2018 (1) TMI 795 - AT - Income Tax

TPA - comparable selection criteria - methodical search process followed by the assessee for identifying the comparables - Held that - Assessee is into call centre services thus companies functionally dissimlar with that of assessee need to be deselected from final list. Thus five comparables are excluded from the final list of valid comparables, the margin shown by the assessee would be within the safe limits of plus/minus 5%. Therefore, we are not commenting upon the other comparables, though the arguments advanced by the AR about the remaining comparables are found to be factually correct. In short, we hold that the assessee had proved that the list of comparables approved by the DRP(12 comparables)contain 8 comparables which should have been excluded. We hold that AMFL, Maple, GTL, TTL. DFL, STSL, AKSPL and ALT are not valid comparables for the purpose of determining the ALP of the IT s entered in to by the assessee for the year under consideration. Remanding the matter to the departmental authorities - Held that - We are not inclined to allow premium on carelessness and callousness of the TPO and allow him a second chance to amend his errors. An erring officer does not deserve a new innings to continue unnecessary litigation. TP proceedings, like any other proceedings under the Act, have to be completed in a proper manner and the record should prove that, while making TP adjustment, the TPO had applied his mind to the facts and circumstances of the case. Posts of TPO. s were specifically created to determine the ALP of the IT. s. Considering the seriousness of the job the AO. s are not allowed to decide the value of IT. s. The scheme of the Act casts an added responsibility on the TPO. s to pass a reasoned, valid and proper order. In the case before us, we find that the TPO had committed several mistakes in the search proceedings and sending notices. So, we are of the opinion that it is not a fit case to be remanded. Profits eligible for deduction u/s. 10A - entitled to incremental deduction under section 10A - Held that - We find that the assessee had filed a specific objection about not allowing incremental deduction, that the DRP did not decide the issue. Therefore, we are of the opinion that the matter should be restored back to the file of AO who would decide the Ground after affording reasonable opportunity to the assessee and after considering the judgment of Gem Plus Jewellery India Ltd. (2010 (6) TMI 65 - BOMBAY HIGH COURT) Disallowance u/s 14A - Held that - We find that the AO had invoked the provisions of section 14A r. w. r. 8D of the Rules to make the disallowance. As provisions of Rule 8 were not applicable for the year under consideration. We direct the AO restrict the disallowance to 1% of the exempt income. Third grounds is partly allowed.

Issues Involved:
1. Transfer Pricing (TP) adjustments.
2. Disallowance under section 10A of the Income Tax Act.
3. Disallowance under section 14A of the Income Tax Act.
4. Levy of interest under section 234B of the Income Tax Act.
5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustments:
The assessee-company, engaged in back-office-support services and software development services, filed its return of income declaring ?1.59 crores, which was assessed at ?4.36 crores by the AO. The AO referred the international transactions to the Transfer Pricing Officer (TPO) who determined the arm's length price (ALP) using the Transactional Net Margin Method (TNMM). The TPO rejected some comparables selected by the assessee and added new ones, arriving at a margin of 24% for benchmarking the ALP. The assessee objected, and the Dispute Resolution Panel (DRP) directed the AO to apply a net margin of 22.67%.

The assessee argued that the TPO's search process was flawed and that certain comparables were invalid. The Tribunal found that the TPO's process was indeed flawed and excluded several comparables (AMFL, Maple, GTL, TTL, DFL, STSL, AKSPL, and ALT) from the final list. The Tribunal emphasized that the TPO's errors and lack of proper application of mind warranted exclusion of these comparables. Consequently, the margin shown by the assessee fell within the safe limits of plus/minus 5%, and the first ground of appeal was decided in favor of the assessee.

2. Disallowance under Section 10A:
The AO disallowed ?23.06 lakhs under section 10A, treating software expenses as capital in nature, though depreciation was allowed. The DRP did not adjudicate the issue. The Tribunal referred to the case of Gem Plus Jewellery India Ltd. and restored the matter to the AO for reconsideration, directing the AO to afford reasonable opportunity to the assessee and consider the relevant judgment. This ground was partly allowed.

3. Disallowance under Section 14A:
The AO made a disallowance of ?5.64 lakhs under section 14A r.w. Rule 8D, which the DRP upheld. The assessee argued that no expenditure was incurred and that Rule 8D provisions were not applicable for the year under consideration. The Tribunal directed the AO to restrict the disallowance to 1% of the exempt income, partly allowing this ground.

4. Levy of Interest under Section 234B:
The Tribunal noted that the issue of levy of interest under section 234B was consequential in nature and did not require separate adjudication.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed this ground as premature, noting that the issue of initiating penalty proceedings was not ripe for adjudication.

Conclusion:
The appeal was partly allowed, with the Tribunal providing detailed reasoning for each issue, emphasizing the need for proper application of mind by the TPO and adherence to legal principles in determining ALP and disallowances. The Tribunal's decision underscores the importance of a methodical and transparent approach in transfer pricing and tax assessments.

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