2019 (12) TMI 1258 - AT - Income Tax

TP Adjustment - benchmarking the international transactions of the assessee by adopting the PLI of OP/VAE - TPO/DRP were in error in rejecting the PLI of OP/VAE adopted by the assessee and substituting the same by PLI of OP/TC - HELD THAT - As in the case before us the costs pertaining to the services obtained by the assessee from the third parties viz. shippers/airliners, clearing and forwarding agents, transport service provider etc. neither involved any service element of the assessee nor the assessee had carried any risk or employed any of its assets with respect to the same, therefore, inclusion of the freight cost in the total cost base of the assessee by the TPO was not permissible. We thus are persuaded to subscribe to the claim of the assessee that the TPO/DRP were in error in rejecting the PLI of OP/VAE adopted by the assessee and substituting the same by PLI of OP/TC. As such, we herein restore the matter to the file of the A.O/TPO for the purpose of benchmarking the international transactions of the assessee by adopting the PLI of OP/VAE. Grounds of appeal Nos. 1, 3.1 and 3.2 are allowed in terms of our aforesaid observations. Adoption of PLI of OP/TC by the TPO - As the segmental information was accepted by the TPO and the same was not the subject matter of dispute before the DRP, therefore, in the backdrop of the fact that the segmental accounts alongwith the accounts formed part of the submissions filed by the assessee with the TPO, the DRP was in error in not considering the said segmental information while passing the order. In fact, the DRP had absolutely proceeded with on the wrong premises that the aforesaid information was not provided by the assessee. As can be gathered from the records, not only the DRP had failed to consider the segmental information as was provided by the assessee with the TPO, but in fact had never raised the issue as regards the segmental accounts in the course of the proceedings before it. Rather, we are in agreement with the contentions advanced by the ld. A.R that now when the DRP as per the mandate of Sec. 144C(6)(e) while issuing the direction was obligated to consider the records relating to the draft order , therefore, it was incorrect on its part to have drawn adverse inferences as regards the segmental information of the assessee company bypassing the fact that the complete details as regards the same formed part of the record of the A.O. Be that as it may, in our considered view, as we have upheld the adoption of PLI of OP/VAE by the assessee, therefore, we refrain from adverting to and therein adjudicating upon the observations of the DRP which have been recorded while upholding the adoption of PLI of OP/TC by the TPO. Inclusion/exclusion of comparables - Referring to Information technology related support services provided by the assessee to its AEs companies functionally dissimilar with that of assessee need to deselected. Entitlement of the assesses towards claim of depreciation on intangible (i.e goodwill) is squarely covered by the orders of the coordinate benches of the Tribunal in the assesses own case for A.Y. 2008-09, A.Y. 2009-10 and A.Y 2012-13. Accordingly, finding no reason to take a different view, we respectfully follow the view taken by the Tribunal as regards the entitlement of the assessee towards claim for depreciation on intangibles (i.e goodwill) during the year under consideration i.e A.Y. 2010-11.

Issues Involved:
1. Validity of the Assessment Order.
2. Arm's Length Price (ALP) of International Transactions.
3. Rejection of Transfer Pricing Study Report.
4. Depreciation on Goodwill.
5. Penalty Proceedings under Section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee contested the validity of the assessment order passed by the Assessing Officer (AO) based on the directions issued by the Dispute Resolution Panel (DRP). The assessee argued that the DRP erred in confirming and enhancing the addition made by the AO to the appellant's income. The Tribunal did not find merit in this argument and upheld the validity of the assessment order.

2. Arm's Length Price (ALP) of International Transactions:
The main issue revolved around the computation of the ALP for international transactions related to freight receipts and expenses. The DRP directed the AO to compute the ALP, which resulted in a significant addition to the assessee's income. The Tribunal examined the methodology and comparables used by the Transfer Pricing Officer (TPO) and DRP.

- Rejection of OP/VAE as PLI: The TPO rejected the Profit Level Indicator (PLI) of Operating Profit to Value Added Expenses (OP/VAE) used by the assessee and substituted it with Operating Profit to Total Cost (OP/TC). The Tribunal found that the costs pertaining to services obtained from third parties did not involve any service element of the assessee, nor did the assessee carry any risk or employ any assets with respect to the same. Thus, the Tribunal concluded that the PLI of OP/VAE was appropriate and directed the AO/TPO to benchmark the international transactions using OP/VAE.

3. Rejection of Transfer Pricing Study Report:
The TPO had rejected the Transfer Pricing Study Report (TPSR) of the assessee for various reasons, including the use of multiple year data and cherry-picking of comparables. The Tribunal upheld the TPO's rejection of multiple year data, stating that as per Rule 10B(4) of the Income Tax Rules, only the data of the relevant year should be considered. However, the Tribunal directed the AO/TPO to verify the segmental financial information provided by the assessee and recompute the margins accordingly.

4. Depreciation on Goodwill:
The assessee claimed depreciation on goodwill resulting from the acquisition of a business unit. The AO disallowed the claim, and the DRP upheld this disallowance. The Tribunal, however, referred to the Supreme Court's decision in the case of Smifs Securities Ltd., which held that goodwill is an intangible asset eligible for depreciation under Section 32 of the Income Tax Act. Consequently, the Tribunal allowed the assessee's claim for depreciation on goodwill.

5. Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under Section 271(1)(c) on the grounds that it had not concealed any particulars of its income nor furnished any inaccurate particulars. The Tribunal did not address this issue in detail, stating that it was premature to adjudicate on the initiation of penalty proceedings at this stage.

Conclusion:
The Tribunal partly allowed the appeal of the assessee by directing the AO/TPO to recompute the ALP using the PLI of OP/VAE, verifying the segmental financial information, and allowing the claim for depreciation on goodwill. The Tribunal upheld the validity of the assessment order and dismissed the ground related to penalty proceedings as premature. The interest under Section 234B was directed to be recomputed based on the relief granted in the present appeal.

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