2017 (9) TMI 1024 - AT - Income Tax

TPA - comparable selection - Held that - Assessee is primarily engaged in providing technical support to its associated enterprises (AEs). The technical support services provided by the assessee to its AEs relate to provision of erection, installation, commissioning, warranty administration, operation and maintenance, inspection, renovation and modernization services for power plants and turbines, this companies functionally dissimilar with that of assesse need to be deselected from final list. Tax deductible at source raised by the DRP and the consequential disallowance u/s 40(a)(i) - AR submits that while computing the disallowance u/s 40(a)(i) of the Act the AO should have considered the factual situation that has a bearing on the computation of disallowance u/s 40(a)(i) - Held that - From a reading of the assessment order, we find that the AO did not consider any further facts while complying with the directions of the DRP, as such, this fact needs verification at the end of the AO, after affording an opportunity to the assessee to furnish the requisite details that have a bearing on the disallowance u/s 40(a)(i) of the Act. We, therefore, set aside this aspect to the file of the AO.

Issues Involved:
1. Validity of the assessment order and additions made.
2. Transfer Pricing adjustments.
3. Disallowance under Section 40(a)(i) of the Income Tax Act.
4. Inclusion and exclusion of comparables in Transfer Pricing.
5. Jurisdiction of the Dispute Resolution Panel (DRP).
6. Interest levied under Sections 234A, 234B, and 234D.
7. Penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Validity of the Assessment Order and Additions Made:
The assessee challenged the assessment order dated 31.12.2015, asserting that it was invalid to the extent of the additions made. The grounds included that the Transfer Pricing Officer (TPO), the Assessing Officer (AO), and the DRP did not adhere to the conditions set out in Section 92C(3) of the Income Tax Act, 1961.

2. Transfer Pricing Adjustments:
The TPO proposed an adjustment of ?4,24,88,928/-, which was contested by the assessee. The core issues revolved around the rejection of the Arm’s Length Price (ALP) determined by the assessee, the inclusion and exclusion of certain comparables, and the methodology used for comparability analysis. The Tribunal noted that the TPO erred in including HSCC India Ltd., Mitcon Consultancy & Engg. Services Ltd., and Rites Ltd. as comparables due to their multi-dimensional functionality and government ownership. The Tribunal directed the inclusion of MN Dastur & Company (P) Limited as a comparable, following the precedent set in the assessee's own case for AY 2010-11. The inclusion of EDAC Engineering Limited was remanded to the TPO for verification of Related Party Transactions (RPT).

3. Disallowance Under Section 40(a)(i) of the Income Tax Act:
The AO disallowed expenses related to travel and conveyance, salary and allowances, and payroll administration services, amounting to ?2,32,85,369/- and ?8,19,24,990/- respectively, on the grounds that these were Fees for Included Services (FIS)/Fees for Technical Services (FTS) and thus liable for tax deduction at source (TDS). The assessee contended that these were mere reimbursements without any income element. The Tribunal remanded this issue back to the AO for factual verification, emphasizing the need to consider the actual nature of the expenses and their compliance with the CBDT Circular No. 3/2015.

4. Inclusion and Exclusion of Comparables in Transfer Pricing:
The Tribunal evaluated the comparables selected by the TPO and found that HSCC India Ltd., Mitcon Consultancy & Engg. Services Ltd., and Rites Ltd. were not suitable due to their government ownership and multi-dimensional functionalities. The Tribunal directed the inclusion of MN Dastur & Company (P) Limited and remanded the inclusion of EDAC Engineering Limited to the TPO for further verification.

5. Jurisdiction of the Dispute Resolution Panel (DRP):
The assessee argued that the DRP exceeded its jurisdiction by raising issues not emanating from the draft assessment order. The Tribunal referred to the decision of the Hon’ble Jurisdictional High Court in Lahmeyer Holding GMBH vs. Deputy Director of Income Tax, which clarified that the DRP has the power to consider any matter arising out of the assessment proceedings relating to the draft order. The Tribunal rejected the assessee's contention, affirming the DRP's jurisdiction.

6. Interest Levied Under Sections 234A, 234B, and 234D:
The assessee challenged the interest levied under these sections, asserting that the income tax return was filed within the due date. The Tribunal did not provide a specific ruling on this issue but included it in the remand for factual verification by the AO.

7. Penalty Proceedings Under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not address this issue explicitly in the judgment, leaving it to be dealt with in subsequent proceedings.

Conclusion:
The appeal was allowed in part for statistical purposes. The Tribunal directed the AO to verify the factual aspects related to the disallowance under Section 40(a)(i) and the inclusion of EDAC Engineering Limited as a comparable. The Tribunal also affirmed the DRP's jurisdiction to consider issues arising from the assessment proceedings. The matter was remanded to the AO for further verification and compliance with the Tribunal's directions.

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