2014 (2) TMI 682 - AT - Income Tax

Transfer pricing adjustment - Selection of comparables Held that - The data available in the public domain leading to the conclusion that ICC International Agencies was operating in unique circumstances during the period under consideration prima facie requires be considered and verified - it cannot be outrightly rejected taking a specious plea that the comparable was proposed by the assessee itself - the data for two years prior to the year in which transaction took place can be considered if it is revealed that these facts could have an influence on the determination of transfer prices in relation to the transactions being compared - sub-Rule (3)(i) requires a certain degree of comparability vis- -vis the differences remaining and clause (d) of sub-Rule (2) of Rule 10B amongst others mandate that conditions prevailing in the market include amongst others criteria a consideration of laws and Government orders is force at the relevant point of time. The assessee cannot be barred from pleading for the exclusion of a comparable when it pleads the existence of extra-ordinary circumstances - The existence of such a fact would make a specific period creating extraordinary circumstances in the case of a functional comparable an incomparable - only like can be compared with like and once the existence of unique circumstances is raised by a party even if the comparable was proposed by the said party itself if the party based on information subsequently available in the public domain, is able to show the existence of unique circumstances thus, there is nothing in law which bars the assessee to move the authorities or the Appellate Forums to look into and seek an adjudication on the issue. A comparable can be taken as a comparable purely and simply only for the reason that it is a comparable and alternately it most definitely cannot be declared to be a comparable only on the ground that it has been offered as a comparable by a party to the proceedings ignoring the arguments that it was offered on a mistaken belief of law and facts there was no statutory or legal impediment in the stand of the assessee as to why the said comparable should not be excluded and also do not see any reason as to why the assessee be saddled with the said comparable thus, the matter remitted back to the TPO for excluding the comparable after allowing the assessee to lay evidence in support of its claim. Power of making further enquiry u/s 144C of the Act Refusal to consider the additional evidences - Identification of New comparables - Held that - The assessee is not barred even at the Appellate stage before the CIT(A) to seek permission to produce additional evidence which the Rules mandate can be admitted on the fulfillment of the conditions set out in clauses (a) to (d) in sub-rule (1) of Rule 46A - The First Appellate Authority while admitting additional evidence is required to pass an order in writing recording the reasons for admitting the evidence as per sub-rule (2) of Rule 46A and thereafter by sub-rule (3) is required to confront the same to the AO - The reason for inclusion of the four additional comparables has been stated to be that the names of the four comparable coming up on applying the changed search criteria of the TPO to the updated data available in the public domain - the procedure has implicitly been followed as the Remand Report has been obtained - The mere argument that a comparable has been accepted in some year is not sufficient by itself to warrant an inclusion of such comparable thus, the assessee is directed to address the 4 comparables it seeks to be included backed by segmental data including specific facts and information to support its claim instead of merely reiterating for the inclusion of the 4 comparables stated to be thrown up applying the search criteria of the TPO Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Validity of the assessment order and directions by AO/TPO/DRP
2. Computation of the profit level indicator (PLI)
3. Refusal to consider additional evidence and new comparables
4. Rejection of certain comparables by TPO
5. Inclusion of ICC International Agencies Ltd. as a comparable
6. Adjustments for differences in working capital and risk levels
7. Use of single-year data versus multiple-year data
8. Reliance on non-public financial data
9. Application of the Proviso to section 92C for upward variation of 5%
10. Initiation of penalty proceedings under section 274 read with section 271

Detailed Analysis:

1. Validity of the Assessment Order and Directions by AO/TPO/DRP:
The appellant challenged the legality of the assessment order dated 04.10.2012, passed u/s 143(3)/144C of the Income Tax Act, 1961. The tribunal found no merit in this general challenge and focused on specific grounds of appeal.

2. Computation of the Profit Level Indicator (PLI):
The appellant argued that the AO/TPO/DRP erred in computing the PLI. The TPO had determined the arm's length margin of the comparables at 24.14%, later recalculated to 25.01%. The tribunal did not find substantial grounds to alter this computation.

3. Refusal to Consider Additional Evidence and New Comparables:
The appellant contended that the DRP erred by not considering additional evidence and new comparables. The tribunal noted that the DRP declined to consider these new comparables because they were not included during the initial proceedings before the TPO. However, the tribunal held that the DRP should have considered the new comparables since they were based on the TPO's own search criteria and directed the TPO to reassess the comparables with the new evidence provided by the appellant.

4. Rejection of Certain Comparables by TPO:
The appellant argued that the TPO's narrow approach led to the rejection of certain comparables. The tribunal found that the TPO had applied specific filters to reject the comparables, and the appellant had not demonstrated sufficient cause to challenge these rejections.

5. Inclusion of ICC International Agencies Ltd. as a Comparable:
The appellant sought the exclusion of ICC International Agencies Ltd., citing extraordinary profits due to a state policy in Gujarat. The tribunal agreed that the unique circumstances warranted reconsideration and directed the TPO to verify the appellant's claims about the state policy and its impact on ICC International Agencies Ltd.'s profitability.

6. Adjustments for Differences in Working Capital and Risk Levels:
The appellant argued that appropriate adjustments for differences in working capital and risk levels were not made. The tribunal did not find substantial evidence to support this claim and did not provide specific directions on this issue.

7. Use of Single-Year Data versus Multiple-Year Data:
The appellant contended that the TPO erred in using single-year data instead of multiple-year data. The tribunal noted that the statute provides for using data from the financial year in which the transaction occurred and allows for prior data if it influences the determination of transfer prices. The tribunal did not find the use of single-year data to be erroneous.

8. Reliance on Non-Public Financial Data:
The appellant argued against the use of financial data not available in the public domain at the time of the economic analysis. The tribunal did not find substantial grounds to alter the TPO's reliance on such data.

9. Application of the Proviso to Section 92C for Upward Variation of 5%:
The appellant claimed that the DRP failed to apply the Proviso to section 92C, which allows for a 5% upward variation in determining the arm's length price. The tribunal did not find sufficient evidence to support this claim.

10. Initiation of Penalty Proceedings under Section 274 Read with Section 271:
The appellant challenged the initiation of penalty proceedings for furnishing inaccurate particulars of income. The tribunal did not provide specific directions on this issue, focusing instead on the primary grounds of appeal.

Conclusion:
The tribunal partly allowed the appeal for statistical purposes, directing the TPO to reassess the comparables with the new evidence provided by the appellant and to consider the exclusion of ICC International Agencies Ltd. based on the unique circumstances cited. The tribunal emphasized the need for a detailed FAR analysis and adherence to statutory provisions in determining the comparability of transactions.