL Imagetic Limited and Tirupati Inks Limited as comparables was also restored to the TPO for verification. Consequently, grounds related to these issues were allowed for statistical purposes. Other grounds were treated as academic or consequential, and the initiation of penalty proceedings was dismissed as premature. The appeal was partly allowed for statistical purposes.