2025 (4) TMI 795 - AT - Income Tax

TP Adjustment made in manufacturing segment - case of the assessee that the TPO has omitted to examine the ALP applying transactions by transactions approach in the light of additional evidences placed before the Tribunal and largely omitted to taking into account various submissions despite the matter having been set aside for fresh determination - as objected TPO has only provided proportionate relief in respect of its manufacturing segment and restricted the TP adjustments to the quantum of international transactions entered with AE. Besides the direction of the ITAT 2012 (11) TMI 1208 - ITAT DELHI to re-examine the contentions of the assessee towards R D support service segment and business support service segment has not been given due effect. HELD THAT - The assessee has filed detailed submissions in writing as well as made lengthy oral submissions as broadly extracted in the preceding paragraphs. The objections of the assessee ranges from failure to apply ALP principles in the assessment order passed under challenge; failure to apply interpretation rendered by Co-ordinate Benches and in disregarding multiple year/prior years data used by the assessee - Plea towards international transactions relating to import of components for manufacturing of electrical equipment would meet arm s length principles on a transaction by transaction basis as canvassed by the assessee have been ignored. The contention towards selection of overseas tested party is also alleged to have been disregarded contrary to position of law and based on incorrect appreciation of facts. The assessee also asserts that the TPO has included certain companies that are not comparable to the assessee in terms of the functions performed assets employed and risks assumed. Likewise as contended the TPO has wrongly excluded certain comparables companies for the purposes of TP adjustments. As further contended the benefit of working capital adjustment while computing the ALP has also not been borne in mind. In the light of order passed by the Tribunal under s. 254(12) of the Act the assessee also claims tax holiday u/s 10A on profits arrived at after the adjustments so made in accordance with law and alleges that the lower authorities have failed to apply the principles laid down in the case of CIT vs TEI Technology Pvt. Ltd. 2012 (9) TMI 47 - DELHI HIGH COURT We find considerable force in the plea of the assessee for appropriate relief from such alleged errors committed by the lower authorities. We thus consider it expedient to restore all the issues placed before the Tribunal back to the file of the TPO/AO for fresh determination of such issues in the light of submissions made and various claims asserted before the Tribunal. It shall be open to the assessee to make such submissions and adduce such evidences as may be considered expedient. The TPO/DRP/AO shall pass fresh order in accordance with law by way of a speaking order. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the transfer pricing adjustments made by the TPO in relation to the manufacturing, R&D support services, and business support services segments were justified.
• Whether the TPO erred in rejecting the segmentation of the manufacturing segment and in not considering the transaction-by-transaction approach for benchmarking.
• Whether the TPO appropriately applied the arm's length principle and considered the correct set of comparables for each segment.
• Whether the denial of the working capital adjustment and the application of certain filters by the TPO were justified.
• Whether the AO erred in denying the deduction under section 10A of the Income Tax Act.
• Whether the penalty proceedings initiated under sections 271(1)(c), 271BA, and 271AA were justified.
• Whether the computation of interest under section 234D and the withdrawal of interest under section 244A were justified.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Adjustments

• Legal Framework and Precedents: The transfer pricing adjustments were made under sections 92C and 92CA of the Income Tax Act, which require international transactions to be at arm's length. The Tribunal referred to the OECD Transfer Pricing Guidelines and various judicial precedents to assess the appropriateness of the adjustments.
• Court's Interpretation and Reasoning: The Tribunal found that the TPO failed to examine the arm's length price (ALP) on a transaction-by-transaction basis and did not consider the additional evidence submitted by the assessee. The TPO also failed to provide a working capital adjustment, despite the DRP's direction to do so.
• Key Evidence and Findings: The Tribunal noted that the TPO did not adequately consider the segmented financials and the different business models of the assessee's manufacturing sub-segments. The TPO also disregarded the comparables proposed by the assessee without providing sufficient reasoning.
• Application of Law to Facts: The Tribunal applied the arm's length principle and found that the TPO's approach was inconsistent with the legal requirements. The Tribunal emphasized the need for a detailed analysis of each sub-segment and the consideration of relevant comparables.
• Treatment of Competing Arguments: The Tribunal considered the assessee's arguments regarding the functional differences between sub-segments and the need for a working capital adjustment. The Tribunal also acknowledged the assessee's reliance on judicial precedents supporting the inclusion of certain comparables.
• Conclusions: The Tribunal concluded that the transfer pricing adjustments were not justified and directed the TPO/AO to re-examine the issues in light of the submissions and evidence provided by the assessee.

Deduction under Section 10A

• Legal Framework and Precedents: Section 10A provides a deduction for profits from export-oriented units. The Tribunal referred to the jurisdictional High Court's decision in CIT v. TEI Technologies (P.) Ltd., which held that section 10A is an exemption provision.
• Court's Interpretation and Reasoning: The Tribunal found that the AO erred in denying the deduction under section 10A, as the assessee had submitted sufficient evidence to support its claim.
• Key Evidence and Findings: The Tribunal noted that the assessee had provided the necessary documentation, including Form 56F, to substantiate its claim for deduction under section 10A.
• Application of Law to Facts: The Tribunal applied the principles established in the TEI Technologies case and concluded that the assessee was entitled to the deduction under section 10A.
• Treatment of Competing Arguments: The Tribunal considered the AO's arguments but found them unconvincing in light of the evidence and legal precedents presented by the assessee.
• Conclusions: The Tribunal directed the AO to allow the deduction under section 10A as claimed by the assessee.

Penalty Proceedings and Interest Computation

• Legal Framework and Precedents: Sections 271(1)(c), 271BA, and 271AA relate to penalties for concealment of income and non-compliance with transfer pricing documentation requirements. Sections 234D and 244A pertain to interest computation.
• Court's Interpretation and Reasoning: The Tribunal found that the initiation of penalty proceedings was mechanical and lacked adequate satisfaction. Similarly, the computation of interest was not supported by satisfactory reasons.
• Key Evidence and Findings: The Tribunal noted the absence of specific findings or reasoning in the AO's order to justify the penalties and interest computation.
• Application of Law to Facts: The Tribunal applied the principles of natural justice and found that the AO's actions were not in accordance with the law.
• Treatment of Competing Arguments: The Tribunal considered the assessee's arguments regarding the lack of justification for penalties and interest computation.
• Conclusions: The Tribunal set aside the penalty proceedings and directed the AO to re-evaluate the interest computation in accordance with the law.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The Tribunal concluded that the transfer pricing adjustments were not justified and directed the TPO/AO to re-examine the issues in light of the submissions and evidence provided by the assessee."
• Core Principles Established: The Tribunal emphasized the importance of a transaction-by-transaction analysis for transfer pricing adjustments and the need to consider relevant comparables and working capital adjustments.
• Final Determinations on Each Issue: The Tribunal allowed the appeal for statistical purposes, directing the TPO/AO to re-evaluate the transfer pricing adjustments and allow the deduction under section 10A. The penalty proceedings and interest computation were also set aside for re-evaluation.