2022 (12) TMI 687 - AT - Income Tax

TP Adjustment - determining the Arm s Length Price (ALP) of the International Transaction pertaining to consideration received for the transfer of business undertaking to AE of the assessee - whether the assessee had transferred its entire business undertaking to its AE or whether the assessee has retained part of assets and liabilities pursuant to Business Transfer Agreement? - contention of the assessee that part of the assets and liabilities were retained and in support of its contention that assessee has placed various documents in the form of Addendum to BTA, etc. to demonstrate that part of the assets only were transferred to its AE - HELD THAT - We noticed that the contention of the assessee was rejected as neither the Addendum to BTA nor the exhibits forming part of Business Transfer Agreement (BTA) were filed before the TPO. We also noticed that even though the Addendum to BTA and exhibits forming part of BTA were filed before the Ld. DRP the Ld. DRP finds no reason to interfere with the order of the TPO which in our view is not correct. The Addendum to BTA which was placed before us clearly show what all the assets and liabilities to be transferred by the assessee to its AE as per BTA. Since what all the assets and liabilities to be transferred by the assessee are clearly reflected in the Addendum to BTA the TPO/DRP are not justified in assuming that the assessee has transferred the entire assets and liabilities to its AE under BTA as slump sale completely ignoring the evidences on record and making some observations on assumptions. Assessee has clearly demonstrated with evidences that it has transferred only part of the assets to its AE under BTA read with Addendum to BTA and, therefore, there is no reason as to why the Addendum should not be considered and acted upon. Therefore, taking the totality of facts and circumstances into consideration, we direct the TPO to take cognizance of the Addendum the exhibits forming part of BTA and the other evidences and calculate the value of only those assets transferred by the assessee and exclude the assets which were retained, for the purpose of determining the ALP. TP Adjustment under the head Income from business or profession instead of income from capital gains - HELD THAT - We are of the view that the consideration received by the assessee on transfer of assets shall be computed under the head Income from capital gains and not under the head Income from Business . AO is directed to compute the adjustment under the head Capital gains and not under the head Income from Business .

Summary

Issues Involved:
1. Upward adjustment in determining the Arm's Length Price (ALP) of the international transaction pertaining to consideration received for the transfer of business undertaking.
2. Incorrect computation of total tax demand under section 156 of the Act.
3. Initiation of penalty proceedings under section 270A of the Act.

Detailed Analysis:

Issue 1: Upward Adjustment in Determining the Arm's Length Price (ALP)
The primary issue revolves around the upward adjustment of INR 15,55,31,595 made by the Assessing Officer (AO) in determining the ALP of the international transaction related to the transfer of business undertaking to the Associated Enterprise (AE). The assessee argued that the AO and the Dispute Resolution Panel (DRP) erred in rejecting the analysis undertaken by the assessee to determine the ALP as documented in the valuation report. The assessee contended that certain assets and liabilities were retained during the transfer, and the AO failed to recognize this fact. The Transfer Pricing Officer (TPO) observed discrepancies in the valuation methods used by the assessee and questioned the lower sale price compared to the Discounted Cash Flow (DCF) valuation. The DRP upheld the AO's adjustment, disregarding the assessee's additional evidence, including the "Addendum to Business Agreement" and other supporting documents. The Tribunal found that the AO and DRP did not properly consider the Addendum and other evidences, which clearly showed that only part of the assets and liabilities were transferred. The Tribunal directed the TPO to re-evaluate the value of the transferred assets and exclude the retained assets for determining the ALP.

Issue 2: Incorrect Computation of Total Tax Demand
The assessee argued that the AO incorrectly computed the final tax demand by adding the transfer pricing adjustment to the "Income from Business or Profession" instead of "Income from Capital Gains." The Tribunal agreed with the assessee, stating that the consideration received from the transfer of assets should be computed under the head "Income from Capital Gains." The AO was directed to reassess the adjustment under the correct head.

Issue 3: Initiation of Penalty Proceedings under Section 270A
The assessee challenged the initiation of penalty proceedings under section 270A for the transfer pricing adjustment made in the final assessment order. The Tribunal deemed this ground as premature and dismissed it accordingly.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to reconsider the valuation of transferred assets by taking into account the Addendum and other evidences. The AO was instructed to compute the adjustment under "Income from Capital Gains" rather than "Income from Business or Profession." The issue of penalty proceedings was dismissed as premature.