2020 (1) TMI 779 - AT - Income Tax

TP Adjustment - international transaction entered into by assessee with its associated enterprises - Comparable selection - comparables have earned losses - HELD THAT - Current year is to be taken into account but the test for 3 consecutive years which means 2 years preceding the current year or also to be taken into account in the event there are factors which could influence the determination of transfer prices. In the present facts of case the authorities below has not considered the situation of these 2 companies in the immediately preceding 2 assessment years relevant to the assessment year under consideration. Merely because these companies have earned losses for the year under consideration would not lead to its exclusion without analysing as per rule 10 B (4) refer to herein above we are thus of opinion that DRP is to analyse the financials of immediately to preceding assessment years. Accordingly, we set aside these comparables back to DRP for re-examining financials, on the basis of Rule 10B(4). Assessee is directed to provide all relevant details in respect of these companies before DRP. Satisfaction of 75% trading filter - We are unable to discern the impact of manufacturing activity on turn over of the comparable company. Assessee do not object the functional similarity of this company. We direct Ld. AO/TPO to call for information under 133(6) of the Act from this company and then decide in terms of filters applied.

Summary

Issues Involved:
1. Incorrect appreciation of facts and wrong interpretation of law by the DRP.
2. Assessment of total income at INR 3,59,30,146 against the returned income of INR 87,85,760.
3. Determination of balance tax demand of INR 1,31,47,772.
4. Invalidity of reference to the TPO under section 92CA due to the omission of clause (i) of section 92BA.
5. Rejection of the economic analysis undertaken by the appellant.
6. Rejection of certain comparable companies in transfer pricing documentation.
7. Inclusion of Oswal Knit India Limited as a comparable.
8. Computation of the operating margin of PUMA Corporate.
9. Lack of suitable adjustment for differences in risk profile.
10. Computation of ALP without giving benefit under proviso to section 92(2).
11. Levying of interest under sections 234B, 234C, and 234D.
12. Initiation of penalty proceedings under section 271(1)(c).
13. Application of the filter of 'companies having negative PBIT and negative net worth' for rejection of companies.
14. Consideration of data for the preceding two years instead of only the current year.
15. Transfer pricing adjustment despite the transaction being tax neutral.

Detailed Analysis:

1. Incorrect Appreciation of Facts and Wrong Interpretation of Law:
The appellant argued that the DRP's order was based on an incorrect appreciation of facts and wrong interpretation of law. However, this ground was not pressed by the appellant during the hearing and therefore stands dismissed.

2. Assessment of Total Income:
The AO assessed the total income at INR 3,59,30,146 as against the returned income of INR 87,85,760. This was due to adjustments made by the TPO in the transfer pricing analysis. The Tribunal did not specifically address this issue as it was not pressed by the appellant.

3. Determination of Balance Tax Demand:
The AO determined a balance tax demand of INR 1,31,47,772, including interest. This issue was also not pressed by the appellant and hence not adjudicated.

4. Invalidity of Reference to TPO:
The appellant contended that the reference to the TPO under section 92CA was invalid due to the omission of clause (i) of section 92BA by the Finance Act, 2017. However, this ground was not pressed and thus dismissed.

5. Rejection of Economic Analysis:
The TPO rejected the economic analysis undertaken by the appellant and conducted a fresh analysis, resulting in a transfer pricing adjustment of INR 2,71,44,382. This ground was not pressed and therefore dismissed.

6. Rejection of Comparable Companies:
The TPO rejected three companies considered as comparable by the appellant: Pantaloons Fashion & Retail Ltd., PIL Industries Ltd., and Oswal Knit India Ltd. The Tribunal directed the DRP to re-examine the financials of Pantaloons Fashion & Retail Ltd. and PIL Industries Ltd. based on Rule 10B(4), considering data from the preceding two years. For Oswal Knit India Ltd., the Tribunal directed the AO/TPO to call for information under section 133(6) and decide based on the filters applied.

7. Inclusion of Oswal Knit India Limited:
The appellant argued that Oswal Knit India Limited should be excluded as it is primarily a manufacturing company. The Tribunal directed the AO/TPO to verify the functional profile of this company by calling for information under section 133(6) and decide accordingly.

8. Computation of Operating Margin:
The TPO computed the operating margin of PUMA Corporate at 1.04% by adjusting certain items from the operating cost and revenue. This ground was not pressed by the appellant and hence dismissed.

9. Lack of Suitable Adjustment for Risk Profile Differences:
The appellant contended that the AO/TPO did not make suitable adjustments for differences in the risk profile. This ground was not pressed and thus dismissed.

10. Computation of ALP Without Benefit Under Proviso to Section 92(2):
The appellant argued that the computation of ALP did not give the benefit of +/-3 percent under the proviso to section 92(2). This ground was not pressed and therefore dismissed.

11. Levying of Interest:
The AO levied interest under sections 234B (INR 34,27,380), 234C (INR 30,675), and 234D (INR 5,68,674). This ground was considered consequential in nature.

12. Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c). This ground was deemed premature at this stage.

13. Application of Filter for Rejection of Companies:
The appellant argued that the DRP/TPO erred in applying the filter of 'companies having negative PBIT and negative net worth' for rejection of companies. The Tribunal admitted this additional ground and directed the DRP to re-examine the financials based on Rule 10B(4).

14. Consideration of Data for Preceding Two Years:
The appellant contended that the DRP/TPO should have considered data for the preceding two years instead of only the current year. The Tribunal directed the DRP to analyze the financials of the comparables for the preceding two years as well.

15. Transfer Pricing Adjustment Despite Tax Neutral Transaction:
The appellant argued that the transfer pricing adjustment was bad in law as the transaction was tax neutral. This ground was not pressed and thus dismissed.

Conclusion:
The Tribunal partly allowed the appeal, directing the DRP to re-examine the financials of certain comparables based on Rule 10B(4) and to verify the functional profile of Oswal Knit India Ltd. by calling for information under section 133(6). The grounds not pressed by the appellant were dismissed.