2019 (5) TMI 1440 - AT - Income Tax

TP Adjustment - selection of MAM - TNMM v/s CUP - TPO rejected TNMM adopted by assessee for ALP determination and made adjustment in respect of commission segment business by adopting margin of profit for trading with non-AE of assessee - HELD THAT - TNMM is most appropriate method under such circumstances instead of CUP. Considering fact that assessee is a low risk service provider and that there is no change in FAR from assessment year 2003-04 to 2018-19 as has been observed by this Tribunal in preceding assessment year, we do not find any reason to deviate by adopting any other method other than TNMM. Respectfully following view taken by this Tribunal in preceding years, we remand the issue back to file of Ld. TPO to examine and benchmark international transaction by adopting TNMM as most appropriate method by taking Berry ratio as PLI, as has been approved by Hon ble High Court. Needless to say that assessee shall be granted proper opportunity as per law. Issue raised by assessee in the appeal for assessment year 2012-13 stands allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of income by the Assessing Officer (AO).
2. Reference to the Transfer Pricing Officer (TPO) under Section 92CA(1).
3. Transfer Pricing adjustments without meeting preconditions of Section 92C(3).
4. Transfer Pricing adjustments without a show-cause notice.
5. Addition on a protective basis.
6. Application of Bilateral Advance Pricing Agreement (BAPA).
7. Dispute Resolution Panel (DRP) upholding TPO's findings.
8. Levy of interest under Sections 234B and 234C.
9. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Determination of Income by the AO:
The AO determined the income of the appellant at ?66,81,20,610 for AY 2012-13 and ?60,53,32,624 for AY 2013-14, significantly higher than the revised returns filed by the appellant. The Tribunal noted that the AO's determination was based on adjustments proposed by the TPO, which were challenged by the appellant.

2. Reference to the TPO under Section 92CA(1):
The appellant argued that the reference to the TPO was not in accordance with Section 92CA(1) and that no opportunity of being heard was provided. The Tribunal observed that the reference and subsequent actions by the TPO lacked procedural fairness.

3. Transfer Pricing Adjustments without Meeting Preconditions of Section 92C(3):
The TPO made adjustments without establishing the existence of any preconditions provided in Section 92C(3). The Tribunal emphasized that these preconditions are mandatory for making any adjustments under Section 92CA(3).

4. Transfer Pricing Adjustments without a Show-Cause Notice:
The TPO made adjustments without issuing a show-cause notice, violating principles of natural justice. The Tribunal noted that the adjustments were arbitrary and lacked procedural fairness.

5. Addition on a Protective Basis:
The TPO made additions on a protective basis, which is not permissible unless income is to be added in the hands of more than one taxpayer. The Tribunal found this approach legally unsustainable.

6. Application of Bilateral Advance Pricing Agreement (BAPA):
The TPO applied the BAPA signed by the appellant, even on transactions not covered by the agreement. The Tribunal found errors in computing the arm's length operating profit/operating expense (OP/OPEX) and segmental profitability, noting that the TPO failed to conduct a proper comparability analysis as mandated under Section 92C.

7. Dispute Resolution Panel (DRP) Upholding TPO's Findings:
The DRP upheld the TPO's findings without any basis or justification. The Tribunal noted that the DRP failed to comprehend the nuances of the case and did not provide adequate reasons for its decision.

8. Levy of Interest under Sections 234B and 234C:
The AO levied interest amounting to ?13,32,89,276 for AY 2012-13 and ?8,82,22,041 for AY 2013-14. The Tribunal observed that the levy of interest was consequential to the adjustments made by the TPO and AO, which were under dispute.

9. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO initiated penalty proceedings under Section 271(1)(c) without examining their validity. The Tribunal noted that the initiation of such proceedings was premature and dependent on the final outcome of the disputed adjustments.

Tribunal's Decision:
The Tribunal remanded the matter back to the TPO to re-examine and benchmark the international transactions using the Transactional Net Margin Method (TNMM) with Berry ratio as the Profit Level Indicator (PLI), as approved by the High Court. The Tribunal emphasized that the TPO must provide the appellant with a proper opportunity to substantiate its arm's length price (ALP).

The appeals for both assessment years were allowed for statistical purposes, with directions to the TPO to follow the Tribunal's guidance and provide the appellant with due process. The Tribunal's decision was pronounced in the open court on 21st May 2019.