2022 (5) TMI 272 - AT - Income Tax

TP Adjustment - ITEs Segment on transaction with Colt Luxembourg - whether the margins accepted by MAP to be applied or not? - whether margin accepted in MAP resolutions i.e. 15.50% should be applied to bench mark the ITEs services rendered by the assessee to Colt Luxembourg as against the margin of 32.24% computed by the Ld. TPO? - HELD THAT - As relying on the case of Amazon Development Centre (India) (P.) Ltd. 2018 (5) TMI 343 - ITAT BANGALORE and CGI Information System Management Consultants (P) Ltd. 2017 (5) TMI 777 - ITAT BANGALORE in the MAP Resolution, the margin accepted was 15.50% , we direct the AO/TPO to apply to benchmark ALP at 15.50% with respect to the ITEs segment on transaction with Colt Luxembourg. Accordingly, we allow the Assessee s Grounds of Appeal No. 1 to 13. Interest on receivables - computing notional interest on the delayed receipt of payment in case of certain receivables with AE s at PLR plus 300 basis points - DRP in its order directed the Ld. TPO to apply interest in keeping with safe harbor regulations i.e. SBI base rate on 30.06.2009 plus 300 basis points which amounted to 14.75% and the addition got revised - HELD THAT - As in the MAP Resolution entered into between UK and Indian Authorities in respect of the addition pertaining to UK got settled at 3 months average Euribor plus 200 basis points applied on receivables beyond 90 days, we direct the AO/TPO to apply 3 months average Euribor plus 200 basis points on the receivables received beyond 90 days in respect of outstanding from Colt Luxembourg. Accordingly, allow the Grounds No. 14 to 16 for statistical purpose. Purchase of fixed assets - TPO added the entire amount of fixed assets purchased by the assessee from its AE s during the year - DRP in its order directed the TPO to accept the value of fixed assets in case of those invoices from AE where it is mentioned that, they have been valued at the present depreciated value of equipment - HELD THAT - In the case of Assistant Commissioner of Income Tax Vs. Coastal Energy Pvt. Ltd, Chennai 2011 (7) TMI 154 - ITAT, CHENNAI it is held that, the custom authorities are assigning the value to imported goods on the basis of scientifically formulated methods and they are responsible for determining a fair value of the imported goods. By considering the facts and circumstances of the case, we are of the opinion that, the fixed assets purchased by the assessee cannot be taken as NIL and the value assigned by the custom authorities are to be taken as the fair value of the fixed assets purchased by the assessee - Accordingly, we allow the Assessee s Grounds of Appeal No. 17 18. Levying interest u/s 234B and 234C on the additional income agreed as per the Advance Pricing Agreement entered between the appellant and the Central Board of Direct Taxes and offered to tax by the appellant in the modified return of income u/s 92CD(1) - HELD THAT - As relying on case of Prime Securities Ltd. Vs. Assistant Commissioner of Income Tax (Investigation) 2010 (12) TMI 475 - BOMBAY HIGH COURT we hold that, the levy of interest u/s 234B and 234C of the Income Tax Act on additional income agreed as per advance pricing agreement entered between appellant and the CBDT is illegal. Ergo, we allow the additional grounds of appeal.

Summary

Issues Involved:
1. Jurisdictional error in reference to Transfer Pricing Officer (TPO)
2. Determination of Arm's Length Price (ALP)
3. Deduction under section 10A of the Income Tax Act
4. Use of financial data for ALP determination
5. Comparability analysis and quantitative filters
6. Working capital adjustments
7. Risk adjustments
8. Interest on receivables
9. Valuation of fixed assets
10. Penalty proceedings under section 271(1)(c)
11. Levying interest under sections 234B and 234C

Issue-wise Detailed Analysis:

1. Jurisdictional Error in Reference to TPO:
The appellant argued that the reference made by the Assessing Officer (AO) to the TPO suffered from jurisdictional error as no reasons were recorded. The tribunal did not specifically address this issue, implying it was not the primary contention.

2. Determination of Arm's Length Price (ALP):
The appellant challenged the ALP determined by the AO/TPO/DRP, arguing that their own ALP determination should have been accepted. The tribunal found merit in the appellant's argument, particularly in light of the Mutual Agreement Procedure (MAP) resolution, which agreed on specific margins for services rendered. The tribunal directed the AO/TPO to apply the MAP agreed margins of 15.50% for ITES segment transactions with Colt Luxembourg, aligning with precedents like Amazon Development Centre and CGI Information System cases.

3. Deduction under Section 10A:
The appellant claimed entitlement to deduction under section 10A, asserting no motive to manipulate transfer prices for tax advantage. The tribunal did not specifically address this issue in the judgment, focusing instead on the ALP determination and related adjustments.

4. Use of Financial Data for ALP Determination:
The appellant contended that the AO/TPO/DRP erred by using data only for the financial year 2009-10, ignoring prior years. The tribunal did not explicitly address this issue, but the acceptance of MAP margins suggests an implicit resolution in favor of the appellant's broader data usage.

5. Comparability Analysis and Quantitative Filters:
The appellant argued against the rejection of their comparability analysis and the adoption of inappropriate filters by the AO/TPO/DRP. The tribunal's acceptance of the MAP margins implicitly supports the appellant's stance on comparability and filters, aligning with judicial precedents.

6. Working Capital Adjustments:
The appellant claimed the TPO did not provide working capital adjustments despite DRP directions. The tribunal did not specifically address this issue, focusing instead on the broader ALP determination and adjustments.

7. Risk Adjustments:
The appellant argued for risk adjustments due to minimal risks undertaken. The tribunal did not specifically address this, but the acceptance of MAP margins suggests consideration of risk adjustments in the overall ALP determination.

8. Interest on Receivables:
The appellant contested notional interest adjustments on delayed receivables, arguing for the application of MAP agreed interest rates. The tribunal directed the AO/TPO to apply the MAP agreed rate of 3 months average Euribor plus 200 basis points for receivables beyond 90 days, aligning with judicial precedents.

9. Valuation of Fixed Assets:
The appellant challenged the TPO's valuation of certain fixed assets as nil. The tribunal agreed with the appellant, directing the AO/TPO to accept the value assigned by customs authorities, recognizing the scientific basis of such valuations as fair market value.

10. Penalty Proceedings Under Section 271(1)(c):
The appellant contested the initiation of penalty proceedings. The tribunal did not specifically address this issue, implying it was consequential to the primary contentions.

11. Levying Interest Under Sections 234B and 234C:
The appellant argued against interest levies on additional income arising from the APA, citing inability to estimate such income in advance. The tribunal agreed, following judicial precedents, and held that interest under sections 234B and 234C should not be levied on additional income declared in the modified return pursuant to the APA.

Conclusion:
The tribunal allowed the appeals for statistical purposes, directing the AO/TPO to apply MAP agreed margins and interest rates, accept customs valuations for fixed assets, and not levy interest under sections 234B and 234C on additional income from the APA. The tribunal's decisions were aligned with judicial precedents, ensuring fair and consistent application of tax laws.