2019 (8) TMI 703 - AT - Income Tax

TP adjustment - MAM selection - assessee s challenge to rejection of CUP method by the department. - Comparable selection - HELD THAT - Issue of rejection of CUP by the TPO and as upheld by the ITAT 2015 (11) TMI 1527 - ITAT DELHI was not challenged by the assessee before the Hon ble High Court also and, thus, the issue has attained finality for all practical purposes. Therefore, we have no other alternative but to dismiss ground nos. 3, 4, 4.1 and 4.2 of the assessee s appeal in this year also by respectfully following the ratio laid down by the Coordinate Bench in assessee s own appeal for assessment year 2010-11 as aforesaid. Thus, ground nos. 3, 4, 4.1 and 4.2 stand dismissed. Remuneration to the assessee from the international transaction cannot be greater than the overall revenue received from the third party. In this regard, the assessee has drawn our attention to the order of the Delhi Tribunal in the case of Global Vantedge vs. DCIT 2009 (12) TMI 668 - ITAT DELHI wherein the Tribunal had held that adjustment on account of arm s length price of international transactions cannot exceed the maximum arm s length price. Entire amount recovered by the AE from the third party i.e. DMRC had been passed on to BTIPL and, therefore, BTIPL could not have recovered any amount which is higher than the amount charged by the AE from the third party. It has been pleaded that although this ground was vehemently raised before the Ld. CIT (A), the CIT (A) did not specifically adjudicate this ground and proceeded to dismiss the assessee s challenge to rejection of the CUP method without considering these alternate arguments of the assessee. As perused the order of the CIT (A) and we do note that although the Ld. CIT (A) has duly reproduced the submissions of the assessee in this regard, he, however, has not adjudicated this issue specifically. The discussion of the CIT (A) centers around the rejection of CUP method but does not refer to the submissions of the assessee regarding the issue as aforesaid. Interest of substantial justice would be served if these grounds are reconsidered by the Ld. CIT (A) and the Ld. CIT (A), after giving due opportunity to the assessee, passes a speaking order on the issue. Accordingly, ground nos. 4.3, 5 and 5.1 are restored to the file of the CIT (A) to be considered afresh and for the purposes of passing a speaking order after giving due opportunity to the assessee to present its case. Thus, ground nos. 4.3, 5 and 5.1 stand allowed for statistical purposes. Comparable selection - Texmaco Rail and Engineering Limited - in the earlier year, only segmental results pertaining to heavy engineering segment were included whereas in this year, the margins at the entity level have been taken. Therefore, it will be in the fitness of things if only segmental results of heavy engineering segment are included by the TPO and further the TPO also gives adequate adjustment in respect of free of cost supplies. As far as the assessee s claim of extraordinary event is concerned, it is seen that the TPO has duly considered the assessee s claim of extraordinary event and has noted that this company has been a steady performer and that the demerger has not caused any radical difference to the performance of the company. This observation of the TPO could not be contradicted by the Ld. AR on facts. Therefore, this argument is rejected and accordingly, this comparable is restored to the file of the TPO/Assessing Officer for re-adjudication and recomputation of the margin after including only the heavy engineering segment after giving the benefit of adjustment with respect to free of cost supplies. Titagarh Wagons Limited - this comparable has been objected to on the ground that this company is dealing in wagons whereas the assessee company is dealing in Metro train coaches and bogies and, thus, they were functionally dissimilar - this company was taken as a comparable in the previous assessment year also and the ITAT had held this company functionally comparable after providing for fee of cost supplies adjustment. It is seen that in the immediately preceding year, the TPO had taken only the wagon segment of the company whereas in the current year, the company has been taken as a whole.This, in our considered opinion, needs rectification. Accordingly, while upholding the inclusion of this company as a comparable, we direct the TPO to recompute the margin after providing for fee of cost supplies adjustment and also after taking the results of only wagon segment for the purpose of comparability. Braithwaite and Co. Limited - Although the assessee has agitated the inclusion of this comparable on the ground of functional incomparability because this company deals in manufacturing of wagons, bogies, couplers, steel casting and structural fabrications as against the metro coaches which were being manufactured by the assessee company, the fact remains that this company was held as a comparable by the ITAT in the immediately preceding year also. ITAT had directed that adjustment should be made with respect to FOC supplies while computing the margins. In this year, the TPO, while giving effect to the order of the CIT (A), has not given effect to the FOC supplies adjustment. Therefore, this comparable is restored to the file of the TPO for the limited purpose of re-computing the margin of this comparable after making suitable adjustment with respect to FOC supplies. Besco Limited - In the case of this comparable also, it is seen that the Ld. Commissioner of Income Tax (A), while following the order of the ITAT in the immediately preceding year, had directed that FOC supplies adjustment should be given while computing the margins but the TPO while giving effect to the order of the Ld. Commissioner of Income Tax (A) has not done so. Therefore, this comparable is also restored to the file of the TPO for recalculation of the margin after making adjustment to FOC supplies. Jessop and Company Limited - This comparable has been agitated by the assessee on the ground that the TPO has taken combined segmental profitability of both EMU and Wagon segments whereas in the immediately preceding assessment year 2010-11, these two segments were taken as two different segments. It has also been agitated that there are computational errors while computing the margin of this company. It has also been agitated that the TPO has taken the miscellaneous income as operating income for the purposes of calculating of margin of this company. In view of the anomalies pointed out by the Ld. AR in this regard, we deem it fit to restore this comparable also to the file of the TPO for duly considering these objections of the assessee.

Summary

Issues Involved:

1. Validity of the order passed by the AO/TPO.
2. Jurisdictional error in the reference made by the AO to the TPO.
3. Rejection of Comparable Uncontrolled Price (CUP) method and application of Transactional Net Margin Method (TNMM).
4. Comparability of international transactions and the validity of internal CUP method.
5. Transfer pricing adjustments and the appropriateness of the methodology adopted by the assessee.
6. Inclusion/exclusion of comparables and the application of filters for selection of comparable uncontrolled enterprises.
7. Miscellaneous issues including levy of interest under various sections of the Income-tax Act.

Detailed Analysis:

1. Validity of the Order Passed by AO/TPO:

The assessee argued that the order passed by the AO/TPO is bad in law and void-ab-initio. The Tribunal found no separate adjudication necessary for this ground as it was general in nature.

2. Jurisdictional Error in Reference Made by AO to TPO:

The assessee contended that the AO did not record any reasons for referring the matter to the TPO, which was a jurisdictional error. This ground was also considered general and did not require separate adjudication.

3. Rejection of CUP Method and Application of TNMM:

The TPO rejected the CUP method applied by the assessee for the sale of metro trains and instead applied the TNMM. The Tribunal upheld the TPO’s decision, noting that the facts were similar to the previous assessment year (AY 2010-11), where the CUP method was also rejected. The Tribunal emphasized that the CUP method requires strict comparability, which was not met in this case.

4. Comparability of International Transactions and Validity of Internal CUP Method:

The assessee argued that the price at which the AE sold metro trains to DMRC should act as a valid CUP. However, the Tribunal upheld the rejection of the CUP method, emphasizing the differences in contractual terms, market levels, and geographical regions between the transactions. The Tribunal noted that the issue had attained finality as it was not challenged before the High Court in the previous year.

5. Transfer Pricing Adjustments and Methodology Adopted by Assessee:

The assessee submitted that the remuneration from the international transaction should not exceed the overall revenue received from the third party (DMRC). The Tribunal noted that this ground was not specifically adjudicated by the CIT(A) and restored it to the file of the CIT(A) for reconsideration and passing a speaking order.

6. Inclusion/Exclusion of Comparables and Application of Filters:

The Tribunal addressed the inclusion/exclusion of comparables as follows:

- Texmaco Rail and Engineering Limited: The Tribunal directed the TPO to recompute the margin after including only the heavy engineering segment and making adjustments for free of cost supplies.
- Titagarh Wagons Limited: The Tribunal upheld the inclusion of this company but directed the TPO to consider only the wagon segment and make adjustments for free of cost supplies.
- Braithwaite and Co. Limited: The Tribunal restored this comparable to the TPO for recomputation of margins after making adjustments for free of cost supplies.
- Besco Limited: Similar directions were given as for Braithwaite and Co. Limited.
- Jessop and Company Limited: The Tribunal restored this comparable to the TPO for reconsideration of the objections raised by the assessee, including computational errors and the inclusion of miscellaneous income as operating income.

7. Miscellaneous Issues Including Levy of Interest:

Grounds related to the levy of interest under various sections of the Income-tax Act were considered consequential and did not require specific adjudication.

Conclusion:

The Tribunal partly allowed the appeal, dismissing some grounds while restoring others to the CIT(A) and TPO for reconsideration and recomputation. The Tribunal emphasized the need for proper adjustments and adherence to the principles of comparability in transfer pricing assessments.