2017 (10) TMI 1398 - AT - Income Tax

Assessee's Appeal Partly Allowed, Tribunal Rejects TP Officer's Comparables

The appeal filed by the assessee was partly allowed. The Tribunal directed the Assessing Officer to verify the returned income and rejected the ... Admission of additional evidence under Rule 29 of the ITAT Rules - Transactional Net Margin Method (TNMM) as Most Appropriate Method - Arm's Length Price (ALP) determination - 5% safe harbour under the proviso to section 92C(2) - Comparability analysis and cherry picking of comparables - Functional comparability - Remand to Assessing Officer for factual verificationAdmission of additional evidence under Rule 29 of the ITAT Rules - Admissibility of additional documents filed by the assessee under Rule 29 - HELD THAT: - The Tribunal examined the application and documents tendered under Rule 29 and concluded that the additional evidence would be useful for deciding the transfer pricing adjustment relating to corporate fees. The Tribunal accepted the assessee's explanation that the papers were not placed before the departmental authorities due to an inadvertent mismatch when preparing the paper book and that there was a reasonable cause for non production earlier. Balancing utility for adjudication and the explanation for prior non production, the Tribunal admitted the additional evidence in the interest of justice. [Paras 2]Additional evidence admitted under Rule 29.Remand to Assessing Officer for factual verification - Claimed arithmetic error in the returned income (difference between returned figures) - HELD THAT: - The Tribunal noted the assessee's contention that the returned income figure recorded by the AO was incorrect and directed factual verification. The Tribunal did not itself determine the correct returned figure on the papers before it but directed the AO to verify the factual correctness of the claim and pass necessary orders if the claim is found correct. [Paras 3]Matter remanded to the AO for verification and necessary orders if the assessee's claim is factually correct.Transactional Net Margin Method (TNMM) as Most Appropriate Method - Arm's Length Price (ALP) determination - Comparability analysis and cherry picking of comparables - Functional comparability - 5% safe harbour under the proviso to section 92C(2) - Validity of transfer pricing adjustment of profit margin under 'provision of Application Engineering Services' by inclusion of three comparables (ATL, HCPL, CCEL) and resulting addition - HELD THAT: - The Tribunal considered the TPO's addition of three comparables to the assessee's comparable set and the DRP's concurrence. Applying the TNMM and examining functional profiles and available segmental information, the Tribunal found that CCEL operated in comprehensive engineering consultancy for power/oil/gas with projects and segmental activities unlike the assessee which provided sales support, servicing and assembly primarily for group entities; CCEL lacked comparable segmental results. ATL had undergone extraordinary corporate events (mergers/acquisitions) whose impact on margins was not reflected or explained, making it unsuitable as a comparable. HCPL (Holtech) provided end to end engineering and had plant, machinery, inventory and substantial subcontracting costs, differing materially from the assessee's profile; its segmental data were also unavailable. Given the lack of functional comparability and absence of reliable segmental data to isolate comparable activities, the Tribunal held that the three comparables accepted by the TPO/DRP were not valid for benchmarking. Excluding these companies, the assessee's reported margin fell within the permissible +/-5% range under the proviso to section 92C(2), and therefore the proposed transfer pricing adjustment was not sustainable. [Paras 4, 6]Transfer pricing addition under 'provision of Application Engineering Services' deleted; appeal on this ground allowed in favour of the assessee.Remand to Assessing Officer for factual verification - Levy of interest under section 234 as consequential to the transfer pricing adjustment - HELD THAT: - The Tribunal treated the levy of interest as consequential to the primary transfer pricing determination and did not adjudicate the interest issue on merits in the present order. [Paras 7]Interest under section 234 not adjudicated (consequential); left open for determination as appropriate.Final Conclusion: The appeal is partly allowed: additional evidence is admitted; the transfer pricing addition relating to application engineering services is set aside as the three comparables relied on by the TPO/DRP lack requisite functional comparability; the AO is directed to verify the alleged arithmetic error in the returned income and pass orders if justified; the interest issue is consequential and not adjudicated in this order. Issues Involved:1. Mistake in considering the returned income of the assessee.2. Transfer Pricing (TP) adjustment under the head provision of Application Engineering Service (AES).3. Admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963.4. Levy of interest under section 234 of the Income Tax Act.Detailed Analysis:1. Mistake in Considering the Returned Income:The first effective ground of appeal (GOA-2) addressed an error in considering the returned income of the assessee at Rs. 5,60,97,490/- instead of Rs. 5,56,17,488/-. The Tribunal directed the Assessing Officer (AO) to verify the facts and pass necessary orders if the claim made by the assessee is found factually correct. This ground of appeal was decided in favor of the assessee, in part.2. TP Adjustment under the Head Provision of Application Engineering Service (AES):The next effective ground of appeal (GOA 3-7) dealt with a TP adjustment of Rs. 78.71 lakhs under the head AES. During the TP proceedings, the Transfer Pricing Officer (TPO) found that the assessee had adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) using operating profit to operating costs (OP/OC) as the Profit Level Indicator (PLI). The TPO selected three additional comparables: Acropetal Technologies Ltd. (ATL), Holtech Consulting Private Ltd. (HCPL), and Cather Consulting Engineers Ltd. (CCEL), which had significantly higher margins. The TPO proposed an addition of Rs. 78.71 lakhs, which was upheld by the Dispute Resolution Panel (DRP).The assessee contended that the TPO/DRP erred in selecting comparables based on an incorrect appreciation of the functional asset and risk profile. The Tribunal found that there was no functional comparability between the assessee and the comparables selected by the TPO. Specifically:- CCEL: Involved in providing comprehensive consultancy services in power, oil, and gas sectors. The Tribunal found no functional comparability with the assessee, whose main business was sales support of marine equipment for group companies.- ATL: Had extraordinary events (mergers/amalgamations) impacting its financials, making it an invalid comparable.- HCPL: Engaged in providing comprehensive services from concept to commissioning for various projects, with no segmental data available for comparison. The Tribunal found no similarity between the functions of the assessee and HCPL.The Tribunal concluded that all three comparables selected by the TPO and approved by the DRP should be rejected for arriving at the Arm's Length Price (ALP) of the assessee's international transactions. Consequently, the second effective ground of appeal (GOA 3-7) was decided in favor of the assessee.3. Admission of Additional Evidences:The assessee requested the admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963, arguing that these documents would prove that the assessee had received services from its Associated Enterprises (AEs). The Tribunal admitted the additional evidences, stating that they would be useful in deciding the issue regarding TP adjustment made under the head corporate fees and that the assessee was prevented from submitting them earlier by a reasonable cause.4. Levy of Interest under Section 234:The last ground of appeal dealt with the levy of interest under section 234 of the Income Tax Act, which was of a consequential nature and hence not adjudicated by the Tribunal.Conclusion:The appeal filed by the assessee was partly allowed. The Tribunal directed the AO to verify the returned income and rejected the comparables selected by the TPO for TP adjustment, thereby deciding in favor of the assessee on significant grounds. The additional evidences were admitted, and the issue of interest levy under section 234 was deemed consequential. The order was pronounced in the open court on 18th October 2017.