2012 (1) TMI 343 - AT - Income Tax

Assessee Granted Conditional Stay with Payment Terms for Disputed Demand

The Stay Application filed by the assessee was allowed conditionally, with payment terms outlined for the disputed demand and an early hearing scheduled ... Transfer pricing comparability and multi-year averaging - application of the proviso to section 92C(2) and +/-5% margin - stay of demand on deposit condition - appropriateness of Transactional Net Margin Method (TNMM) with OP/TC as PLI - treatment of disputed/irrecoverable demand arising from contrary precedentApplication of the proviso to section 92C(2) and +/-5% margin - treatment of disputed/irrecoverable demand arising from contrary precedent - Denial of benefit of the proviso to section 92C(2) of the Act by the AO/TPO/DRP and its effect on the disputed demand - HELD THAT: - The Tribunal held that the AO/TPO/DRP denied the benefit of the proviso to section 92C(2) (the +/-5% tolerance) despite pronouncements of various Benches, including Pune, to the contrary. That denial was found not to be in accordance with existing coordinate decisions, rendering the portion of the demand attributable to that denial a clearly disputed and effectively irrecoverable demand. The Tribunal accepted the assessee's contention that granting the proviso would materially reduce the tax demand and that the denial contradicted settled Tribunal rulings. [Paras 6]Benefit of the proviso to section 92C(2) was wrongly denied by the revenue authorities and the demand attributable to that denial is treated as a clearly disputed/irrecoverable component.Stay of demand on deposit condition - transfer pricing comparability and multi-year averaging - appropriateness of Transactional Net Margin Method (TNMM) with OP/TC as PLI - Application for stay of demand filed by the assessee pending appeal - HELD THAT: - Having found that a significant portion of the demand was rendered clearly disputed by the incorrect denial of the proviso, the Tribunal exercised its power to grant conditional stay. Considering the assessee's argument, its readiness to deposit a portion of adjusted tax demand and its capacity to pay, and balancing revenue interests, the Tribunal directed payment of 50% of the clear disputed demand (after excluding the component related to the +/-5% proviso and statutory interest). The Tribunal quantified the immediate deposit required as Rs. 1 crore (approx.), allowed this to be paid in five equal monthly instalments with the first instalment due at the end of January 2012, and acceded to the assessee's request for early hearing, listing the appeal for hearing on 23rd February 2012. The stay was therefore granted conditionally on compliance with these terms. [Paras 6, 7]Stay of demand allowed conditionally upon payment of the directed deposit of Rs. 1 crore in five monthly instalments; matter posted for early hearing.Final Conclusion: The Tribunal found the revenue's denial of the proviso to section 92C(2) to be contrary to coordinate decisions, treated the related demand as clearly disputed, and allowed the assessee's stay application conditionally on payment of the directed deposit in five instalments and granted an early hearing date. Issues:Transfer pricing analysis for IT and IT enabled services, application of RPT Filter, rejection of comparable companies, risk adjustment, addition proposed by TPO, confirmation of addition by AO and DRP, disputed tax demand, benefit of proviso to section 92C(2) denied, calculation of tax demand, request for stay of demand, payment terms for disputed demand, early hearing of appeal.Transfer Pricing Analysis for IT and IT Enabled Services:The assessee, a captive service provider, charged for IT and IT enabled services on a cost plus basis. The transfer pricing analysis was based on Rule 10B(4) of the Income-tax Rules, 1962, using multiple year average financial data of comparable companies. The TPO rejected certain comparables and arrived at arm's length OP/TC percentages for both services. The assessee selected TNMM as the most appropriate method and operating profit as a proportion of total cost as the profit level indicator.Application of RPT Filter and Rejection of Comparable Companies:The TPO disregarded the assessee's use of prior years' data of comparables and applied the financial data for FY 2006-07. The TPO also rejected submissions regarding the RPT Filter and comparability of selected companies. Furthermore, the TPO did not provide the benefit of risk adjustment for differences in the risk profile of the assessee and comparables, leading to a proposed addition of Rs. 103,840,122.Confirmation of Addition by AO and DRP:The Assessing Officer confirmed the addition proposed by the TPO, resulting in a total income adjustment of Rs. 103,840,122. The DRP upheld the draft order of the AO, leading to a final assessment with the increased income.Disputed Tax Demand and Benefit of Proviso to Section 92C(2) Denied:The disputed tax demand of Rs. 5,43,92,973 included statutory interest. The benefit of the proviso to section 92C(2) was denied, impacting the tax liability significantly.Calculation of Tax Demand and Request for Stay of Demand:The assessee disputed the tax demand and sought deletion based on the proviso to section 92C(2). The counsel argued for a reduced demand after granting the proviso's benefits, estimating the adjusted tax demand and interest. The request for stay of demand was made, with differing payment proposals from the assessee and the Revenue.Payment Terms for Disputed Demand and Early Hearing of Appeal:The Tribunal found the denial of the proviso's benefits unjustified and considered the disputed demand irrecoverable. The assessee was directed to pay Rs. 1 crore in five monthly instalments for conditional stay of demand. An early hearing was granted, and the case was scheduled for further proceedings.Conclusion:The Stay Application filed by the assessee was allowed conditionally, with payment terms outlined for the disputed demand and an early hearing scheduled for the appeal.