2025 (4) TMI 719 - AT - Income Tax

TP Adjustment - adjustment of 3% as per section 92C and relevant rules - only plea in the present appeal was to restore the matter back to the AO to apply the direction of the DRP to grant adjustment to the arm s length price of the transaction by 3% in terms of section 92C(1) - HELD THAT - Today on 26.12.2024 when the matter came up for hearing the ld.DR fairly conceded that the AO had failed to comply with the direction of the DRP to grant 3% adjustment to the ALP of the international transaction. Accordingly in view of the above the matter is restored back to the file of the AO to comply with the direction of the DRP noted at para 6.3.4 of his order as reproduced above in our order.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the Assessing Officer (AO) erred in the re-computation of the arm's length price (ALP) of international transactions by proposing an upward adjustment without granting the benefit of the second proviso to section 92C(1) of the Income Tax Act, 1961.

2. Whether the AO failed to consider specific companies, Ador Powerton Ltd and Fuji Electric Consul Neowatt Private Limited, as comparables in the final set of comparable companies for determining the ALP.

3. Whether the initiation of penalty under section 270A of the Act was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Re-computation of ALP and Application of Second Proviso to Section 92C(1)

- Relevant Legal Framework and Precedents: The primary legal framework involves section 92C of the Income Tax Act, which deals with the computation of ALP in international transactions. The second proviso to section 92C(1) states that if the variance between the ALP determined and the actual transaction price does not exceed 3%, the ALP shall be deemed to be the actual transaction price.

- Court's Interpretation and Reasoning: The Tribunal noted that the AO, while determining the ALP, did not grant the benefit of the second proviso to section 92C(1). The Dispute Resolution Panel (DRP) had directed the AO to provide the necessary adjustment of +/- 3% as per the relevant rules, but the AO failed to comply with this direction.

- Key Evidence and Findings: The assessee had benchmarked its transactions using the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of 3.10%. The Transfer Pricing Officer (TPO) rejected two comparables, resulting in a PLI of 5.24% for the remaining comparables. This led to an adjustment of INR 7,37,64,846.

- Application of Law to Facts: The Tribunal found that the AO did not apply the DRP's direction to adjust the ALP by +/- 3%, which was a clear oversight.

- Treatment of Competing Arguments: The Tribunal acknowledged the Department's request for more time to review the case but ultimately found that the AO's failure to follow the DRP's direction was a straightforward issue that needed correction.

- Conclusions: The Tribunal restored the matter to the AO to comply with the DRP's direction to apply the +/- 3% adjustment to the ALP.

2. Consideration of Comparable Companies

- Relevant Legal Framework and Precedents: The selection of comparable companies is crucial in determining the ALP under transfer pricing regulations. The choice of comparables can significantly impact the PLI and, consequently, the ALP.

- Court's Interpretation and Reasoning: The Tribunal did not delve deeply into this issue as the primary focus was on the AO's failure to apply the DRP's direction regarding the +/- 3% adjustment.

- Key Evidence and Findings: The Tribunal noted that the TPO had rejected two comparables selected by the assessee, which affected the PLI calculation.

- Application of Law to Facts: The Tribunal's decision did not specifically address the inclusion or exclusion of Ador Powerton Ltd and Fuji Electric Consul Neowatt Private Limited as comparables.

- Treatment of Competing Arguments: The Tribunal focused on the procedural lapse regarding the DRP's direction rather than the substantive issue of comparables.

- Conclusions: The issue of comparables was not resolved in this judgment, as the decision centered on the procedural compliance by the AO.

3. Initiation of Penalty under Section 270A

- Relevant Legal Framework and Precedents: Section 270A deals with penalties for underreporting or misreporting income.

- Court's Interpretation and Reasoning: The Tribunal did not explicitly address the penalty issue, as the primary focus was on the adjustment of the ALP.

- Key Evidence and Findings: The Tribunal's decision did not provide specific findings on the penalty issue.

- Application of Law to Facts: The penalty issue was not a focal point in the Tribunal's analysis.

- Treatment of Competing Arguments: The Tribunal's decision did not address arguments related to the penalty under section 270A.

- Conclusions: The penalty issue remains unresolved in this judgment.

SIGNIFICANT HOLDINGS

- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The TPO is directed to provide the adjustment of +/- 3% as per section 92C and relevant rules."

- Core Principles Established: The Tribunal emphasized the importance of compliance with DRP directions and the application of statutory provisions such as the second proviso to section 92C(1).

- Final Determinations on Each Issue: The Tribunal allowed the appeal for statistical purposes, directing the AO to comply with the DRP's direction to apply the +/- 3% adjustment to the ALP.