2018 (1) TMI 1158 - HC - Income Tax

Directions for fresh Transfer Pricing (TP) study for benchmarking of the international transactions involving the Assessee and its Associated Enterprises (AE) - Held that - A perusal of the impugned order of the ITAT reveals that there was indeed no occasion for the ITAT to direct the TPO to undertake a fresh TP study analysis to benchmark the international transactions undertaken by the Assessee. The issue before the ITAT was whether three comparables viz., Apitco, Choksi and Wapcos were rightly included and the Assessee s three comparables viz., Educational Consultants (India) Limited, ITDC and In House Productions Ltd. were rightly excluded. This required an FAR analysis to be undertaken vis-a-vis these comparables. Direction to the TPO to allocate the expenses on the basis of gross margin in the agency segment and not in the ratio of sales for the purpose of computing ALP of the international transactions, had nothing to do with the above issue concerning selection of comparables. For the latter purpose, Rule 10B (2) read with Rule 10B (3) of the Income Tax Rules require the said exercise to be undertaken with reference to inter alia the functions performed/taken into account, assets ought to be employed and the risks assumed by the tested party and the comparable. A specific characteristic of the property transferred or services provided in both the controlled and uncontrolled transactions had to be taken into consideration. It is not understood why the ITAT did not undertake such exercise regarding the correctness of the inclusion and exclusion of comparables. - matter restored before ITAT - Consequently, the Court answers the question framed in the affirmative, that is, in favour of the Assessee and against the Revenue

Summary

Issues:
1. Delay in re-filing condonation.
2. Appeal under Section 260A of the Income Tax Act, 1961 against ITAT order.
3. Correctness of TPO's direction for fresh TP study.
4. Selection of comparables for benchmarking analysis.

Delay in Re-filing Condonation:
The High Court condoned the delay in re-filing based on the reasons provided in the application, disposing of the matter promptly.

Appeal Against ITAT Order:
The appeal was filed by the Assessee challenging the ITAT's order directing the TPO to undertake a fresh Transfer Pricing (TP) study for benchmarking international transactions. The primary question of law framed was whether the ITAT erred in law by this direction.

Correctness of TPO's Direction for Fresh TP Study:
The Assessee, a Branch Office of a French company, engaged in various business segments including distribution, agency, and market support services. The TPO recommended an upward TP adjustment, segregating agency services and combining them with market support services for benchmarking. The DRP upheld this decision, leading to an increased TP adjustment. The ITAT partly allowed the appeal, directing the TPO to rework the TP analysis, focusing on the allocation of expenses. The High Court set aside the ITAT's order, emphasizing the need for an FAR analysis in selecting comparables and criticizing the remand to the TPO.

Selection of Comparables for Benchmarking Analysis:
The Assessee challenged the inclusion of certain comparables by the TPO for benchmarking, arguing for a correct selection based on functions performed, assets employed, and risks assumed. The High Court found the ITAT's remand to the TPO unnecessary, setting aside the order and restoring the appeal to the ITAT for a decision on the validity of the comparables' selection.

This detailed analysis of the judgment covers the issues of delay in re-filing condonation, the appeal against the ITAT order, the correctness of the TPO's direction for a fresh TP study, and the selection of comparables for benchmarking analysis, providing a comprehensive understanding of the legal proceedings and decisions involved.