ITAT: Adjustments to arm's length price deleted, interest disallowance upheld. AO directed for fresh adjudication.

The ITAT upheld the deletion of the addition made for adjustments to the arm's length price, as the TPO's selection of comparables was found inappropriate. The disallowance on interest on borrowed capital was also deleted, supported by commercial expediency. The matter was remanded to the AO for fresh adjudication, directing a reevaluation of comparables and addressing the assessee's submissions. The Revenue's appeal was partly allowed, and the cross objection and appeal by the assessee were allowed for statistical purposes.

---

---

Issues Involved:
1. Deletion of addition made on the recommendation of the TPO for adjustments to the arm’s length price.
2. Deletion of disallowance on account of interest on borrowed capital.
3. Jurisdictional error in the reference made by the AO to the TPO.
4. Rejection of the economic analysis conducted by the assessee.
5. Non-disclosure of transfer pricing methodology by the TPO.
6. Selection of non-comparable companies by the TPO.
7. Incorrect profit level indicator (PLI) used by the TPO.
8. Misinterpretation of the assessee's acceptance of previous adjustments.
9. Entitlement to the benefit of the option of +5% as per the provisions of proviso to sec. 92C(2).

Detailed Analysis:

1. Deletion of Addition for Adjustments to Arm’s Length Price:
The Revenue challenged the deletion of Rs. 5,69,04,207 added based on the TPO's recommendation. The CIT(A) accepted the assessee's use of the Transactional Net Margin Method (TNMM) and excluded one comparable. The TPO had used service providers as comparables, which the assessee argued were not appropriate. The assessee's functional profile was different, involving distribution of TV channels and marketing advertisements. The CIT(A) found the assessee’s profit level indicator (PLI) of OP/VAE appropriate and deleted the adjustment. The ITAT upheld this, noting that the TPO had inappropriately selected service companies as comparables and ignored the assessee’s proposed comparables.

2. Deletion of Disallowance on Interest on Borrowed Capital:
The CIT(A) deleted the disallowance of Rs. 28,87,831 on interest on borrowed capital. The assessee had obtained ECB loans for working capital, utilized for business purposes. The ITAT in a previous year had ruled in favor of the assessee, stating there was no evidence of diversion of funds for non-business purposes. The ITAT upheld the CIT(A)'s decision, concurring that the expenditure was incurred out of commercial expediency.

3. Jurisdictional Error in Reference to TPO:
The assessee argued that the AO did not record reasons for referring the matter to the TPO as required under section 92CA(1). The ITAT noted that a proper functional and economic analysis must be conducted annually to reflect market changes and intra-group transactions' nature.

4. Rejection of Economic Analysis:
The TPO rejected the economic analysis conducted by the assessee, which was based on a detailed Functional Asset and Risk (FAR) analysis. The TPO’s comparables were service providers, not distributors like the assessee. The ITAT found that the TPO erred in rejecting the assessee’s analysis and comparables.

5. Non-disclosure of Transfer Pricing Methodology:
The TPO did not disclose the transfer pricing methodology and the source of data used to identify comparables. The ITAT emphasized the need for transparency and the opportunity for the assessee to analyze the methodology adopted.

6. Selection of Non-comparable Companies:
The TPO selected companies with different functional profiles as comparables. The ITAT noted that the selected companies were engaged in services unrelated to the assessee’s distribution activities. The ITAT directed the AO to undertake a fresh search for appropriate comparables.

7. Incorrect Profit Level Indicator (PLI):
The assessee argued that if service companies were to be accepted as comparables, OP/VAE should be used as the PLI. The ITAT agreed, noting that OP/VAE was a more meaningful comparison for the assessee's distribution segment.

8. Misinterpretation of Assessee's Acceptance of Previous Adjustments:
The TPO assumed the assessee accepted previous adjustments due to not pressing appeals. The ITAT clarified that the assessee’s non-pressing of appeals was due to a settlement under the India-USA Double Taxation Avoidance Agreement, not acceptance of the adjustments.

9. Entitlement to +5% Benefit:
The assessee contended entitlement to the benefit of the option of +5% as per the proviso to sec. 92C(2). The ITAT directed the AO to consider this benefit while re-evaluating the comparables.

Conclusion:
The ITAT set aside the matter to the AO for fresh adjudication, directing a fresh search for comparable companies and ensuring a speaking order addressing the assessee's submissions. The appeal of the Revenue was partly allowed, and the cross objection and appeal filed by the assessee were allowed for statistical purposes. The ITAT upheld the deletion of disallowance on interest on borrowed capital, concurring with the CIT(A)'s findings.

---