2022 (1) TMI 647 - AT - Income Tax

Penalty proceedings under section 271(1)(c) - TP Adjustment - comparable selection - HELD THAT - We hold that the comparable doesn t pass the functional analysis and turnover filter and hence is liable to be excluded from the list of comparables We find that the reply of the assessee is only with regard to the adjudication of the ld. DRP on the comparables hence doesn t amount to any admission or appraisal of new evidences before us. The assessee did not appear before the TPO but appeared before the ld. DRP. Before us the order of the ld. DRP is being contested. Hence the objections of the ld. DR as mentioned above is not pertaining to the order before the ld. DRP. We also were made aware that penalty proceedings for non-compliance have already been initiated by the revenue and hence the issue of non-compliance would be dealt separately based on the outcome of the penalty proceedings. Hence the submission of the ld. AR is not relevant to the issue that is being adjudicated before us. Appeal of the assessee is allowed.

Issues Involved:

1. Assessment of income and penalty proceedings under section 271(1)(c).
2. Inappropriate economic analysis and comparability adjustments.
3. Determination of the arm's length price for specified domestic transactions.
4. Determination of the arm's length price for international transactions.

Detailed Analysis:

1. Assessment of Income and Penalty Proceedings:

The appellant contested the assessment of income at INR 2,51,40,768 against the returned income of INR 70,52,530. The appellant also challenged the initiation of penalty proceedings under section 271(1)(c) for concealment of particulars of income. The tribunal noted that the penalty proceedings are separate from the current adjudication and will be dealt with based on their outcome.

2. Inappropriate Economic Analysis and Comparability Adjustments:

The appellant argued that the AO/TPO conducted an opaque analysis, violating natural justice by not sharing the search methodology, keywords, and criteria used for selecting/rejecting comparable companies. The appellant also contended that the AO/TPO cherry-picked companies arbitrarily without providing cogent reasons and failed to recognize the appellant's functional profile.

The tribunal examined specific comparables:

- BCH Electric Ltd.: The tribunal found BCH Electric Ltd. functionally dissimilar to the appellant, which manufactures setup boxes, while BCH Electric Ltd. manufactures voltage panels. Therefore, BCH Electric Ltd. was excluded from the list of comparables.

- Havells India Ltd.: The tribunal noted that Havells India Ltd.'s turnover of INR 5833 crores was significantly higher than the appellant's INR 18.97 crores. Citing various judicial pronouncements, the tribunal held that companies with turnover ranging from INR 1 crore to INR 200 crores should be considered for comparability. Consequently, Havells India Ltd. was excluded from the list of comparables.

- Eddy Current Controls (India) Ltd.: The tribunal found significant product differentiation between Eddy Current Controls (India) Ltd., which manufactures current variable speed drives, and the appellant, which manufactures setup boxes. Therefore, Eddy Current Controls (India) Ltd. was excluded from the list of comparables.

3. Determination of Arm's Length Price for Specified Domestic Transactions:

The appellant argued that the AO/TPO erred in determining the arm's length price for specified domestic transactions, ignoring that the relevant provision had been repealed. Additionally, the appellant contended that the transactions between related parties were revenue-neutral, as both parties were taxable at the maximum marginal rate without claiming any tax holiday exemptions.

4. Determination of Arm's Length Price for International Transactions:

The appellant argued that the AO/TPO should have provided the benefit of proportionate adjustment and pointed out arithmetic computational errors in the margin of comparable companies, impacting the determination of the arm's length price and total income. The tribunal acknowledged the appellant's arguments and noted that the appellant did not appear before the TPO but did appear before the DRP. The tribunal found the objections of the DR not relevant to the order before the DRP.

Conclusion:

The tribunal allowed the appeal of the assessee, excluding the contested comparables from the list and recognizing the need for a fresh analysis considering the functional profile and appropriate comparable data. The tribunal also noted that the issue of non-compliance would be separately addressed in the penalty proceedings. The appeal was pronounced in the open court on 10/01/2022.

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