2016 (4) TMI 1178 - AT - Income Tax

Tribunal adjusts comparables, upholds forex treatment, grants tax credits while dismissing penalties.

The tribunal partly allowed the appeal, directing the TPO to reconsider certain comparables and adjustments. It upheld treating forex gain/loss and ... TPA selection of comarables - Held that:- A comparable company engaged in the similar business which is having the similar FAR may be generally included though same might have been held to be not includible by the courts in some other cases. Further the contractual terms as well as host of other factors stated in above sub rule may determine the comparability analysis. If the difference arising on comparability analysis does not affect the price or profitability of comparable or if so it can be reasonably adjusted same should be taken as good comparable for the Comparability analysis. Therefore it cannot be ever assumed that if a comparable is held to be excludible in one case , it shall always be excluded in the decisions to follow subsequently. Therefore while deciding the comparability the decisions cited definitely would be perused from this angle. Risk adjustment - Held that:- We have carefully considered the rival contentions and fully agree with the contention of the ld. AR that an adjustment should be allowed to the assessee of the difference in the risk borne by the assessee as well as the comparables. Before us assessee has submitted a working which is based on market rate of return of 12.26% used by the TPO while granting working capital adjustment compared with 7.57% rate of return for Indian treasury bills. Based on this working assessee has computed the risk adjustment as under:- Particulars Percentage Market Interest Rate (As per TPO Order PB Pg.286) (A) 12.26% Risk Free interest (B) 7.57% Risk Premium (OA-B) 4.69% Proportion of Risk Premium Rate to Total Market Interest (D=C/A) 38.25% Average PLI of Comparables (as per AO final order) (E) for market return (PB 224) 22.56% Less: Adjustment of Risk Premium out of Market return (F=E*D) (22.56%*38.25%) 8.63% Adjusted Risk free PLI of comparables (G=E-F) 13.93% Tested Party PLI (para 1 5. 1 of TPO order) 10.24%. Without commenting on the correctness of the computation of adjustment requested by assessee we set aside this ground to the file of ld. TPO for fresh consideration in accordance with law after granting proper opportunity to the assessee for supporting its claim. Non including the forex gain or loss of the assessee as operating cost or operating income - Held that:- Forex gain or loss shall be treated as operating income/ expenditure both in the case of tested party as well as comparables and the PLI should be determined accordingly. Regarding the treatment for provision for doubtful debts in para 55 at page 27 of the order coordinate bench has held that this provision be treated as part of operating expenditure. In view of this finding of the coordinate bench for AY 2010-11 in assessee’s own case we direct the ld. TPO to work out PLI of comparables and the assessee on the similar lines following that order. Non-granting of credit for advance tax and TDS - Held that:- Assessee has submitted that the amount of advance tax has not been given credit because of error in quoting PAN no of the assessee and whereas the short credit of TDS is on account of mis-match as per form No.26AS. these facts have also been drawn attention of Assessing Officer vide letter dated 11.03.2015 and 18.11.2015. ld. DR also fairly agreed that credit may be given after verification. In view this we direct the Assessing Officer to grant credit of advance tax as well as TDS to the assessee after obtaining proper undertaking. Issues Involved:1. Addition on account of arm's length price under section 92CA(3) of the Income-tax Act.2. Rejection of the assessee's search process for comparables.3. Choice of comparable companies by the TPO.4. Determination of the PLI of the assessee and the comparable companies.5. Non-allowance of credit for prepaid taxes and TDS.6. Penalty proceedings under section 271(1)(c).7. Interest charged under sections 234B and 234C.Detailed Analysis:1. Addition on Account of Arm's Length Price:The assessee contested the addition of Rs. 3,64,82,532/- made by the TPO and upheld by the DRP/AO under section 92CA(3) of the Income-tax Act. The tribunal noted that the assessee's case for AY 2010-11 was similar, where it was determined that the assessee was a low-risk, non-risk-bearing business support service provider. Consequently, the tribunal followed the previous decision and held that the assessee’s services were not comparable to high-end technical services, thus allowing the appeal on this ground.2. Rejection of the Assessee's Search Process:The TPO rejected the assessee's scientifically run search process without cogent reasons. The tribunal observed that in the previous year, the assessee's search process was accepted, and the TPO’s rejection was not substantiated. Therefore, the tribunal directed that the assessee's search process should be accepted, aligning with the precedent set in AY 2010-11.3. Choice of Comparable Companies:The tribunal examined various comparables selected by the TPO and DRP:- Apitco Ltd. and Kitco Ltd.: Both were excluded as they were functionally different and not comparable to the assessee’s services, following the decision in AY 2010-11.- TCE Consulting Engineers Ltd.: Excluded as it provided high-end engineering consulting services, not comparable to the assessee.- IBI Chematur (Engineering & Consultancy) Ltd.: Remitted to the TPO for verification as the functional profile was not clearly established.- Mahindra Consulting Engineers Ltd.: Excluded due to its highly technical capabilities in infrastructure projects.- Mitcon Consultants & Engineering Services Ltd.: Remitted to the TPO as the exclusion plea was raised for the first time.- Infoedge India Pvt. Ltd. and MMTV Ltd.: Excluded as they were engaged in online portal activities and running a news channel respectively, both functionally different from the assessee.- Ashok Leyland Project Services Ltd. and HSCC India Ltd.: Remitted to the TPO for reconsideration as the exclusion plea was raised for the first time and for proper opportunity to the assessee regarding adjustments made to the PLI.4. Determination of the PLI:The tribunal directed the TPO to treat forex gain/loss and provision for doubtful debts as part of operating income/expenditure, following the decision in AY 2010-11. However, the tribunal dismissed the assessee's objection regarding the treatment of interest and bank charges as non-operating expenses as it was raised for the first time.5. Non-allowance of Credit for Prepaid Taxes and TDS:The tribunal directed the AO to grant credit for advance tax of Rs. 7,83,847/- and TDS of Rs. 70,321/- after proper verification, as the non-allowance was due to errors in quoting PAN and mismatches in Form 26AS.6. Penalty Proceedings under Section 271(1)(c):The tribunal dismissed the ground as premature, noting that the penalty proceedings were still ongoing and not yet finalized.7. Interest Charged under Sections 234B and 234C:The tribunal dismissed this ground as it was consequential in nature, dependent on the final determination of the tax liability.Conclusion:The appeal was partly allowed, with the tribunal directing the TPO to reconsider certain comparables and adjustments, and to grant proper credits for prepaid taxes and TDS. The tribunal also upheld the treatment of forex gain/loss and provision for doubtful debts as operating income/expenditure.