2019 (8) TMI 176 - AT - Income Tax

TPA - selection of TNMM by the assessee for benchmarking the transactions - Whether margin of the tested party is at arm s length to the margins of the comparable companies? - HELD THAT - No infirmity in the selection of TNMM by the assessee for benchmarking the transactions. We have already held that the assessee has rightly selected the AE as tested party. Thus, the international transactions of payment of fees for technical assistance services is to be benchmarked by comparing the margins of the CWT, Singapore (tested party) with the margins of seven entities selected by the assessee as comparables. The Ld. counsel has further pointed out that the comparable companies are engaged in the similar kind of services. Hence, we find substance in the contention of the Ld. counsel for the assessee, however, since the TPO has not verified the margins shown by the assessee vis- -vis the companies selected by the assessee as comparables, we respectfully following the decision of the Pune Bench of the Tribunal in the case of Emerson Climate Technologies (India) Ltd 2017 (12) TMI 1568 - ITAT PUNE restore this issue to the file of AO/TPO for a limited purpose of verification as to whether the margin of the tested party is at arm s length to the margins of the comparable companies. Needless to say, that the authorities shall give a reasonable opportunity of being heard to the assessee while deciding the said issue

Summary

Issues Involved:
1. Validity of the orders passed by the AO/TPO and directions issued by the DRP.
2. Legality of the directions issued by the DRP dated August 6, 2018.
3. Assessment of income under normal provisions.
4. Transfer Pricing Adjustment.
5. Levying of interest under section 234B of the Act.
6. Initiation of penalty proceedings under section 271(1)(c) read with section 274 of the Act.

Detailed Analysis:

1. Validity of the Orders Passed by AO/TPO and Directions Issued by DRP:
The assessee contended that the orders passed by the AO/TPO and the directions issued by the DRP were not in accordance with the law and violated the principles of equity and natural justice. The Tribunal noted that these grounds were general in nature and did not require specific adjudication.

2. Legality of the Directions Issued by DRP Dated August 6, 2018:
The assessee argued that the directions issued by the DRP were bad in law and violated section 144C(6) of the Act. The Tribunal did not find it necessary to specifically adjudicate these grounds as they were also general in nature.

3. Assessment of Income Under Normal Provisions:
The AO assessed the income of the appellant at INR 658,511,620 as against the returned income of INR 355,931,140. The Tribunal did not specifically address this issue separately but focused on the transfer pricing adjustment which significantly impacted the assessed income.

4. Transfer Pricing Adjustment:
The primary issue was the adjustment of INR 302,580,485 in respect of international transactions for receipt of technical assistance from the Associated Enterprise (AE). The AO/TPO rejected the Transactional Net Margin Method (TNMM) adopted by the assessee and determined the arm's length price (ALP) as Nil, questioning the commercial expediency and benefits derived from the services.

The Tribunal noted that similar grounds were raised in previous assessment years (AY 2011-12 and 2012-13), where the issue was restored to the file of AO/TPO for limited verification. The Tribunal found that the assessee had provided substantial evidence, including agreements, cost allocation details, and CPA certificates, to substantiate the services received and their benefits. The Tribunal emphasized that the TPO cannot question the commercial expediency of the assessee and must rely on evidence.

The Tribunal cited the case of AWB India Pvt. Ltd., where it was held that the CUP method cannot be applied without identifying a comparable uncontrolled transaction. The Tribunal also referred to the case of Emerson Climate Technologies (India) Ltd., where the issue was restored for verification of margins. Following these precedents, the Tribunal restored the issue to the file of AO/TPO for limited verification of whether the margin of the tested party (CWT Singapore) is at arm's length compared to the margins of the comparable companies.

5. Levying of Interest Under Section 234B:
The assessee contended that the AO erred in levying interest under section 234B mechanically and without satisfactory reasons. The Tribunal noted that this ground was consequential and did not require separate adjudication.

6. Initiation of Penalty Proceedings Under Section 271(1)(c) Read with Section 274:
The assessee argued that the AO/DRP erred in initiating penalty proceedings for furnishing inaccurate particulars of income. The Tribunal found this ground to be premature and did not adjudicate it.

Conclusion:
The Tribunal allowed the appeals for statistical purposes, restoring the issue of transfer pricing adjustment to the file of AO/TPO for limited verification. The AO/TPO was directed to verify whether the margin of the tested party is at arm's length compared to the margins of the comparable companies, following the principles laid down in previous cases. The Tribunal emphasized the need for a reasonable opportunity of being heard for the assessee during this process.