2018 (9) TMI 786 - AT - Income Tax

Addition on account of Transfer Pricing Adjustment - selection and rejection of comparable - denial of natural justice - non providing an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the said comparables - Held that - CIT(A) ought to have given an opportunity to the AO/TPO to offer their comments on the various aspects of the matter by seeking remand report before accepting the submissions made on behalf of the assessee. CIT(A) has passed a very cryptic order and after extracting the submissions made on behalf of the assessee of his impugned order, he has given his conclusions hardly on one and half pages. As rightly pointed out by the learned DR, the comparables selected by the assessee were rejected by the TPO on specific grounds, but the Ld. CIT(A) has accepted the same only by stating that the FAR of the said entities was comparable to the FAR of the assessee-company. He has not given any reason whatsoever to come to that conclusion and has also not commented upon the specific grounds given by the TPO for rejecting the said comparables. Similarly the entities selected by the TPO as comparables on specific grounds were rejected by the Ld. CIT(A) on the ground that their profit and loss account was not available. As rightly pointed out by the learned DR, the OP/OC of the said entities was worked out by the TPO in his order which was not possible without having their profit and loss account. This aspect, therefore, should have been confronted by the CIT(A) to the AO/TPO seeking their comments. CIT(A) in his impugned order has observed that the TPO did not provide an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the comparables selected by him and there was thus a violation of principles of natural justice by the TPO. - Held that - It is observed that the TPO has clearly mentioned in his impugned order that the financial statements of the said comparables were available in public domain and the assessee did not ask for the same specifically. CIT(A) at least should have remanded the matter to the AO/TPO for providing an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the said comparables if at all, according to the CIT(A), there was any violation of principles of natural justice by the TPO - set aside the impugned order of the Ld. CIT(A) and remit the matter back to him for deciding the same afresh after getting the remand report from the AO/TPO and by passing a well reasoned and well discussed order. Decided in favour of revenue for statistical purpose.

Summary

Issues Involved:
1. Deletion of addition made by the AO on account of Transfer Pricing Adjustment for A.Y. 2010-11.
2. Deletion of addition made by the AO on account of Transfer Pricing Adjustment for A.Y. 2011-12.

Detailed Analysis:

1. Deletion of Addition Made by AO on Account of Transfer Pricing Adjustment for A.Y. 2010-11:

The assessee, a branch of a company incorporated in Cyprus, engaged in providing Steel Detailing Services, filed its return for A.Y. 2010-11 declaring a total income of Nil after claiming deductions under Section 10 of the Act. The international transactions involving Engineering Design Services with its AE were scrutinized for arm's length pricing. The assessee used the TNMM method with OP/OC as the PLI, selecting five comparables. However, the TPO rejected four comparables and recalculated the OP/OC, leading to an adjustment of ?81,53,989.

The CIT(A) deleted this addition, reasoning that the TPO violated principles of natural justice by not providing the assessee with audited financial statements and FAR analysis of the comparables. The CIT(A) found the FAR of the comparables used by the TPO to be different or incomplete and thus rejected them. The CIT(A) accepted the comparables initially selected by the assessee, concluding that the international transaction was at arm's length.

The Revenue's appeal argued that the CIT(A) did not seek a remand report from the AO/TPO and failed to provide specific reasons for accepting the assessee's comparables and rejecting the TPO's. The Tribunal found merit in this contention, noting that the CIT(A) passed a very cryptic order without detailed reasoning. It was held that the CIT(A) should have remanded the matter to the AO/TPO for comments, especially regarding the availability of the financial statements in the public domain. The Tribunal set aside the CIT(A)'s order and remitted the matter back for a fresh decision after obtaining a remand report from the AO/TPO.

2. Deletion of Addition Made by AO on Account of Transfer Pricing Adjustment for A.Y. 2011-12:

The issue for A.Y. 2011-12 was similar to that of A.Y. 2010-11, involving the deletion of an addition made by the AO on account of transfer pricing adjustment. The Tribunal followed its decision for A.Y. 2010-11, remitting the matter back to the CIT(A) for a fresh decision after obtaining a remand report from the AO/TPO.

Conclusion:

The Tribunal allowed both appeals by the Revenue for statistical purposes, remitting the matters back to the CIT(A) for a fresh decision after obtaining remand reports from the AO/TPO, ensuring a well-reasoned and well-discussed order.