2019 (8) TMI 888 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee has prayed for exclusion of five comparables and inclusion of three comparables. A perusal of the impugned order shows that the Ld. CIT (A) has not properly considered the objections/submissions of the assessee on a number of comparables and has also passed a non-speaking order in respect of some of the comparables. The Ld. Sr. DR has been fair to accept that the issues need a reexamination by the Ld. First Appellate Authority. Therefore, we deem it appropriate to restore the adjudication on the exclusion and inclusion of the above mentioned eight comparables to the file of the Ld. CIT (A). It is restored accordingly with a direction to the Ld. CIT (A) to adjudicate the issue after providing reasonable opportunity to the assessee in this regard. Issue of working capital adjustment and risk adjustment is also restored to the file of the Ld. CIT (A). It is restored accordingly with a direction to the Ld. CIT (A) to adjudicate the issues after providing reasonable opportunity to the assessee in this regard.

Issues Involved:
1. Addition of INR 15,610,332 by rejecting the economic analysis undertaken by the assessee.
2. Lack of opportunity for the assessee to be heard before referring transfer pricing issues to the TPO.
3. Use of single-year data instead of multiple-year data.
4. Rejection and inclusion of certain companies as comparables for benchmarking transactions.
5. Non-speaking order by CIT(A) regarding rejection of Hartron Communication Limited.
6. Inclusion of companies rejected in the preceding assessment year.
7. Assumption of operating margin of 21.63% by AO/TPO.
8. Lack of adjustments for differences in working capital and risk profile.
9. Non-provision of arm’s length range benefit under proviso to Section 92C.
10. Initiation of penalty proceedings under section 271(1)(c).
11. Levy of interest under section 234B.

Issue-wise Detailed Analysis:

1. Addition of INR 15,610,332:
The CIT(A) upheld the addition made by the AO/TPO by rejecting the economic analysis undertaken by the assessee. The Tribunal noted that the assessee had used the Transactional Net Margin Method (TNMM) with OP/TC as the Profit Level Indicator (PLI) and had arrived at a set of six comparables. However, the TPO included additional comparables, leading to a transfer pricing adjustment of INR 1,56,10,332.

2. Lack of Opportunity to be Heard:
The assessee argued that the AO did not provide an opportunity to be heard before referring the transfer pricing issues to the TPO. This procedural lapse was highlighted as an error by the CIT(A).

3. Use of Single-Year Data:
The CIT(A) and AO were criticized for using single-year data instead of multiple-year data for determining arm’s length margins/prices. The assessee contended that the data for FY 2004-05 was not available at the time of complying with Indian TP documentation requirements.

4. Rejection and Inclusion of Comparables:
The Tribunal noted that the TPO accepted some of the assessee’s comparables and added others. The assessee sought inclusion of five comparables (CMC Limited, FL Smidth Limited, Hartron Communication Limited, Himachal Futuristics Communication Limited, Powerplant Performance Improvement Limited) and exclusion of three comparables (TCE Consulting Engineers Limited, Tera Software Limited, Vital Communications Limited). The CIT(A) had not provided specific reasons for rejecting or including certain comparables, leading to a non-speaking order.

5. Non-Speaking Order:
The Tribunal observed that the CIT(A) passed a non-speaking order regarding the rejection of Hartron Communication Limited and other comparables, which violated the principles of natural justice.

6. Inclusion of Companies Rejected in Preceding Year:
The CIT(A) included companies that were rejected in the immediately preceding assessment year, leading to an inconsistent approach in benchmarking the transactions.

7. Assumption of Operating Margin:
The AO/TPO assumed that the assessee should have earned an operating margin of 21.63% from uncontrolled transactions, which was contested by the assessee as exceeding jurisdiction and contravening the law.

8. Adjustments for Working Capital and Risk Profile:
The Tribunal noted that the CIT(A) did not make appropriate adjustments for differences in working capital and risk profile between the assessee and the comparables.

9. Arm’s Length Range Benefit:
The CIT(A) and AO failed to provide the benefit of the arm’s length range as per proviso to Section 92C for computing the arm’s length price under Section 92F.

10. Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c) in relation to the transfer pricing adjustment, which was contested by the assessee.

11. Levy of Interest:
The CIT(A) upheld the levy of interest under section 234B, which was also contested by the assessee.

Conclusion:
The Tribunal restored the adjudication on the inclusion and exclusion of comparables to the file of the CIT(A) for re-consideration. The CIT(A) was directed to adjudicate the issues after providing reasonable opportunity to the assessee. The issues of working capital adjustment and risk adjustment were also restored to the CIT(A). The appeal of the assessee was allowed for statistical purposes.

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