2023 (2) TMI 1103 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Datamatics Financial Services Ltd. comparable is functionally dissimilar and hence cannot be considered. Allsec Technologies Ltd. - TPO has considered the financial over the period of three years and hence rejected this as a comparable. We decline to interfere with the order of the ld. CIT(A) who affirm the order of the TPO. Computation of profit margin of two comparables - ICRA Online Ltd. and Axis IT T Ltd. - ICRA Online Ltd. (19.13%) TPO wrongly adopted margin of 19.13% in its order dated 01 June 2015 while giving effect to CIT(A) order. Corrected margin of 17.08% should be considered.TPO has incorrectly treated Interest and Miscellaneous Income as operating income and loss on sale of assets as operating expense. In doing so, the TPO failed to appreciate that these are non-operating items and cannot be included. Axis-I T T Ltd. (13.13%) - TPO wrongly adopted margin of 13.13% in its order dated 01 June 2015 while giving effect to CIT(A) order. It is submitted that corrected margin should be computed after excluding non-operating income/expenses like dividend, interest, liabilities written back, provision for bad debts, prior period expenses. TPO shall re-compute the profit margins. Risk adjustment to the Appellant - We direct that the assessee shall demonstrate the risk involved, encountered before the TPO and the TPO shall after examining the facts of the case and allow risk adjustment.

Summary

Issues:
1. Jurisdictional error in referring the matter to the Transfer Pricing Officer.
2. Determination of arm's length adjustment in international transactions.
3. Errors in assessing the arm's length price of international transactions.
4. Discrepancies in computing margins of comparable companies.
5. Application of amended provisions instead of the relevant provision.
6. Charging interest under specific sections of the Act.
7. Withdrawal of interest under a specific section of the Act.
8. Initiation of penalty proceedings without adequate satisfaction.

Issue 1: Jurisdictional Error in Referral:
The appeal raised concerns about the Assessing Officer's failure to record reasons for referring the matter to the Transfer Pricing Officer (TPO), as required by section 92CA(1). The appellant argued that the reference suffered from a jurisdictional error, rendering it void ab-initio.

Issue 2: Arm's Length Adjustment in Transactions:
The dispute centered on the determination of arm's length adjustments in the appellant's international transactions with Associated Enterprises (AEs). The errors in the assessment led to an enhancement of the returned income by a substantial amount.

Issue 3: Errors in Arm's Length Price Assessment:
Various errors were highlighted in the assessment of the arm's length price of the appellant's international transactions. These included modifications to comparability analysis, rejection of comparable companies, incorrect margin computations, and failure to consider working capital adjustments and rectification applications.

Issue 4: Discrepancies in Margin Computations:
Specific discrepancies were noted in the computation of profit margins for certain comparable companies, such as ICRA Online Ltd. and Axis IT & T Ltd. The TPO was directed to re-compute the profit margins accurately.

Issue 5: Application of Amended Provisions:
The appellant contested the application of amended provisions from the Finance Act 2009 instead of the relevant provision for the financial year 2008-09. The argument emphasized the need to consider a range of prices within 5% of the arithmetic mean margins of comparables.

Issue 6: Interest Charges and Withdrawals:
Challenges were raised regarding the charging of interest under sections 234B and 234D of the Act, as well as the withdrawal of interest under section 244A. The appellant disputed the application of these sections in the given circumstances.

Issue 7: Penalty Proceedings Initiation:
The initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Act was contested by the appellant. It was argued that there was a lack of adequate satisfaction recorded for such initiation, questioning the validity of the penalty proceedings.

Conclusion:
The judgment addressed multiple issues related to transfer pricing adjustments, margin computations, application of legal provisions, interest charges, and penalty proceedings. The appellant succeeded partially in challenging various aspects of the assessment, leading to directions for re-computation, adjustments, and considerations based on legal principles and previous judgments.