2021 (9) TMI 229 - AT - Income Tax

Admission of additional ground - TP Adjustment issue - whether the impugned order u/s. 92CA(3) of the TPO has been passed beyond the time limit provide under section 92CA(3A), therefore, bad in law and liable to the quashed? - HELD THAT - We are of the view that this additional ground raised by the assessee will go to the root of the matter. Hence, we admit the additional ground raised by the assessee, which would not require any fresh investigation into facts of the case, by following the dictum laid down by the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT 1996 (12) TMI 7 - SUPREME COURT . This additional ground is raised for the first time before the Tribunal and the Income Tax Authorities did not have any occasion to examine the merits of the additional ground. Accordingly, we remit the issue raised in the additional ground to the files of the DRP, for fresh adjudication in accordance with law. Since we have remitted the issue raised in the additional ground to the files of the DRP, which will go to the root of the matter, we are refrained from adjudicating the grounds raised in the assessee's appeals.

Summary

Issues Involved:
1. Adjustment to the transfer price of corporate management services and reimbursement of expenses.
2. Disallowance of reimbursement made to CAE Simulation Technologies.
3. Recharacterization of functions from project management to software development.
4. Disallowance of expenses under Section 40(a)(ia).
5. Comparability analysis and selection of comparables.
6. Arm's length nature of international transactions.
7. Admissibility of additional grounds raised by the assessee.

Detailed Analysis:

1. Adjustment to the Transfer Price of Corporate Management Services and Reimbursement of Expenses:
The assessee contested the adjustments made by the AO/TPO regarding the international transactions for corporate management services and reimbursement of expenses, arguing that these transactions satisfied the arm's length principle under the Income-tax Act, 1961. The DRP upheld the AO/TPO's view, categorizing these services as stewardship activities and disregarding the genuineness of the arrangement despite the existence of a legal agreement. The DRP also concluded that no commercial or economic benefits were received by the assessee, and computed the arm's length value of the transactions to be NIL.

2. Disallowance of Reimbursement Made to CAE Simulation Technologies:
The AO disallowed the reimbursement amounting to ?11,40,279/- made to CAE Simulation Technologies, ignoring the directions issued by the DRP to delete the additions made towards reimbursements. The assessee argued that the disallowance was unjustified.

3. Recharacterization of Functions from Project Management to Software Development:
For the assessment year 2011-2012, the AO/DRP recharacterized the functions of CAE India from project management services to software development services. The assessee contended that the DRP erred in disregarding the multiple-year data used in the TP documentation and in conducting a fresh comparability analysis. The DRP's approach in rejecting certain comparables and not allowing the use of financial projections was also challenged.

4. Disallowance of Expenses under Section 40(a)(ia):
The AO disallowed expenses amounting to ?17,26,480/- under Section 40(a)(ia), which the assessee argued was both legally and factually incorrect.

5. Comparability Analysis and Selection of Comparables:
The Revenue's appeal for the assessment year 2011-2012 raised issues regarding the rejection of certain companies as comparables by the DRP. The DRP was criticized for imposing conditions beyond the law and for excluding companies like E-infochips and L&T Infotech on grounds of functional differences and significant onsite revenue, respectively.

6. Arm's Length Nature of International Transactions:
The Revenue challenged the DRP's decision that the international transactions pertaining to reimbursement and project expenses to CAE Canada were at arm's length. The DRP's reliance on an overall entity-level analysis under the Transactional Net Margin Method (TNMM) was contested, as was the DRP's rejection of the TPO's view that these transactions were stewardship activities.

7. Admissibility of Additional Grounds Raised by the Assessee:
The assessee raised an additional ground regarding the timeliness of the TPO's order under Section 92CA(3), which was admitted by the Tribunal. The Tribunal remitted the issue to the DRP for fresh adjudication, noting that it went to the root of the matter and did not require fresh investigation into the facts.

Conclusion:
The Tribunal admitted the additional ground raised by the assessee and remitted the issue to the DRP for fresh adjudication. Consequently, the Tribunal refrained from adjudicating the other grounds raised in the assessee's appeals. The cross objections filed by the assessee and the Revenue's appeals were dismissed as infructuous. The appeals filed by the assessee were allowed for statistical purposes.