2017 (4) TMI 1060 - AT - Income Tax

TPA - selection of comparables - Held that - If there is a change in functions carried out, assets employed and risk taken (FAR analysis) of the comparables in the year under consideration viz-a-viz earlier years, the comparables selected in earlier year might be rejected in the year under consideration, but following the observation of the Tribunal in the Thomas Cook (India) limited (2016 (7) TMI 318 - ITAT MUMBAI) the TPO should assign reasons as what are the differences in the FAR analysis of the comparables as compared to the earlier years, which led to rejection of those in the current year. The departmental authorities (i.e. ld. TPO/DRP) are required to bring on record the salient feature of the year under consideration as compared to the facts of the earlier years, in absence of which, the departmental authorities cannot taken opposite view. This issue was taken up by the assessee before the Ld. DRP while challenging the approach of bifurcating single transaction of marketing and after sales support service into the separate transaction of marketing support service and technical support service, however, the issue of consistency was not addressed by the Ld. DRP . Similarly, on the issue of following the rule of consistency in respect of rejection of the comparables in both the segments, the Ld. counsel has submitted that FAR analysis of the assessee as well as comparables was similar in earlier years and therefore there was no reason for rejection of the comparables chosen by the assessee. On the other end, the Ld. CIT(DR) contended that the AO/TPO has given reasons for rejection of the comparables chosen by the assessee. In our opinion, issue before us is if the comparables chosen by the assessee in earlier years were having FAR analysis similar to FAR analysis in year under consideration, how the same were accepted by the TPO in earlier years but rejected in the current year. If there is no change in the FAR analysis of the comparables and the assessee in earlier years viz-a-viz current year, then the rule of consistency demands that comparables chosen by the assessee should be accepted. We find that in absence of records of earlier years, the Ld. CIT(DR) could not address on the issue, and therefore in such circumstances, we feel it appropriate to restore following issues to the file of the Assessing Officer for deciding afresh in the light of rule of consistency (i) the issue of single transaction of marketing and sales support services viz-a-viz two separate transactions of marketing support services and technical support services, (ii) accepting the comparables chosen by the assessee for marketing and sales support services segment (iii) accepting the comparables chosen by the assessee for technical services segment The learned AO/TPO is directed accordingly to re-compute the arm s length price of the international transaction carried out by the assessee.

Issues Involved:
1. Violation of principles of natural justice.
2. Transfer pricing addition.
3. Errors in confirming the transfer pricing adjustment.
4. Non-acceptance of economic analysis for international transactions.
5. Incorrect bifurcation of international transactions.
6. Transfer pricing addition contrary to DRP findings.
7. Selection of companies with supernormal profits as comparables.
8. Treatment of foreign exchange gain/loss.
9. Non-allowance of risk adjustment.
10. Apparent mistakes in calculation of operating margins and working capital.
11. Non-allowance of 5% downward adjustment.
12. Levying of interest under section 234D.
13. Withdrawing of interest under section 244A.
14. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The assessee claimed that the assessment order was vitiated, arbitrary, and void ab-initio due to a violation of principles of natural justice. However, this issue was not specifically adjudicated upon and was dismissed as infructuous.

2. Transfer Pricing Addition:
The assessee contested the addition of ?116,939,450/- made by the AO while computing the income. The Tribunal noted that the TPO had made adjustments based on the arm's length price (ALP) of international transactions, which included technical services and marketing and after-sales support services.

3. Errors in Confirming Transfer Pricing Adjustment:
The DRP confirmed the TPO's order proposing a transfer pricing adjustment. The Tribunal observed that the TPO rejected the comparables selected by the assessee for functional dissimilarity and extraordinary events during the year, and instead, used current year data of 12 new comparables.

4. Non-Acceptance of Economic Analysis:
The TPO did not accept the economic analysis of the assessee for international transactions related to marketing and after-sales support services, technical services, and Bharti IVR business segments. The TPO rejected the data used by the assessee and used single-year data instead of multiple-year data, which was contested by the assessee.

5. Incorrect Bifurcation of International Transactions:
The TPO bifurcated the marketing and after-sales support services into technical support services and business support services using employee headcount, which the assessee claimed was arbitrary and not contractually possible. The Tribunal noted that in the earlier assessment year 2008-09, the TPO had accepted these services as a single segment.

6. Transfer Pricing Addition Contrary to DRP Findings:
The assessee argued that the TPO made additions contrary to the DRP's findings by not restricting the transfer pricing adjustment to the proportion of international transactions vis-à-vis the total cost of respective segments.

7. Selection of Companies with Supernormal Profits:
The TPO selected certain companies with supernormal profits as comparables to benchmark the international transactions, which was contested by the assessee.

8. Treatment of Foreign Exchange Gain/Loss:
The TPO treated foreign exchange gain/loss as a non-operating item while determining the ALP, which the assessee argued was against the terms and conditions of inter-company transactions.

9. Non-Allowance of Risk Adjustment:
The TPO did not allow a risk adjustment for the assessee on account of being remunerated on a cost-plus basis for the marketing and after-sales support services, irrespective of the outcome of the services provided.

10. Apparent Mistakes in Calculation:
The assessee claimed that the TPO made apparent mistakes in calculating the operating margin of certain companies and in the working capital computation while calculating the working capital adjusted margin of the comparables.

11. Non-Allowance of 5% Downward Adjustment:
The TPO did not allow the benefit of a downward adjustment of 5% from the ALP of the international transactions as provided in the Proviso to section 92C of the Act.

12. Levying of Interest under Section 234D:
The AO levied consequential interest under section 234D, which the assessee contested.

13. Withdrawing of Interest under Section 244A:
The AO withdrew the interest under section 244A, which was contested by the assessee.

14. Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under section 271(1)(c), which was contested by the assessee.

Tribunal's Decision:
The Tribunal restored the issues related to the bifurcation of marketing and sales support services, acceptance of comparables for both marketing and sales support services, and technical services segments to the AO for fresh consideration in light of the rule of consistency. The Tribunal directed the AO/TPO to re-compute the ALP of the international transactions carried out by the assessee, ensuring the assessee is afforded sufficient opportunity of hearing on the issues in dispute.

The decision on grounds related to risk adjustment, mistaken calculation of margins, and benefit of downward adjustment was held as infructuous and dependent on the decision of the restored issues. Grounds related to consequential interest or penalty proceedings were also held as infructuous and dismissed.

The appeal of the assessee was allowed partly for statistical purposes.

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