2021 (3) TMI 312 - AT - Income Tax

Revision u/s 263 - TP Adjustment - CIT (IT TP) has found that there was error in the calculation of the PLI of the assessee company i.e. adoption of the operating cost and also allocation of operating cost between the branded food segment and SIT segment and the assessee has not been able to point out that these discrepancies are not arising out of the TPO s order - HELD THAT - There is clearly an error committed by the TPO, in computing the operating revenue while determining the ALP. Thus, the TPO order was clearly erroneous in so far as it was prejudicial to the interest of the revenue. Whether the CIT (IT TP) could have revised the TPO order? - Where the direction of the DRP have been held to be part of the assessment order, then, there can be no doubt that TP order is also part of assessment order and is thus amenable to jurisdiction of the CIT u/s.263 of the Act and particularly on the issues which were not considered by the TPO and DRP. Thus, assessee s grounds of appeal No.1 to 3(i), (ii) (iii) are rejected. Assessee s objection that the Tasty Bites and Eastables Ltd does not satisfy the filter adopted by the TPO - We find that the TPO has himself adopted the RPT filter of more than 25% and in the case of Tasty Bites and Eatables Ltd., it s RPT is clearly beyond the range fixed by the TPO, its RPT transactions are much more than 50%, but nearly 75%. In such circumstances, the TPO ought not to have considered the said company as a comparable company. Though the assessee may not have challenged the same before the TPO, assessee has challenged it before the DRP, but the DRP has not adjudicated the same and since there was no demand arising due to the consequential order passed by the AO, there was no occasion for the assessee to file an appeal before the ITAT. Therefore, in our opinion, the CIT (IT TP) ought to have directed the TPO to consider assessee s objections to Tasty Bites and Eatables Ltd before concluding the assessment proceedings. We direct the AO to examine and verify whether the RPT transaction of Tasty Bites Eatables Ltd with its AE is more than 25% and if it is found to be correct, then the said company shall be excluded from the final list of comparables. With these directions, the order of the CIT u/s 263 is modified and the AO/TPO is directed to recompute the ALP by excluding the Tasty Bites Eatables Ltd, and if thereafter the PLI of the assessee is less than -5% of the comparable companies, then no TP adjustment is called for. With these directions, the appeal of the assessee against the order u/s.263 of the Act, is partly allowed.

Summary

Issues Involved:
1. Jurisdiction of CIT under Section 263 of the I.T. Act to revise the TPO's order.
2. Correctness of the Transfer Pricing (TP) adjustments and the inclusion of Tasty Bites Eatables Ltd. as a comparable.
3. Allocation of operating costs and consideration of miscellaneous income and foreign exchange gains in the computation of the assessee's Profit Level Indicator (PLI).

Detailed Analysis:

1. Jurisdiction of CIT under Section 263:
The primary issue was whether the CIT (IT&TP) had the authority to revise the TPO's order under Section 263 of the I.T. Act. The assessee argued that the TPO is not an AO, and hence, the TP order is not subject to revision under Section 263. However, the Tribunal held that the TPO's order, being part of the assessment record, can indeed be revised by the CIT under Section 263. The Tribunal cited the case of Philips Ltd. vs. Pr.CIT, Kolkata, emphasizing that the DRP’s directions and the TPO's order are integral parts of the assessment process and can be revised if found erroneous and prejudicial to the interest of the revenue. Thus, the CIT's jurisdiction to revise the TPO's order was upheld.

2. Correctness of TP Adjustments and Inclusion of Tasty Bites Eatables Ltd.:
The assessee contended that the inclusion of Tasty Bites Eatables Ltd. as a comparable was incorrect due to its high Related Party Transactions (RPT), which exceeded the 25% filter adopted by the TPO. The Tribunal found merit in this argument, noting that Tasty Bites Eatables Ltd. had RPTs amounting to 75%, far exceeding the acceptable threshold. Although the DRP did not address this issue, the Tribunal directed the AO to re-examine the inclusion of Tasty Bites Eatables Ltd. and exclude it from the comparables if the RPT filter was indeed violated. This directive was aimed at ensuring accurate computation of the Arm's Length Price (ALP).

3. Allocation of Operating Costs and Consideration of Miscellaneous Income and Foreign Exchange Gains:
The CIT (IT&TP) observed discrepancies in the TPO's allocation of operating costs and the treatment of miscellaneous income and foreign exchange gains. Specifically, the TPO allocated ?610.44 crores out of a total operating cost of ?626.92 crores without justification for the unallocated ?16.48 crores. Additionally, the TPO included miscellaneous income and foreign exchange gains as operating revenue for the assessee but not for the comparables. The Tribunal upheld the CIT's view that these inconsistencies rendered the TPO's order erroneous and prejudicial to the revenue's interest. Consequently, the Tribunal directed the AO/TPO to recompute the ALP, ensuring a consistent approach to the allocation of costs and revenue.

Conclusion:
The Tribunal's judgment addressed the jurisdictional scope of the CIT under Section 263, validated the need for accurate TP adjustments by excluding inappropriate comparables, and emphasized the importance of consistent allocation of operating costs and revenue. The appeal in ITA No.775/Hyd/2016 was partly allowed, directing a re-examination of the comparables, while the appeal in ITA No.1116/Hyd/2018 was dismissed as infructuous due to the modifications in the CIT's order.