2020 (11) TMI 337 - AT - Income Tax

TP Adjustment - adjustments made under the licensed manufacturing segment being exchange fluctuation, bank charges, interest charges, management fee - HELD THAT - In the show cause notice issued to assessee by Ld. TPO under section 92CA, Ld. TPO failed to follow the due process of law in respect of proposing comparables for computing the ALP of international transaction in manufacturing segment. Ld. TPO is therefore, directed to issue show cause notice with proposed comparables in accordance with law. Also, in respect of bank charges, interest charges, management fees assessee should establish categorically based on cogent materials/evidences of how it should not be considered as operating for the purposes of computing margin of licensed manufacturing segment. Assessee is therefore directed to file all relevant documents/evidences/information necessary to establish its claim in respect of aggregation/segregation of the costs alleged in the order passed by Ld. CIT(A)/Ld. TPO. Assessee is also directed to file its response to various comparables proposed by Ld. TPO. Ld. TPO shall then pass a detailed order considering all the material evidences placed by assessee and compute the margin in accordance with law. Remand the issue to Ld. AO/TPO for de novo assessment as per Transfer Pricing provisions in accordance with law. Grounds raised by assessee and revenue stands allowed for statistical purposes.

Summary

Issues:
Cross appeals filed by assessee and revenue against the order dated 30/09/2016 passed by Ld. CIT(A)-1, Bangalore for assessment year 2011-12.

Detailed Analysis:

1. The appellant, a subsidiary of a company in the Netherlands, undertook projects for Indian Railways and entered into international transactions. Dispute arose regarding expenses incurred in the licensed manufacturing segment, leading to proposed adjustments by the TPO.

2. The TPO aggregated certain expenses with the manufacturing segment, proposing adjustments. The AO disallowed a notional forex loss, which was challenged by the appellant before the CIT(A).

3. The CIT(A) upheld the aggregation of expenses but deleted the notional forex loss adjustment. Both the appellant and revenue appealed the CIT(A)'s decisions.

4. The appellant highlighted delays in project completion due to various reasons, incurring substantial losses. Additional evidence was presented to demonstrate losses were not due to transactions with associated enterprises.

5. During Transfer Pricing assessment, the TPO's selection of comparables was questioned for lack of basis and FAR similarities discussion. Request was made for a de novo assessment.

6. The Tribunal considered both appeals together and addressed the primary issue of aggregating expenses in the licensed manufacturing segment. Lack of reasoning for aggregation and failure to follow due process in proposing comparables were noted.

7. The TPO was directed to issue a show cause notice with proposed comparables and assess the margin considering all material evidence. The appellant was instructed to provide necessary documents to support its claims.

8. The issue was remanded for de novo assessment in compliance with Transfer Pricing provisions, ensuring the appellant's right to be heard.

9. Both appeals were allowed for statistical purposes, and the order was pronounced on 27th Oct, 2020.