2022 (8) TMI 301 - AT - Income Tax

TP Adjustment - Selection of MAM - assessee submitted to consider CUP as most appropriate method in view of the availability of TIPS data base for comparability and filed additional evidence in the form of TIPS data - HELD THAT - Exercise of examining comparability has already been carried out by the TPO in remand during DRP proceedings, wherein the TPO has rejected the comparability on the ground that geography and volume of the transactions was not available in the database. In our opinion, the AO or the TPO has authority to call for complete information of the transactions of import of raw materials and export of finished goods from the Custom Authorities including invoices of import or export having details of geography and volume. The Ld. TPO may also remove the related party transactions from the relevant information. We note that AO in assessment year 2014-15 has carried out exercise for comparing the international transactions of the assessee with the uncontrolled transactions available in TIPS data base and that too after the order of the Ld. DRP for year under consideration.We feel it appropriate to restore the matter to the AO/TPO for comparing the TIPS data with the international transactions of the assessee under CUP method of comparability as most appropriate method. In case, the CUP method fails, the Ld. AO/TPO may explore another methods including TNMM. - Ground of the appeal are accordingly allowed for statistical purposes. Nature of receipt - compensation received on termination of marketing support agreement - revenue or capital receipt - contention of the assessee that said compensation is respect of loss of source of income and therefore it is capital in nature and not chargeable to tax - HELD THAT - As there was no restriction on the assessee to carry out his activity of marketing support services to anyone. By way of cancellation of marketing support service agreement in respect of SBH, there is no damage or impairment to the trading structure of the assessee. There was no removal of any employee of the marketing team by way of amendment in agreement and therefore there is no loss of source of income. The entire team of marketing support as capable of rendering services as was before the termination of market support of SBH. Moreover, the marketing team was providing marketing support in respect of other product after termination of assessment for SBH. In the case of Kettlewell Bullen Co. Ltd. 1964 (5) TMI 4 - SUPREME COURT also it is held that where payment is made to compensate the person for cancellation of the contract, which does not affect the trading structure of his business or deprive him of what in substance is a source of income, termination of the contract being a normal incident of the business and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue. Charging of interest u/s 234A - HELD THAT - As assessee has contended that the assessee filed its return of income on 27/11/2015, whereas due date prescribed for filing return of income under section 139 (1) during relevant assessment year was 30/11/2015 and therefore interest u/s 234A has been wrongly levied. Both the parties agreed that issue is for verification by the AO and accordingly, the issue in dispute is restored to the file of the AO for deciding in accordance with law after verifying the facts on the record. Appeal is accordingly allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Compensation Received on Termination of Marketing Support Agreement
3. Charge of Interest under Section 234A
4. Charge of Interest under Section 234B
5. Penalty Proceedings under Section 271(1)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the determination of total income at Rs. 18,87,64,272 against a returned income of Nil, primarily due to transfer pricing adjustments. The key points of contention included:
- Rejection of Cost-Plus Method (CPM): The assessee used CPM for determining the arm's length price, but the TPO rejected this, citing the assessee’s loss-making status and the non-availability of gross profit margin details for comparables. The TPO instead adopted the Transactional Net Margin Method (TNMM).
- Comparable Uncontrolled Price (CUP) Method: The assessee argued for the CUP method using TIPS and ICIS data for export of finished goods and import of raw materials. The TPO and DRP rejected this, stating the data was non-contemporaneous and unreliable due to fluctuations and lack of specific details.
- Selection of Comparables: The DRP upheld the selection of one comparable by the TPO and directed the inclusion of another if its annual report was available, which was not.
- Tribunal’s Decision: The Tribunal restored the matter to the AO/TPO for re-examination using CUP as the most appropriate method, considering the TIPS data. If CUP fails, other methods, including TNMM, may be explored.

2. Compensation Received on Termination of Marketing Support Agreement:
The assessee received Rs. 17,87,49,236 as compensation for termination of a market support agreement and claimed it as a capital receipt. The AO and DRP treated it as revenue receipt, taxable under section 28, relying on the decision of the Hon’ble Bombay High Court in Blue Star Ltd. The Tribunal upheld this view, noting that the termination did not impair the trading structure or source of income of the assessee.

3. Charge of Interest under Section 234A:
The assessee contended that the interest charged under section 234A was incorrect as the return was filed within the due date. The Tribunal restored this issue to the AO for verification and decision in accordance with the law.

4. Charge of Interest under Section 234B:
The charge of interest under section 234B was deemed consequential and dismissed as infructuous.

5. Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings was considered premature and dismissed as infructuous.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing a re-examination of transfer pricing adjustments and verification of the interest charged under section 234A. The compensation received on termination of the marketing support agreement was upheld as revenue in nature.