2020 (11) TMI 451 - AT - Income Tax

TP Adjustment - PLI computation - whether the reimbursement amount received by the assessee can be ignored while considering the rental expenditure as operating expenditure? - HELD THAT - It is imperative to examine as to whether the assessee has utilised the premises for which rental has been paid for the purpose of business carried on by the assessee. If the said premises has been so utilised, then the rental expenditure should be taken as operating expenditure. It is an undisputed fact that M/s. GE Power has given the money to the assessee only in respect of rental expenditure burden that is going to be borne by the assessee. In that case, the reimbursement of rental expenditure, in our view, is intricately related to the rental expenditure. Accordingly, if rental expenditure is considered as an operating expenditure, then the reimbursement should be set off against the rental expenditure and net rent expenditure should be taken as operating expenditure. On the other hand, if the rental expenditure is not considered as operating expenditure, then both rental expenditure and reinvestment of reimbursement received by the assessee should be excluded while computing PLI of the assessee. We feel it proper to restore this issue to the file of A.O./TPO to examine it afresh in the light of discussions made (supra). Working capital adjustment - it was the submissions of the assessee that the relevant details have been furnished to the tax authorities - A.R. submitted that the assessee would be in a position to furnish explanations and information in this regard to the A.O./TPO. In view of the above, we are of the opinion that the claim of working capital adjustment also requires examination at the end of A.O./TPO - we restore the issue of transfer pricing adjustment to the file of A.O./TPO. Interest charged u/s 234A - submission of the assessee that the return of income has been filed by it within the due date prescribed u/s 139(1) of the Act and hence no interest is chargeable u/s 234A of the Act. Since the facts relating to this issue also require examination, we restore this issue also to the file of A.O. Appeal filed by the assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing adjustment in respect of specified domestic transactions.
2. Interest charged under Section 234A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment in Respect of Specified Domestic Transactions:

The assessee, engaged in providing energy management solutions, contested the Transfer Pricing (TP) adjustment made by the Assessing Officer (AO) for the assessment year 2015-16. The assessee had entered into specified domestic transactions with associated enterprises, including the purchase of power management items and spares, and remuneration, totaling ?327,275,469.

The assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method, with the Operating Profit/Operating Revenue (OP/OR) as the profit level indicator (PLI). The assessee's PLI was calculated at 4.24%, and it chose two comparable companies with an average margin of 7.42%, asserting that the transactions were at arm's length after considering a range of +/- 3%.

However, the Transfer Pricing Officer (TPO) noticed discrepancies in the other income reported by the assessee, leading to a revised PLI of 2.16%. The TPO also rejected the assessee's request for a working capital adjustment, citing a lack of specific impact on profit margins. Consequently, the TPO made an adjustment of ?6,18,51,634/-.

Upon appeal, the Dispute Resolution Panel (DRP) partially agreed with the assessee, directing the TPO to restrict the adjustment to specified domestic transactions (SDT) only, reducing the TP adjustment to ?1,75,92,364/-.

The assessee argued that the reimbursement of rental expenditure from GE Power should be considered as operating income if the rental expenditure is treated as operating expenditure. The Tribunal noted that if the rental expenditure is considered operating, the reimbursement should be set off against it. The Tribunal restored this issue to the AO/TPO for fresh examination.

2. Interest Charged Under Section 234A of the Income-tax Act, 1961:

The assessee contended that it had filed the return of income within the due date prescribed under Section 139(1) of the Act, and therefore, no interest should be charged under Section 234A. The Tribunal found that the facts relating to this issue required examination and restored it to the AO for verification.

Conclusion:

The Tribunal restored the issues of transfer pricing adjustment and interest charged under Section 234A to the AO/TPO for fresh examination and verification. The appeal filed by the assessee was treated as allowed for statistical purposes.