2019 (5) TMI 951 - HC - Income Tax

TP Adjustment - writ against DRP order - admission of additional documents - constitution working of DRP - reject the methodology adopted by the petitioner for the reason that the segmental profit and loss had not been disclosed as part of the financial statements and were also not certified by an external Chartered Accountant - rejection claim of assessee for the reason that remand report of the TPO as incomplete - HELD THAT - The intent and purpose of constituting the DRP, with three high ranking Commissioners that have exclusive jurisdiction for the said purpose, is to provide effective and speedy resolution of transfer pricing disputes. DRP is thus expected to use every measure possible to resolve a dispute before it. DRP, in the present case, rejects the petitioners claim solely on the reasoning that the report of the TPO was incomplete. If at all further information was required, the DRP is expected to have called for the said information to equip itself with the necessary material to come to a reasoned conclusion. Its conclusion will depend upon independent application of mind to all relevant facts and circumstances but such an exercise has to be undertaken in a judicious manner, taking cognizance of all relevant factors. The fact that the DRP has, in the present case, accepted the request to admit additional documents and seek a remand report from the assessing officer can only mean that the panel was of the view that further examination of the issue by the Department was called for. Having done this, the purpose is lost if the exercise is not carried through to its logical conclusion. The remand report of the TPO states that the addition was unwarranted on facts but the DRP reasons that the aspect of cost being included in the sales was not examined by the officer. Certainly the DRP is not bound to accept the conclusions of the officer in the report, but the Panel could well have sought a clarification, or directed the officer to carry out further verification in this regard. Set-aside the order of the DRP dated 16.12.2016 and direct rehearing of the matter, in regard to the adjustment relating to ₹ 634,773,087/-. The DRP will decide the issue de novo, calling for such information as it deems necessary either from the Assessing Officer or the petitioner, and after affording an opportunity of personal hearing to the petitioner. Seeing as the matter pertains to Assessment Year 2011-12, the DRP will conclude the hearing within a period of two months from date of receipt of a copy of this order. The writ petition is allowed in the aforesaid terms.

Summary

Issues Involved:
1. Challenge to the order of the Dispute Resolution Panel (DRP).
2. Determination of Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO).
3. Methodology and verification of segmental profits and losses.
4. Admission and verification of additional evidence by the DRP.
5. Role and responsibilities of the DRP in resolving transfer pricing disputes.

Issue-wise Detailed Analysis:

1. Challenge to the order of the Dispute Resolution Panel (DRP):
The petitioner challenged the order of the DRP dated 16.12.2016, which rejected the report of the TPO regarding the adjustment of ?63,47,73,087/-. The DRP dismissed the petitioner's claim based on the incomplete report of the TPO, without further verification.

2. Determination of Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO):
The TPO scrutinized the petitioner’s international transactions with Associated Enterprises (AE) for the assessment year 2012-13. The petitioner used the Transactional Net Margin Method (TNMM) to determine the ALP on a segmental basis. The TPO rejected this methodology due to the absence of certified segmental profit and loss statements and issued a show cause notice. Despite objections, the TPO made an adjustment of ?63,47,73,087/- based on circumstantial evidence, without proper verification of export invoices.

3. Methodology and verification of segmental profits and losses:
The TPO noted inconsistencies in the segmental profits disclosed by the petitioner, which varied significantly in different submissions. The TPO concluded that the segmental turnover reported did not represent the actual export turnover to AEs and benchmarked the results with external comparables, leading to a downward adjustment.

4. Admission and verification of additional evidence by the DRP:
The petitioner filed additional evidence to support its claim that the TP adjustment arose from a difference in accounting methodologies between the petitioner and the AE. The DRP admitted this evidence and sought a remand report from the AO, who verified the invoices and found the petitioner's claim to be correct. However, the DRP rejected the TPO's report, citing incomplete verification of cost figures.

5. Role and responsibilities of the DRP in resolving transfer pricing disputes:
The DRP, constituted to provide effective and speedy resolution of transfer pricing disputes, rejected the petitioner's claim solely based on the incomplete TPO report. The court highlighted that the DRP should have sought further information or clarification to come to a reasoned conclusion, emphasizing the DRP's role in resolving disputes in a non-adversarial manner.

Conclusion:
The court set aside the DRP's order dated 16.12.2016 and directed a rehearing of the matter concerning the adjustment of ?63,47,73,087/-. The DRP was instructed to decide the issue de novo, calling for necessary information from the AO or the petitioner, and to conclude the hearing within two months. The writ petition was allowed, and the connected WMP was closed.